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 extensions of 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 Facility B into a term loan with the same maturity date as Facility A.
The availability of loans under each of the Facilities is subject to customary conditions, including the absence of any defaults thereunder and the accuracy (in all material respects) of Shire’s representations and warranties contained therein.
The Facilities include representations and warranties, covenants and events of default, including requirements that Shire’s ratio of Net Debt to EBITDA (as defined in the Facilities Agreement) not exceed 3.0 to 1 and that the ratio of EBITDA to Net Interest be not less than 4.0 to 1, both in respect of the most recently ended fiscal year, and limitations on the creation of liens, disposal of assets, incurrence of indebtedness, making of loans and giving of guarantees.
Interest on loans under the Facilities will be payable on the last day of each interest period, which period may be one, two, three or six months at the election of Shire (or as otherwise agreed with the Lenders). The interest rate on each loan for each interest period is the percentage rate per annum which is the aggregate of the applicable margin (ranging from 0.35 to 0.65 per cent per annum, depending on the ratio of Net Debt to EBITDA), LIBOR, and mandatory cost, if any (as calculated in accordance with Schedule 5 of the Facilities Agreement). Shire shall also pay fees equal to 35 per cent per annum of the applicable margin on available commitments under Facility A for the availability period applicable to Facility A and 20 per cent per annum of the applicable margin on available commitments under Facility B for the availability period applicable to Facility B in respect of the period prior to January 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 which is one percent higher than the rates otherwise applicable to the loans under the Facilities.
Upon a change of control of Shire or upon the occurrence of an event of default and the expiration of any applicable cure period, the total commitments under the Facilities may be cancelled, all or part of the loans, together with accrued interest and all other amounts accrued or outstanding may be immediately due and payable and all or part of the loans may become payable on demand. Events of default under the Facilities include: (i) non-payment of any amounts due under the Facilities, (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults under, other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of the group, (vii) certain ERISA breaches which would have a material adverse effect, (viii) change of control of a subsidiary of Shire that is a party to the Facilities Agreement, or (ix) if it becomes illegal for Shire or any of its subsidiaries that are parties to the Facility Agreement to perform their obligations 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.
10. Commitments and contingencies
(a) Leases
Future minimum lease payments presented below include principal lease payments and other fixed executory fees under lease arrangements as of June 30, 2005:
| | Operating leases |
| | | $’000 |
| | |
|
| 2005 | | 6,442 |
| 2006 | | 14,661 |
| 2007 | | 13,832 |
| 2008 | | 12,307 |
| 2009 | | 10,282 |
| 2010 | | 7,844 |
| Thereafter | | 38,129 |
| |
|
| | 103,497 |
| |
|
| | | |
(i) Operating leases
The Company leases facilities, motor vehicles and certain equipment under operating leases expiring through 2015. Lease and rental expense included in selling, general and administrative expenses in the accompanying statements of operations amounted to $9.6 million for the six months to June 30, 2005 (2004: $6.2 million).
During the six months to June 30, 2004, Shire Inc., a wholly owned subsidiary of Shire, signed an eleven-year operating lease on a property in Wayne, Pennsylvania. Shire US, Inc., another wholly owned subsidiary, acts as guarantor in respect of this lease. The future minimum lease payments under the lease agreement are $34.4 million in aggregate.
(ii) Restricted cash in respect of leases
At June 30, 2005 the Company had $5.4 million of restricted cash held as collateral for certain equipment leases (December 31, 2004: $5.3 million).
(b) Letters of credit and guarantees
As of June 30, 2005, the Company had an irrevocable standby letter of credit with Barclays Bank plc, in the amount of $15.0 million, providing security on the recoverability of insurance claims. The Company has restricted cash of $15.0 million, as required by this letter of credit.
(c) Commitments
(i)Interests in companies and partnerships
The Company has undertaken to subscribe for interests in companies and partnerships for amounts totaling $16.2 million (December 31, 2004: $22.0 million) of which $8.3 million is committed to be paid in 2005 and a further $3.5 million could be payable in 2005, depending on the timing of capital calls.
(ii)Manufacturing facility
The Company has committed to the expansion and modification of its manufacturing facility at Owings Mills, Maryland to facilitate the production and packaging of additional strategic products. The Company has committed to spend a further $1.0 million by the end of 2005 and has an additional commitment of $3.0 million for the design and construction of a technology center at Owings Mills, which is expected to be incurred in 2005.
(iii)Wayne, Pennsylvania fit out
The Company is in the process of fitting out its new US headquarters at Wayne, Pennsylvania. As of June 30, 2005, the Company had an outstanding commitment of $2.4 million which is expected to be incurred in 2005.
(iv)NRP104
In connection with the Company’s collaboration with New River Pharmaceuticals Inc. (New River) to commercialize NRP104, the Company has an obligation to make certain payments on the achievement of the following milestones:
20
$50 million upon the US Food and Drug Administration’s (FDA’s) acceptance of filing of the New Drug Application (NDA);up to $300 million following the first commercial sale of the product, depending on the characteristics of the approved product labelling; $100 million as a sales bonus on achieving a significant sales target; and $5 million following the first commercial sale in certain specified EU markets. An upfront payment of $50 million was expensed as an R&D cost during the first quarter of 2005. Regulatory submission is currently expected to be in the last quarter of 2005.
(v)MTS
In connection with the Company’s purchase of MTS in 2003, Shire has an obligation to make certain payments on the achievement of the following milestones: $50 million upon regulatory approval of the product, which will be capitalized and amortized over its useful economic life; and up to $75 million, linked to future sales performance. Regulatory approval is currently expected to be in the last quarter of 2005.
(vi)FOSRENOL patent rights
In connection with the Company’s purchase of the global patents for FOSRENOL, Shire now owns the FOSRENOL patents in the US and throughout the world (excluding Europe and Japan) and has agreed to pay AnorMED Inc. $6 million when FOSRENOL is approved in certain European countries for the assignment of the European patents and $6 million upon receipt of regulatory approval in Japan for the Japanese patents.
(vii)Other R&D commitments
As of June 30, 2005, the Company had commitments of $9.7 million on achievement of specified milestones.
(d) Legal proceedings
(i)General
The Company accounts for litigation losses in accordance with SFAS No. 5, "Accounting for Contingencies" (SFAS No. 5). Under SFAS No. 5, loss contingency provisions are recorded for probable losses when management is able to reasonably estimate the loss. Where the estimated loss lies within a range and no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. In other cases management's best estimate of the loss is recorded. These estimates are developed substantially before the ultimate loss is known and the estimates are refined in each accounting period in light of additional information becoming known. In instances where the Company is unable to develop a reasonable estimate of loss, no litigation loss is recorded at that time. As information becomes known a loss provision is set up when a reasonable estimate can be made. The estimates are reviewed quarterly and the estimates are changed when expectations are revised. Any outcome upon settlement that deviates from the Company’s estimate may result in an additional expense in a future accounting period.
(ii)Specific
There are various legal proceedings brought by and against the Company that are discussed in the Company’s Annual Report on Form 10-K for the year to December 31, 2004. Material updates to the proceedings discussed in the Company’s Annual Report on Form 10-K are described below. There is no assurance that the Company will be successful in these proceedings and if it is not, there may be a material impact on the Company’s results and financial position.
ADDERALL XR
(a) Barr Laboratories, Inc.
Shire’s extended release "once daily" version of ADDERALL, ADDERALL XR is covered by US patent No. 6,322,819 (the ‘819 Patent) and US patent No. 6,605,300 (the ‘300 Patent). In January 2003 the Company was notified that Barr Laboratories, Inc. (Barr) had submitted an Abbreviated New Drug Application (ANDA) under the Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR (Barr’s ANDA products) prior to the expiration date of the Company’s ‘819 Patent, and alleging that the ‘819 Patent is not infringed by Barr's ANDA products. In August 2003 Shire was notified that Barr also was seeking permission to market its ANDA products prior to the expiration date of the ‘300 Patent and alleging that the ‘300 Patent is invalid. Shire Laboratories Inc (Shire Laboratories) filed suit against Barr for infringement of the ‘819 Patent in February 2003 and for infringement of the ‘300 Patent in September 2003. The schedules for the lawsuits against Barr with respect to the ‘819 and ‘300 Patents were consolidated in December 2003 and a trial date is scheduled for January 2006. The Company is seeking a ruling that Barr’s ANDA and ANDA products infringe the ‘819 and ‘300 Patents and its ANDA should not be approved before the expiration date of the patents. The Company is also seeking injunctions to prevent Barr from commercializing its ANDA products before the expiration of the ‘819 and ‘300 Patents, damages in the event that Barr should engage in such commercialization, and its attorneys’ fees and costs. On September 27, 2004 Barr filed an amended Answer, Affirmative Defense and Counterclaim in which Barr added the following
21
counterclaims: invalidity of the ‘819 patent, non-infringement of the ‘300 Patent and unenforceability of the ‘819 and ‘300 Patents due to inequitable conduct. Shire has asserted affirmative defenses, alleging, among other things, that Barr has waived its right to assert the counterclaims set forth in its September 27, 2004 amended answers.
(b) Impax Laboratories, Inc.
In November 2003, Shire was notified that Impax Laboratories, Inc. (Impax) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 30mg strength of ADDERALL XR (Impax’s ANDA product) prior to the expiration date of the ‘819 and ‘300 Patents. In December 2003, Shire Laboratories filed suit against Impax for infringement of the ‘819 and ‘300 Patents. The Company is seeking a ruling that Impax’s ANDA product infringes the ‘819 and ‘300 Patents and that its ANDA should not be approved before the expiration date of the ‘819 and ‘300 Patents. The Company is also seeking injunctions to prevent Impax from commercializing its ANDA product before the expiration of the ‘819 and ‘300 Patents, damages in the event that Impax should engage in such commercialization, and its attorneys’ fees and costs. Impax’s affirmative defenses include non-infringement and invalidity of both the ‘819 and ‘300 Patents.
In December 2004, Shire received an additional notification from Impax advising of the filing of an amendment to its ANDA for a generic version of the 5mg, 10mg, 15mg, 20mg and 25mg strengths of ADDERALL XR in addition to the 30mg strength, the subject of Impax’s initial ANDA. In January 2005, Shire Laboratories filed suit against Impax for infringement of the ‘819 and ‘300 Patents. The Company is seeking a ruling that Impax’s amended ANDA infringes the ‘819 and ‘300 patents and should not be approved before the expiration dates of the ‘819 and ‘300 Patents. The Company is also seeking an injunction to prevent Impax from commercializing its amended ANDA products before the expiration of the ‘819 and ‘300 Patents, damages in the event that Impax should engage in such commercialization, as well as its attorneys’ fees and costs. Impax’s affirmative defenses include non-infringement, invalidity and unenforceability of both the ‘819 and ‘300 Patents. Impax is also requesting that costs be assessed against the Company.
The Delaware District Court had set an October 11, 2005 trial date for the first Impax case. Following a scheduling conference with the same Court in the second case, a consolidated February 23, 2006 trial date has now been set for both cases.
(c) Colony Pharmaceuticals Inc.
In December 2004, Shire was notified that Colony Pharmaceuticals Inc. (Colony) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Company’s ‘819 and ‘300 Patents. Shire has chosen not to sue Colony.
(d) Teva Pharmaceuticals USA, Inc.
In February 2005, Shire was notified that Teva Pharmaceuticals USA, Inc. (Teva) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 10mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Company’s ‘819 and ‘300 Patents. In June 2005, Shire was notified that Teva had amended it's ANDA to seek permission to market additional strengths of 5mg, 15mg and 20mg of ADDERALL XR prior to the expiration of the '819 and '300 Patents. Shire has chosen not to sue Teva.
None of Barr, Impax, Colony or Teva may launch their generic versions of ADDERALL XR before they receive final FDA approval of their respective ANDAs. In respect of Barr’s and Impax’s ANDAs, the lawsuits triggered stays of final FDA approval of up to 30 months from the date of the Company’s receipt of, respectively, Barr’s and Impax’s notice letters. Even if Barr and/or Impax receive tentative FDA approval of their ANDAs, neither of them can lawfully launch their generic versions of ADDERALL XR before the earlier of the expiration of the respective stays (Barr - February 2006; Impax - May 2006 in the case of the 30mg strength and June 2007 in the case of the 5mg, 10mg,15mg, 20mg and 25mg strengths) or a district court decision in its favor. In the event that the Company does not prevail in the Barr suit, Barr could be in a position to market its ANDA products upon FDA final approval of its ANDA. In the event the Company does not prevail in the Impax suit, Impax could be in a position to market its ANDA product upon FDA final approval of its ANDA and upon expiry of any exclusivity that Barr may hold. The FDA may grant 180 days of generic market exclusivity to the “first to file”.
Neither Colony nor Teva may market their ANDA products until FDA final approval of their ANDAs and upon the expiration of the first to file’s exclusivity rights.
The Hatch-Waxman exclusivity period for ADDERALL XR expired on April 11, 2005.
22
CARBATROL
In August 2003 the Company was notified that Nostrum Pharmaceuticals, Inc. (Nostrum) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 300mg strength of CARBATROL (Nostrum’s ANDA product) prior to the expiration date of the Company’s US patents for CARBATROL, US patent No. 5,912,013 (the ‘013 Patent) and US patent No. 5,326,570 (the ‘570 Patent). The notification alleges that the ‘013 and ‘570 Patents are not infringed by Nostrum’s ANDA product. On September 18, 2003 Shire Laboratories filed suit against Nostrum in the United States District Court for the District of New Jersey alleging infringement of these two patents by Nostrum’s ANDA and ANDA product. The Company was seeking a ruling that Nostrum’s ANDA infringes the ‘013 and ‘570 Patents and should not be approved before the expiration date of the ‘013 and ‘570 Patents. The Company was also seeking an injunction to prevent Nostrum from commercializing its ANDA product before the expiration of the ‘013 and ‘570 Patents, damages in the event that Nostrum should engage in such commercialization, as well as its attorneys’ fees and costs. On January 23, 2004 the Company amended the complaint to delete the allegations with respect to the ‘013 Patent while maintaining the suit with respect to the ‘570 Patent. By way of counterclaims Nostrum is seeking a declaration that the ‘570 and ‘013 Patents are not infringed by Nostrum’s ANDA product. Nostrum also was seeking actual and punitive damages for alleged abuse of process by Shire. On July 12, 2004 the Court dismissed Nostrum’s abuse of process counterclaim for failure to state a claim upon which relief can be granted. On December 10, 2004 Nostrum filed a summary judgment motion seeking a declaration of non-infringement of the ‘570 Patent. Shire’s opposition to this motion was filed on January 14, 2005. Summary judgment arguments were presented to the Court on July 15, 2005. The Court ruled during the hearing that Nostrum's motion for summary judgment was denied. Expert discovery will now continue. The Court will also set a new discovery and pretrial schedule. No trial date has been set.
Nostrum may not launch a generic version of CARBATROL before it receives final approval of its ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30 months from Shire’s receipt of Nostrum’s notice letter. Even if Nostrum receives tentative approval from the FDA for its ANDA, it cannot lawfully launch its generic version before the earlier of the expiration of the stay (February 2006) or a district court decision in its favor. In the event that the Company does not prevail, then Nostrum could be in a position to market its 300mg extended-release carbamazepine product upon FDA final approval of its ANDA.
TKTShire completed its acquisition of TKT on July 27, 2005. In its Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Report on Form 10-Q for the three months ended March 31, 2005, TKT described certain legal proceedings to which it is a party.
23
11. Earnings per share
The following table reconciles income from continuing operations and the weighted average ordinary shares outstanding for basic and diluted earnings per share for the periods presented:
| | | 3 months to | | 3 months to | | 6 months to | | 6 months to |
| | | June 30, | | June 30, | | June 30, | | June 30, |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| | | $’000 | | $’000 | | $’000 | | $’000 |
| | |
| |
| |
| |
|
| Income from continuing operations | | 116,154 | | 89,513 | | 133,531 | | 172,873 |
| Loss from discontinued operations, net of tax | | - | | (11,349) | | - | | (20,135) |
| (Loss)/gain on disposition of discontinued operations | | - | | (44,157) | | 3,125 | | (44,157) |
| |
| |
| |
| |
|
| Numerator for basic earnings per share | | 116,154 | | 34,007 | | 136,656 | | 108,581 |
| Interest charged on convertible debt, net of tax | | - | | - | | 1 | | 2,666 |
| |
| |
| |
| |
|
| Numerator for diluted earnings per share | | 116,154 | | 34,007 | | 136,657 | | 111,247 |
| |
| |
| |
| |
|
| | | | | | | | | |
| Weighted average number of shares: | | No. of shares | | No. of shares | | No. of shares | | No. of shares |
| |
| |
| |
| |
|
| Basic | | 499,664,524 | | 496,074,144 | | 499,333,386 | | 495,896,175 |
| Effect of dilutive shares: | | | | | | | | |
| Stock options | | 4,135,344 | | 3,115,296 | | 4,287,982 | | 3,460,629 |
| Warrants | | 224,894 | | 52,392 | | 234,916 | | 94,742 |
| Convertible debt | | 5,756 | | - | | 5,756 | | 18,370,564 |
| |
| |
| |
| |
|
| | 4,365,994 | | 3,167,688 | | 4,528,654 | | 21,925,935 |
| |
| |
| |
| |
|
| Diluted | | 504,030,518 | | 499,241,832 | | 503,862,040 | | 517,822,110 |
| |
| |
| |
| |
|
The share options and convertible debt not included within the calculation of the diluted weighted average number of shares, (due to their exercise prices exceeding the Company’s average share price during the calculation period), are shown below:
| | | 3 months to | | 3 months to | | 6 months to | | 6 months to |
| | | June 30, | | June 30, | | June 30, | | June 30, |
| | | 2005 | | 2004 | | 2005 | | 2004 |
| | | $’000 | | $’000 | | $’000 | | $’000 |
| | |
| |
| |
| |
|
| Share options | | 6,899,222 | | 17,996,604 | | 6,907,099 | | 14,566,902 |
| Convertible debt | | - | | 18,370,564 | | - | | - |
| |
| |
| |
| |
|
| | 6,899,222 | | 36,367,168 | | 6,907,099 | | 14,566,902 |
| |
| |
| |
| |
|
24
12. Segmental reporting
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”(SFAS No. 131) establishes standards for reporting information about operating segments and related disclosures, products and services, geographic areas and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.
Shire sells a number of pharmaceutical products in multiple geographic markets across the world. The Company is continuously looking to develop and replenish its pharmaceutical product pipeline and has continued to focus on meeting the needs of the specialist physician in targeting therapeutic areas within its strategic aim.
In previous reporting periods, the Company’s internal management reporting structure was based on a combination of geography and function. As a result the Company provided segment information, which showed geographic sales and costs for the US and International sales and marketing businesses, R&D costs and a Corporate segment which included corporate costs and royalty income.
Following a restructuring of operational management into therapeutic areas, management has re-evaluated and amended its internal reporting structures giving rise to a change in reporting segments of the business.
Effective January 1, 2005, Shire’s internal management reporting structures have been changed to show two segments, Pharmaceutical Products and Royalties. The Pharmaceutical Products segment comprises three therapeutic areas, central nervous system (CNS), gastro-intestinal (GI) and general products (GP) and all products have been aggregated for reporting purposes within this segment.
The Company evaluates performance based on revenue and operating income. The Company does not have inter-segment transactions. Prior period amounts have been reclassified to conform to the new, current period presentation.
The Pharmaceutical Products segment represents the Company’s commercial operations and costs in respect of products currently promoted and sold together with costs of developing projects for future commercialization. The Royalties segment represents royalties earned from the out-licensing of products to third parties. These projects have been developed and commercialized by the third party and royalties are being received on the sale of the commercialized product. ‘All Other’ has been included in the table below in order to reconcile the segments to the total consolidated figures. Costs have not been allocated to Royalties below as the magnitude of the costs incurred in respect of managing this segment is small and the internal reporting consequently does not allocate costs to this segment. Assets that are directly attributable to the Royalty segment have been separately disclosed from the Pharmaceutical Products segment.
25
Shire’s reportable segments for periods to June 30, 2004 and 2005 are as follows:
| 3 months to June 30, 2005 | | Pharmaceutical | | | | Segment | | | | |
| | Products | | Royalties | | Sub-total | | All Other | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 351,555 | | - | | 351,555 | | - | | 351,555 |
| Royalties | | - | | 62,564 | | 62,564 | | - | | 62,564 |
| Licensing and development | | - | | - | | - | | 2,714 | | 2,714 |
| Other revenues | | - | | - | | - | | 7,763 | | 7,763 |
| |
| |
| |
| |
| |
|
| Total revenues | | 351,555 | | 62,564 | | 414,119 | | 10,477 | | 424,596 |
| | | | | | | | | | | |
| Cost of product sales | | 41,945 | | - | | 41,945 | | - | | 41,945 |
| Research and development | | 63,967 | | - | | 63,967 | | 1,490 | | 65,457 |
| Selling, general and administrative | | 153,475 | | - | | 153,475 | | - | | 153,475 |
| Depreciation and amortization(1) | | 20,079 | | - | | 20,079 | | - | | 20,079 |
| Intangible asset impairment | | 3,000 | | | | 3,000 | | - | | 3,000 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 282,466 | | - | | 282,466 | | 1,490 | | 283,956 |
| |
| |
| |
| |
| |
|
| Operating income | | 69,089 | | 62,564 | | 131,653 | | 8,987 | | 140,640 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets | | 2,739,945 | | 58,812 | | 2,798,757 | | - | | 2,798,757 |
| Long-lived assets | | 778,863 | | - | | 778,863 | | - | | 778,863 |
| Capital expenditure on long-lived assets | | 29,952 | | - | | 29,952 | | - | | 29,952 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization is the write-down of property, plant and equipment of $5.9 million. Depreciation from manufacturing plants ($0.9 million) is included in cost of product sales.
| 3 months to June 30, 2004 | | Pharmaceutical | | | | Segment | | | | |
| | Products | | Royalties | | Sub-total | | All Other | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 255,280 | | - | | 255,280 | | - | | 255,280 |
| Royalties | | - | | 57,657 | | 57,657 | | - | | 57,657 |
| Licensing and development | | - | | - | | - | | 5,482 | | 5,482 |
| Other revenues | | - | | - | | - | | 2,541 | | 2,541 |
| |
| |
| |
| |
| |
|
| Total revenues | | 255,280 | | 57,657 | | 312,937 | | 8,023 | | 320,960 |
| | | | | | | | | | | |
| Cost of product sales | | 26,984 | | - | | 26,984 | | - | | 26,984 |
| Research and development | | 46,424 | | - | | 46,424 | | 951 | | 47,375 |
| Selling, general and administrative | | 105,141 | | - | | 105,141 | | - | | 105,141 |
| Depreciation and amortization(1) | | 13,079 | | - | | 13,079 | | - | | 13,079 |
| Reorganization costs | | 18,167 | | - | | 18,167 | | - | | 18,167 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 209,795 | | - | | 209,795 | | 951 | | 210,746 |
| |
| |
| |
| |
| |
|
| Operating income | | 45,485 | | 57,657 | | 103,142 | | 7,072 | | 110,214 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets from continuing operations | | 2,617,074 | | 57,166 | | 2,674,240 | | - | | 2,674,240 |
| Long-lived assets | | 700,258 | | - | | 700,258 | | - | | 700,258 |
| Capital expenditure on long-lived assets | | 22,933 | | - | | 22,933 | | - | | 22,933 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization are the write-downs of property, plant and equipment of $0.8 million. Depreciation from manufacturing plants ($0.7 million) is included in cost of product sales.
26
| 6 months to June 30, 2005 | | Pharmaceutical | | | | Segment | | | | |
| | Products | | Royalties | | Sub-total | | All Other | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 620,999 | | - | | 620,999 | | - | | 620,999 |
| Royalties | | - | | 120,887 | | 120,887 | | - | | 120,887 |
| Licensing and development | | - | | - | | - | | 6,583 | | 6,583 |
| Other revenues | | - | | - | | - | | 9,820 | | 9,820 |
| |
| |
| |
| |
| |
|
| Total revenues | | 620,999 | | 120,887 | | 741,886 | | 16,403 | | 758,289 |
| | | | | | | | | | | |
| Cost of product sales | | 75,278 | | - | | 75,278 | | - | | 75,278 |
| Research and development | | 173,972 | | - | | 173,972 | | 3,017 | | 176,989 |
| Selling, general and administrative | | 311,048 | | - | | 311,048 | | - | | 311,048 |
| Depreciation and amortization(1) | | 33,715 | | - | | 33,715 | | - | | 33,715 |
| Intangible asset impairment | | 3,000 | | | | 3,000 | | - | | 3,000 |
| Reorganization costs | | 2,878 | | - | | 2,878 | | - | | 2,878 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 599,891 | | - | | 599,891 | | 3,017 | | 602,908 |
| |
| |
| |
| |
| |
|
| Operating income | | 21,108 | | 120,887 | | 141,995 | | 13,386 | | 155,381 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets | | 2,739,945 | | 58,812 | | 2,798,757 | | - | | 2,798,757 |
| Long-lived assets | | 778,863 | | - | | 778,863 | | - | | 778,863 |
| Capital expenditure on long-lived assets | | 71,657 | | - | | 71,657 | | - | | 71,657 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization is the write-down of property, plant and equipment of $5.9 million. Depreciation from manufacturing plants ($1.7 million) is included in cost of product sales.
| 6 months to June 30, 2004 | | Pharmaceutical | | | | Segment | | | | |
| | Products | | Royalties | | Sub-total | | All Other | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 519,874 | | - | | 519,874 | | - | | 519,874 |
| Royalties | | - | | 113,802 | | 113,802 | | - | | 113,802 |
| Licensing and development | | - | | - | | - | | 7,397 | | 7,397 |
| Other revenues | | - | | - | | - | | 3,487 | | 3,487 |
| |
| |
| |
| |
| |
|
| Total revenues | | 519,874 | | 113,802 | | 633,676 | | 10,884 | | 644,560 |
| | | | | | | | | | | |
| Cost of product sales | | 61,077 | | - | | 61,077 | | - | | 61,077 |
| Research and development | | 84,224 | | - | | 84,224 | | 1,777 | | 86,001 |
| Selling, general and administrative | | 225,475 | | - | | 225,475 | | - | | 225,475 |
| Depreciation and amortization(1) | | 25,583 | | - | | 25,583 | | - | | 25,583 |
| Reorganization costs | | 21,980 | | - | | 21,980 | | - | | 21,980 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 418,339 | | - | | 418,339 | | 1,777 | | 420,116 |
| |
| |
| |
| |
| |
|
| Operating income | | 101,535 | | 113,802 | | 215,337 | | 9,107 | | 224,444 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets from continuing operations | | 2,617,074 | | 57,166 | | 2,674,240 | | - | | 2,674,240 |
| Long-lived assets | | 700,258 | | - | | 700,258 | | - | | 700,258 |
| Capital expenditure on long-lived assets | | 31,475 | | - | | 31,475 | | - | | 31,475 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization are the write-downs of property, plant and equipment of $1.2 million. Depreciation from manufacturing plants ($1.3 million) is included in cost of product sales.27
Supplemental information
To improve comparability between periods for investors, the previous reporting format has also been used to report the current period to June 30, 2005 together with the previously reported segmental analysis for the periods to June 30, 2004. Whilst there is no requirement to include this disclosure under SFAS No. 131 as the new internal reporting format has been used for the current and historic period, management believes that during 2005, it may be useful to include the previously reported segmental analysis for comparative purposes. This internal management-reporting format is no longer used as the basis for making decisions within the business.
| 3 months to June 30, 2005 | | US | | International | | Corporate | | R&D | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 301,480 | | 50,075 | | - | | - | | 351,555 |
| Royalties | | 262 | | 1,957 | | 60,345 | | - | | 62,564 |
| Licensing and development | | 2,318 | | 396 | | - | | - | | 2,714 |
| Other revenues | | 3,796 | | 3,967 | | - | | - | | 7,763 |
| |
| |
| |
| |
| |
|
| Total revenues | | 307,856 | | 56,395 | | 60,345 | | - | | 424,596 |
| | | | | | | | | | | |
| Cost of product sales | | 27,286 | | 14,659 | | - | | - | | 41,945 |
| Research and development | | - | | - | | - | | 65,457 | | 65,457 |
| Selling, general and administrative | | 103,566 | | 27,936 | | 21,973 | | - | | 153,475 |
| Depreciation and amortization(1) | | 13,850 | | 2,512 | | 3,717 | | - | | 20,079 |
| Intangible asset impairment | | 3,000 | | - | | - | | - | | 3,000 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 147,702 | | 45,107 | | 25,690 | | 65,457 | | 283,956 |
| |
| |
| |
| |
| |
|
| Operating income/(loss) | | 160,154 | | 11,288 | | 34,655 | | (65,457) | | 140,640 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets | | 1,204,263 | | 403,792 | | 1,127,566 | | 63,136 | | 2,798,757 |
| Long-lived assets | | 314,518 | | 132,380 | | 291,030 | | 40,935 | | 778,863 |
| Capital expenditure on long-lived assets | | 21,363 | | 31 | | 8,558 | | - | | 29,952 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
(1) Included in depreciation and amortization is the write-down of property, plant and equipment of $5.9 million included in the US segment. Depreciation from manufacturing plants ($0.9 million) is included in cost of product sales in the US segment. Depreciation and amortization relating to R&D assets are included in the US and International segments.28
| 3 months to June 30, 2004 | | US | | International | | Corporate | | R&D | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 210,004 | | 45,276 | | - | | - | | 255,280 |
| Royalties | | - | | 2,837 | | 54,820 | | - | | 57,657 |
| Licensing and development | | 4,395 | | 1,087 | | - | | - | | 5,482 |
| Other revenues | | 716 | | 1,825 | | - | | - | | 2,541 |
| |
| |
| |
| |
| |
|
| Total revenues | | 215,115 | | 51,025 | | 54,820 | | - | | 320,960 |
| |
| |
| |
| |
| |
|
| Cost of product sales | | 20,101 | | 6,883 | | - | | - | | 26,984 |
| Research and development | | - | | - | | - | | 47,375 | | 47,375 |
| Selling, general and administrative | | 67,421 | | 24,204 | | 13,516 | | - | | 105,141 |
| Depreciation and amortization(1) | | 7,158 | | 2,956 | | 2,965 | | - | | 13,079 |
| Reorganization costs | | 9,563 | | 2,696 | | 2,839 | | 3,069 | | 18,167 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 104,243 | | 36,739 | | 19,320 | | 50,444 | | 210,746 |
| |
| |
| |
| |
| |
|
| Operating income/(loss) | | 110,872 | | 14,286 | | 35,500 | | (50,444) | | 110,214 |
| |
| |
| |
| |
| |
|
| Total assets from continuing operations | | 878,185 | | 370,111 | | 1,361,520 | | 64,424 | | 2,674,240 |
| Long-lived assets | | 241,106 | | 178,283 | | 236,144 | | 44,725 | | 700,258 |
| Capital expenditure on long-lived assets | | 2,893 | | 1,000 | | 18,773 | | 267 | | 22,933 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization are the write-downs of property, plant and equipment of $0.8 million included in the US segment. Depreciation from manufacturing plants ($0.7 million) is included in cost of product sales in the US segment. Depreciation and amortization relating to R&D assets are included in the US and International segments
..
| 6 months to June 30, 2005 | | US | | International | | Corporate | | R&D | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 524,920 | | 96,079 | | - | | - | | 620,999 |
| Royalties | | 534 | | 4,522 | | 115,831 | | - | | 120,887 |
| Licensing and development | | 5,544 | | 1,039 | | - | | - | | 6,583 |
| Other revenues | | 4,036 | | 5,784 | | - | | - | | 9,820 |
| |
| |
| |
| |
| |
|
| Total revenues | | 535,034 | | 107,424 | | 115,831 | | - | | 758,289 |
| | | | | | | | | | | |
| Cost of product sales | | 46,333 | | 28,945 | | - | | - | | 75,278 |
| Research and development | | - | | - | | - | | 176,989 | | 176,989 |
| Selling, general and administrative | | 216,962 | | 58,931 | | 35,155 | | - | | 311,048 |
| Depreciation and amortization(1) | | 21,347 | | 5,246 | | 7,122 | | - | | 33,715 |
| Intangible asset impairment | | 3,000 | | - | | - | | - | | 3,000 |
| Reorganization costs | | 2,228 | | - | | 307 | | 343 | | 2,878 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 289,870 | | 93,122 | | 42,584 | | 177,332 | | 602,908 |
| |
| |
| |
| |
| |
|
| Operating income/(loss) | | 245,164 | | 14,302 | | 73,247 | | (177,332) | | 155,381 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets | | 1,204,263 | | 403,792 | | 1,127,566 | | 63,136 | | 2,798,757 |
| Long-lived assets | | 314,518 | | 132,380 | | 291,030 | | 40,935 | | 778,863 |
| Capital expenditure on long-lived assets | | 37,731 | | 1,050 | | 32,876 | | - | | 71,657 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization are the write-downs of intangible assets of $3.0 million and property, plant and equipment of $5.9 million included in the US segment. Depreciation from manufacturing plants ($1.7 million) is included in cost of product sales in the US segment. Depreciation and amortization relating to R&D assets are included in the US and International segments.29
| 6 months to June 30, 2004 | | US | | International | | Corporate | | R&D | | Total |
| | $’000 | | $’000 | | $’000 | | $’000 | | $’000 |
| |
| |
| |
| |
| |
|
| Product sales | | 433,300 | | 86,574 | | - | | - | | 519,874 |
| Royalties | | - | | 5,635 | | 108,167 | | - | | 113,802 |
| Licensing and development | | 6,279 | | 1,118 | | - | | - | | 7,397 |
| Other revenues | | 1,439 | | 2,048 | | - | | - | | 3,487 |
| |
| |
| |
| |
| |
|
| Total revenues | | 441,018 | | 95,375 | | 108,167 | | - | | 644,560 |
| |
| |
| |
| |
| |
|
| Cost of product sales | | 41,861 | | 19,216 | | - | | - | | 61,077 |
| Research and development | | - | | - | | - | | 86,001 | | 86,001 |
| Selling, general and administrative | | 144,616 | | 49,805 | | 31,054 | | - | | 225,475 |
| Depreciation and amortization(1) | | 17,109 | | 5,410 | | 3,064 | | - | | 25,583 |
| Reorganization costs | | 12,424 | | 2,696 | | 2,900 | | 3,960 | | 21,980 |
| |
| |
| |
| |
| |
|
| Total operating expenses | | 216,010 | | 77,127 | | 37,018 | | 89,961 | | 420,116 |
| |
| |
| |
| |
| |
|
| Operating income/(loss) | | 225,008 | | 18,248 | | 71,149 | | (89,961) | | 224,444 |
| |
| |
| |
| |
| |
|
| | | | | | | | | | | |
| Total assets from continuing operations | | 878,185 | | 370,111 | | 1,361,520 | | 64,424 | | 2,674,240 |
| Long-lived assets | | 241,106 | | 178,283 | | 236,144 | | 44,725 | | 700,258 |
| Capital expenditure on long-lived assets | | 6,878 | | 2,157 | | 21,351 | | 1,089 | | 31,475 |
| |
| |
| |
| |
| |
|
(1) Included in depreciation and amortization are the write-downs of property, plant and equipment of $1.2 million ($0.4 million in the Corporate segment and $0.8 million in the US segment). Depreciation from manufacturing plants ($1.3 million) is included in cost of product sales in the US segment. Depreciation and amortization relating to R&D assets are included in the US and International segments.13. Subsequent events
Acquisition of TKT
On July 27, 2005, Shire Pharmaceuticals Group plc completed its acquisition of TKT pursuant to the Agreement and Plan of Merger, dated April 21, 2005 (the “Merger Agreement”), among Shire, Sparta Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Shire (“Merger Sub”), and TKT. Shire’s acquisition of TKT was effected by merging Merger Sub with and into TKT (the “Merger”), with TKT continuing as the surviving corporation. As consideration for the Merger and pursuant to the terms 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 of the Merger, less any applicable withholding taxes. In addition, each outstanding option to purchase TKT common stock that was granted or committed to be granted prior to the date of the Merger Agreement became the right to receive the difference between $37.00 per share and the per share exercise price of such option, less any applicable withholding taxes, and each outstanding option to purchase TKT common stock that was granted pursuant to an offer of employment made on or after the date of the Merger Agreement was cancelled and will be substituted with an option having equivalent value under an equity compensation plan of Shire.
In connection with the merger, the holders of 12,318,765 shares of TKT common stock submitted written demands for appraisal of their shares and have, as a result, elected not to accept the $37.00 per share merger consideration. To the extent that these demands were validly asserted in accordance with the applicable requirements of Delaware law and these holders perfect their rights thereunder, such holders will be entitled to receive the fair value of their shares as determined by the Delaware Court of Chancery. The determination of fair value of the TKT shares will be made excluding any element of value arising from the transaction, such as cost savings or business synergies. The Delaware Court of Chancery may ascribe a valuation to the shares that is greater than, less than or equal to $37.00 per share and may award interest on the amount determined in the appraisal process. TKT shareholders who have asserted appraisal rights may within 60 days after the effective time of the Merger withdraw their demand for appraisal and accept the $37.00 per share Merger consideration in cash.
For accounting purposes, the acquisition of TKT will be accounted for as an acquisition in accordance with SFAS 141, “Business Combinations”.
30
Funding of the Acquisition
The total cost of the acquisition of approximately $1.6 billion will be funded from Shire’s existing cash resources and drawings from a $500 million general purpose bank facility. In addition Shire has arranged a separate $300 million bank facility solely for the purpose of financing certain milestone payments due under the agreement between Shire and New River relating to NRP104. For details of the Facilities Agreement see Note 9.
14. Related parties
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 equity interest. Dr Bellini, a non-executive director of BioChem had an indirect substantial interest in a company which is a co-investor of ViroChem Pharma Inc.
31
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes appearing elsewhere in this report.
OverviewShire’s strategic goal is to become the leading specialty pharmaceutical company that focuses on meeting the needs of the specialist physician. Shire focuses its business on central nervous system (CNS), gastrointestinal (GI), general products (GP) and rare genetic diseases - all being areas in which Shire has a commercial presence. The structure is sufficiently flexible to allow Shire to target new therapeutic areas to the extent opportunities arise through product or project acquisitions. Shire believes that a carefully selected portfolio of products with a strategically aligned and relatively small scale sales force will deliver strong results.
Shire’s focused strategy is to develop and market products for specialty physicians. This approach aims to deliver increased returns and lower risks. Shire’s in-licensing and merger and acquisition efforts are focused on products in niche markets with strong intellectual property either in the US or Europe.
In accordance with this strategy Shire completed the acquisition of TKT on July 27, 2005. Shire views TKT as complementary to and consistent with Shire's stated strategy of meeting the needs of the specialist physician using small scale sales forces.
TKT’s business is focused on enzyme replacement therapy (ERT) prescribed by a small number of specialist physicians, who can also be reached through small scale sales forces. The ERT business has a relatively small number of competitors and the diseases that TKT focuses on generally result in products that have long lifecycles, aided by orphan drug status.
Significant events in the three months to June 30, 2005
Generic versions of AGRYLIN
AGRYLIN’s pediatric marketing exclusivity expired in September 2004 in the US and on April 18, 2005 the FDA rejected Shire’s Citizens’ Petition, which had been filed with the FDA in August 2004. The FDA subsequently approved several generic versions of AGRYLIN which, as expected, adversely affected Shire’s sales of this product in the US.
Generic version of ADDERALL XR
In June 2005, Shire was notified that Teva had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 15mg and 20mg strengths of ADDERALL XR prior to the expiration date of the Company’s patents. This is in addition to Teva’s February 2005 notification regarding 10mg and 30mg strengths. On April 11, 2005 the Company announced that it had chosen not to sue Teva in respect of the 10mg and 30mg strengths and on July 19, 2005, the Company announced that it would not sue Teva in respect of the 5mg, 15mg and 20mg strengths.
Shire has also been notified that Barr, Impax and Colony have submitted applications to the FDA seeking permission to market generic versions of ADDERALL XR. For further information see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings.
REMINYL
Shire has submitted its response to the preliminary Appraisal Consultation Document issued by the National Institute for Health and Clinical Excellence in England and Wales (NICE) which recommended that all existing approved products for the symptomatic treatment of mild to moderate Alzheimer's disease in England and Wales were no longer to be reimbursable under the National Health Service (NHS) when used by new patients. NICE’s final recommendation was expected to be published in June 2005. However, on July 18, 2005 NICE announced that it had delayed its decision and asked the pharmaceutical companies that market drugs to treat Alzheimer's disease to identify sub-groups of patients who may get benefit from the treatments. Shire and the other concerned pharmaceutical companies are in ongoing discussions with NICE.
32
Shire and Janssen’s affiliate, Johnson & Johnson Pharmaceutical Research & Development, LLC, are in the final stages of discussions with the UK and Irish regulatory authorities in relation to updated wording of the labeling for REMINYL. When finalized, the new label will incorporate information from the investigational studies in mild cognitive impairment.
On April 11, 2005, Ortho-McNeil Neurologics Inc. (Janssen’s US affiliate company) announced that REMINYL would be marketed in the US under the new product name of RAZADYNE. Ortho-McNeil Neurologics Inc. worked closely with the FDA on a name change following dispensing errors in the US, between REMINYL and the Type 2 diabetes mellitus drug known as AMARYL. Shire is unaware of any similar dispensing errors outside the US and REMINYL continues to be marketed outside the US under its original name.
North American site consolidation
The Company is continuing its North American site consolidation, which commenced in 2004. Although no costs were incurred in the three months to June 30, 2005, the Company intends to close its Newport site in the second half of 2005 and this will represent the final element of the reorganization program. The remaining costs in respect of the site consolidation are expected to be approximately $9 million. See Note 2 to the condensed consolidated financial statements in this Form 10-Q for further information.
Recent developments
Transkaryotic Therapies, Inc.
On July 27, 2005, Shire completed its acquisition of TKT in an all-cash transaction at $37 per outstanding TKT share, or approximately $1.6 billion. See Note 13 to the condensed consolidated financial statements in this Form 10-Q for further information.
ADDERALL XR adolescent
In September 2004 a supplemental new drug application (sNDA) for the use of ADDERALL XR in the adolescent population was submitted to the FDA. On July 22, 2005, Shire announced that the FDA approved ADDERALL XR as a once-daily treatment for adolescents aged 13 to 17 with ADHD.
CARBATROL patent litigation
On July 15, 2005, the United States District Court for the District of New Jersey denied Nostrum’s motion for summary judgment. Consequently, the lawsuit between Shire and Nostrum will continue to move toward trial. No trial date has yet been set by the Court.
Research and development
Shire focuses its resources on projects within its core therapeutic areas in late stage development, which Shire believes are at lower risk. The Company presently has one product in registration for the treatment of ADHD (MTS) and four projects in Phase 3 of development – three for the treatment of ADHD (NRP104, SPD465, SPD503) and one for the treatment of ulcerative colitis (SPD476).
Products in registration at June 30, 2005
MTS: Shire acquired the worldwide sales and marketing rights to MTS, a methylphenidate transdermal delivery system for the once daily treatment of ADHD, from Noven in February 2003. In April 2003 Noven received a “not approvable” letter from the FDA. A complete response to the “not approvable” letter was submitted on June 28, 2005 following the completion of an extensive clinical program designed to address concerns raised by the FDA. On July 26, 2005 the Company announced that the FDA had accepted the amendment to the NDA and confirmed that the amendment will receive a six month review.
In addition to FDA approval, an application must be made to the US Drug Enforcement Agency (DEA) for procurement quotas in order to obtain access to methylphenidate. Pursuant to recent legislation, the DEA cannot establish procurement quotas following FDA approval of a NDA for a controlled substance (including methylphenidate) until after the DEA reviews and provides public comment on the labeling, promotion, risk management plan and other documents associated with the product. Any delay by the DEA in establishing Shire's procurement quotas for methylphenidate could delay the launch of MTS.
33
Products in late stage development as of June 30, 2005
- SPD476 for ulcerative colitis, which is in Phase 3 development. During the three months to June 30, 2005 Shiremet with the FDA and EU Regulatory Agencies to discuss the proposed regulatory filing strategy. The FDA filingis anticipated in late 2005;
- NRP104 for ADHD, which is in Phase 3 development in collaboration with New River. During the three monthsto June 30, 2005 New River reported positive Phase 3 data for NRP104. Shire is working with New River tosupport their activities leading to regulatory submission, which New River has stated it expects to make in thefourth quarter of 2005;
- SPD465 for ADHD, which is in Phase 3 development. The FDA filing is anticipated in the first half of 2006; and
- SPD503 for ADHD, which is in Phase 3 development. During the three months to June 30, 2005 Shire met withthe FDA to discuss the proposed regulatory filing strategy. In order to optimize the characterization of theproduct in the label , Shire has agreed with the FDA to include results from an ongoing study in its submissionpackage. As a result the FDA filing is now anticipated in the first half of 2006.
Results of operations for the three months to June 30, 2005 and 2004
Total revenues
The following table provides an analysis of the Company’s total revenues by source:
| | 3 months to | | 3 months to | | |
| | June 30, | | June 30, | | |
| | 2005 | | 2004 | | Change |
| | $’000 | | $’000 | | % |
| |
| |
| |
|
| Product sales | | 351,555 | | 255,280 | | +38 |
| Royalties | | 62,564 | | 57,657 | | +9 |
| Licensing and development | | 2,714 | | 5,482 | | -50 |
| Other | | 7,763 | | 2,541 | | +206 |
| |
| |
| |
|
| Total | | 424,596 | | 320,960 | | +32 |
| |
| |
| |
|
Product salesFor the three months to June 30, 2005, product sales increased 38% ($96.3 million) to $351.6 million (2004: $255.3 million) and represented 83% of total revenues (2004: 80%). The following table provides an analysis of the Company’s key product sales:
| | 3 months to | | 3 months to | | Product | | US |
| | June 30, | | June 30, | | sales | | prescription |
| | 2005 | | 2004 | | growth | | growth |
| | $’000 | | $’000 | | % | | % |
| |
| |
| |
| |
|
| CNS | | | | | | | | |
| ADDERALL XR | | 205,424 | | 143,484 | | +43 | | +15 |
| ADDERALL | | 12,053 | | 1,261 | | n/a | | n/a |
| CARBATROL | | 21,785 | | 11,863 | | +84 | | -5 |
| | | | | | | | | |
| GI | | | | | | | | |
| PENTASA | | 30,989 | | 26,433 | | +17 | | +10 |
| COLAZIDE | | 2,185 | | 2,004 | | +9 | | n/a |
| | | | | | | | | |
| GP | | | | | | | | |
| AGRYLIN and XAGRID* | | 29,667 | | 33,974 | | -13 | | -35 |
| FOSRENOL | | 9,865 | | - | | n/a | | n/a |
| CALCICHEW | | 10,082 | | 9,066 | | +11 | | n/a |
34
| SOLARAZE | | 3,031 | | 2,188 | | +39 | | n/a |
| REMINYL/RAZADYNE | | 2,898 | | 2,828 | | +2 | | n/a |
| | | | | | | | | |
| Other product sales | | 23,576 | | 22,179 | | +6 | | |
| |
| |
| |
| | |
| | 351,555 | | 255,280 | | +38 | | |
| |
| |
| |
| | |
*XAGRID is not included in US prescription growthNote: The following discussion includes references to prescription and market share data for the Company’s key products. The source of this data is IMS Health, June 2005. IMS Health is a leading global provider of business intelligence for the pharmaceutical and healthcare industries.
ADDERALL XR
US prescriptions for ADDERALL XR for the three months to June 30, 2005 were up 15% due primarily to an 8% increase in the total US ADHD market compared to the same period in 2004 and an increase in ADDERALL XR’s market share.
ADDERALL XR had a 24% share of the total US ADHD market in June 2005 (June 2004: 23%) and continues to maintain its position as the leading brand in the US ADHD market.
Product sales growth was higher than prescription growth for the quarter due mainly to the impact of price increases in June 2004 and December 2004 and lower sales deductions.
Shire is continuing with its appeal in relation to the February 2005 suspension of sales of ADDERALL XR in Canada by Health Canada.
ADDERALL XR’s pediatric exclusivity in the US under the Hatch-Waxman regulations expired on April 11, 2005.
Litigation proceedings relating to the Company’s ADDERALL XR patents are in progress. For further information see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings. Any decrease in the sales of ADDERALL XR could significantly reduce revenues and earnings.
CARBATROL
US prescriptions for the three months to June 30, 2005 were down 5%, compared to the same period in 2004. This was due primarily to limited promotion of this product during the quarter as promotional resources were diverted to other products.
Product sales for the three months to June 30, 2005 were up 84%, compared to the same period in 2004. The difference between sales growth and the lower level of prescriptions is due to a significant wholesaler re-stocking in order to replenish a previously low pipeline, a price increase in August 2004 and significantly lower sales deductions.
CARBATROL had a 43% share of the total US extended release carbamazepine prescription market in June 2005 (June 2004: 45%).
Patent litigation proceedings relating to CARBATROL are in progress. For further information see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings.
PENTASA
US prescriptions for the three months to June 30, 2005 were up 10%, compared to the same period in 2004. The increase was largely due to the success of the co-promotional agreement with Solvay Pharmaceuticals Inc. and the impact of the 500mg dosage form launched in the third quarter of 2004.
Product sales for the three months to June 30, 2005 were up 17%, compared to the same period in 2004. The difference between sales growth and prescription growth is due to the impact of the September 2004 price increase which more than offset some limited wholesaler de-stocking and increased sales deductions.
PENTASA had a 19% share of the total US oral mesalamine prescription market in June 2005 (June 2004: 17%).
35
AGRYLIN and XAGRID
AGRYLIN/XAGRID sales worldwide for the three months to June 30, 2005 were $29.7 million, down 13% compared to the same period in 2004 (Q2 2004: $34.0 million).
US sales were down 31% due to the impact of generic versions of AGRYLIN being approved 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 up 23%, primarily due to the successful launch of XAGRID in the UK, Germany and France in the first quarter of 2005. In accordance with current orphan drug legislation in the EU, XAGRID will have up to 10 years of marketing exclusivity in the EU.
FOSRENOL
US prescriptions for the three months to June 30, 2005 were up 100%, to 36,000 prescriptions, compared to the previous quarter (Q1 2005: 18,000). FOSRENOL was launched in the US in January 2005.
Product sales for the three months to June 30, 2005 were up 101%, to $9.9 million, compared to the previous quarter (Q1 2005: $4.9 million).
FOSRENOL had an 8% share of the total US phosphate binding market in June 2005.
Shire continues its discussions relating to FOSRENOL with regulatory authorities across Europe and other regions. Launches will begin in Europe during 2005, subject to obtaining national approvals and pricing and concluding reimbursement negotiations.
Royalties
Royalty revenue increased 9% to $62.6 million for the three months to June 30, 2005 (2004: $57.7 million) and represented 15% of total revenues (2004: 18%). The following table provides an analysis of Shire’s royalty income:
| | 3 months to | | 3 months to | | |
| | June 30, | | June 30, | | |
| | 2005 | | 2004 | | change |
| | $’000 | | $’000 | | % |
| |
| |
| |
|
| 3TC | | 40,475 | | 39,636 | | +2 |
| ZEFFIX | | 7,736 | | 6,802 | | +14 |
| Others | | 14,353 | | 11,219 | | +28 |
| |
| |
| |
|
| Total | | 62,564 | | 57,657 | | +9 |
| |
| |
| |
|
| 3TC | | | | | | |
Royalties from sales of 3TC for the three months to June 30, 2005 were $40.5 million, an increase of 2% compared to the three months to June 30, 2004 ($39.6 million). This was due to the positive impact of foreign exchange movements.
Shire receives royalties from GSK on 3TC worldwide sales, with the exception of Canada where a commercialization partnership with GSK exists. GSK’s worldwide sales of 3TC for the three months to June 30, 2005 were $309 million (2004: $298 million).
ZEFFIX
Royalties from sales of ZEFFIX for the three months to June 30, 2005 were $7.7 million, an increase of 14% compared to the three months to June 30, 2004 ($6.8 million), due to strong growth in the Japanese market and the positive impact of foreign exchange movements.
Shire receives ZEFFIX royalties from GSK on worldwide sales, with the exception of Canada where a commercialization partnership with GSK exists. GSK’s worldwide sales of ZEFFIX for the three months to June 30, 2005 were $68 million (2004: $60 million).
36
OtherOther royalties are primarily in respect of REMINYL (now marketed as RAZADYNE in the US), a product marketed worldwide by Janssen, with the exception of the United Kingdom and the Republic of Ireland where Shire acquired the exclusive marketing rights from May 2004.
On April 11, 2005, Ortho-McNeil Neurologics Inc. (Janssen’s US affiliate company) announced that REMINYL would be marketed in the US under the new product name of RAZADYNE. Ortho-McNeil Neurologics Inc. worked closely with the FDA on a name change following dispensing errors in the US, between REMINYL and the Type 2 diabetes mellitus drug known as AMARYL. Shire is unaware of any similar dispensing errors outside the US and REMINYL continues to be marketed outside the US under its original name.
Sales of REMINYL/RAZADYNE, a treatment for mild to moderately severe dementia of the Alzheimer’s type, are growing well in the Alzheimer’s market.
Shire and Janssen’s affiliate, Johnson & Johnson Pharmaceutical Research & Development, LLC, are in the final stages of discussions with the UK and Irish regulatory authorities in relation to updated wording of the labeling for REMINYL. When finalized, the new label will incorporate information from the investigational studies in mild cognitive impairment.
Shire has submitted its response to the preliminary Appraisal Consultation Document issued by the National Institute for Health and Clinical Excellence in England and Wales (NICE) which recommended that all existing approved products for the symptomatic treatment of mild to moderate Alzheimer's disease in England and Wales were no longer to be reimbursable under the National Health Service (NHS) when used by new patients. NICE’s final recommendation was expected to be published in June 2005. However, on July 18, 2005 NICE announced that it had delayed its decision and asked the pharmaceutical companies that market drugs to treat Alzheimer's disease to identify sub-groups of patients who may get benefit from the treatments. Shire and the other concerned pharmaceutical companies are in ongoing discussions with NICE.
Cost of product sales
For the three months to June 30, 2005, the cost of product sales amounted to 12% of product sales (2004: 11%). The decrease in gross margin is driven by a change in the product mix, with more income being generated from lower margin products.
Research and development (R&D)
R&D expenditure increased from $47.4 million in the three months to June 30, 2004 to $65.5 million in the three months to June 30, 2005. Expressed as a percentage of total revenues, R&D expenditure was 15% for the three months to June 30, 2005 (2004: 15%). Shire’s pipeline is now well advanced with five projects in late stage development or registration.
Selling, general and administrative (SG&A)
SG&A expenses increased from $118.2 million in the three months to June 30, 2004 to $173.6 million in the three months to June 30, 2005, an increase of 47%. As a percentage of product sales, SG&A expenses were 49% (2004: 46%).
| 3 months to June 30, | | 2005 | | 2004 | | Change |
| | $M | | $M | | % |
| |
| |
| |
|
| Sales costs | | 49.6 | | 34.8 | | +43 |
| Marketing costs | | 61.2 | | 44.1 | | +39 |
| Other SG&A costs | | 42.7 | | 26.2 | | +63 |
| |
| |
| |
|
| | 153.5 | | 105.1 | | +46 |
| Depreciation and amortization1 | | 20.1 | | 13.1 | | +53 |
| |
| |
| |
|
| Total SG&A costs | | 173.6 | | 118.2 | | +47 |
| |
| |
| |
|
| | | | | | | |
1. Excludes depreciation from manufacturing plants of $0.9 million (2004: $0.7 million) which is included in cost of product sales.
37
Sales, marketing and other SG&A costs in the three months to June 30, 2005 increased 46% to $153.5 million (2004: $105.1 million). This increase was expected with additional costs in the three months to June 30, 2005 attributable to four product launches in the first half of 2005. In addition there is an incremental cost in 2005 associated with the FOSRENOL and EQUETRO sales forces. Sales, marketing and other SG&A costs have moderated (Q1: $157.6 million) and this trend is expected to continue throughout the remainder of 2005.
The depreciation charge for the three months to June 30, 2005 was $11.1 million (2004: $3.1 million) which includes a write-down of property, plant and equipment of $5.9 million. Amortization charges were $9.0 million for the three months to June 30, 2005 (2004: $10.0 million).
Intangible asset impairment
The intangible asset impairment charge for the three months to June 30, 2005 was $3.0 million (2004: $nil). The impairment charge arose as a result of the economic value and strategic worth of the product concerned being less than its carrying value.
Reorganization costs
The Company incurred no costs in the three months to June 30, 2005 in relation to the reorganization of the business announced in 2004 (2004: $18.2 million). There are expected remaining costs of approximately $9 million in respect of the reorganization relating to duplicate facilities. These costs will be booked when the Company ceases to use its Newport facility, which is expected to occur by the end of 2005.
For further information see Note 2 to the condensed consolidated financial statements in this Form 10-Q.
Interest income and expense
For the three months to June 30, 2005, the Company received interest income of $11.3 million (2004: $4.4 million). This increase in interest income is primarily due to higher interest rates on the Company's US cash deposits.
For the three months to June 30, 2005, the Company had interest expense of $1.2 million which primarily related to costs of a bridging loan to finance the TKT transaction (2004: interest on convertible loan notes: $2.1 million).
Other income, net
For the three months to June 30, 2005, other income totaled $0.8 million (2004: $14.1 million). During the three months to June 30, 2004, other income was primarily attributable to the realized gain on the sale of a portfolio investment.
Taxation
The effective rate of tax for the three months to June 30, 2005 was 24% (2004: 30%). The Company’s effective tax rate was 4% lower than in the first quarter of 2005. The reduction in rate this quarter followed the conclusion of a routine tax audit. At June 30, 2005, net deferred tax assets of $87.5 million were recognized (December 31, 2004: $78.1 million).
Equity in earnings of equity method investees
Earnings of $0.9 million were recorded for the three months to June 30, 2005 (2004: $1.2 million). Earnings of $1.3 million, representing a 50% share of earnings from the antiviral commercialization partnership with GSK in Canada (2004: $1.2 million) were offset by the share of losses in the GeneChem and EGS Healthcare Funds of $0.4 million (2004: $nil).
38
Results of operations for the six months to June 30, 2005 and 2004
Total revenues
The following table provides an analysis of the Company’s total revenues by source:
| | 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 sales
For the six months to June 30, 2005, product sales increased 19% ($101.1 million) to $621.0 million (2004: $519.9 million) and represented 82% of total revenues (2004: 81%). The following table provides an analysis of the Company’s key product sales:
| | 6 months to | | 6 months to | | Product | | US |
| | June 30, | | June 30, | | sales | | prescription |
| | 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 growth
The following discussion includes references to prescription and market share data for the Company’s key products. The source of this data is IMS Health, June 2005. IMS Health is a leading global provider of business intelligence for the pharmaceutical and healthcare industries.
ADDERALL XRUS prescriptions for the six months to June 30, 2005 were up 15%, compared to the same period in 2004, due to a 1% increase in ADDERALL XR’s total share of the US ADHD market, from 23% in June 2004 to 24% in June 2005 and a 7% increase in the total US ADHD market.
39
Product sales growth of 24% was higher than US prescription growth of 15% for the six months due to the impact of price increases in June 2004 and December 2004 offset by modest destocking and modest increases in sales deductions.
In February 2005, Shire announced that Health Canada had suspended sales of ADDERALL XR in Canada where sales in 2004 amounted to $7.8 million. The suspension followed Health Canada’s interpretation of adverse event data as part of routine label updating. The FDA has reviewed the same adverse event data as Health Canada both at the time of the Health Canada suspension and again when the FDA was reviewing the ADDERALL XR sNDA for use in adolescents. On both occasions the FDA concluded that Health Canada’s regulatory action was not warranted and the FDA approved the sNDA on July 22, 2005. Although Shire is complying with Health Canada’s suspension request, the Company strongly disagrees with the conclusions drawn by Health Canada and has lodged an appeal.
ADDERALL XR’s pediatric marketing exclusivity in the US under the Hatch-Waxman regulations expired on April 11, 2005.
Litigation proceedings relating to the Company's ADDERALL XR patents are in progress. For further information see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings. Any decrease in the sales of ADDERALL XR could significantly reduce revenues and earnings.
CARBATROLUS prescriptions for the six months to June 30, 2005 were down 2% compared to the same period in 2004. This was due primarily to limited promotion of this product by Shire during first six months of 2005 as promotional resources were diverted to other products.
Product sales increased by 40%. The difference between sales growth and the lower level of prescriptions is due to significant wholesaler re-stocking in order to replenish a previously low pipeline, a price increase in August 2004 and significantly lower sales deductions.
CARBATROL had a 43% share of the total US extended release carbamazepine prescription market in June 2005 (June 2004: 45%).
Patent litigation proceedings relating to CARBATROL are in progress. For further information see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings.
PENTASAUS prescriptions for the six months to June 30, 2005 were up 8%, compared to the same period in 2004. The increase was largely due to the success of the co-promotional agreement with Solvay Pharmaceuticals Inc. and the impact of the 500mg 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 the increase in prescriptions and a price increase in September 2004 offset by wholesaler destocking and increased sales deductions.
PENTASA had a 19% share of the total US oral mesalamine prescription market in June 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 being approved 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 up 20%, primarily due to the successful launch of XAGRID in the UK, Germany and France in the first quarter of 2005. In accordance with current orphan drug legislation in the EU, XAGRID will have up to 10 years of marketing exclusivity in the EU.
40
FOSRENOLFOSRENOL was launched in the US in January 2005 and had acheived an 8% share of the 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 regulatory authorities across Europe and other regions. Launches will begin in Europe during 2005, subject to obtaining national approvals and pricing and concluding reimbursement negotiations.
Royalties
Royalty 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 of Shire’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, an increase 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, with the exception of Canada where a commercialization partnership with GSK exists. GSK’s worldwide sales of 3TC for the six months to June 30, 2005 were $606 million (2004: $587 million).
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 of foreign exchange movements.
Shire receives ZEFFIX royalties from GSK on worldwide sales, with the exception of Canada where a commercialization partnership with GSK exists. GSK’s worldwide sales 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 RAZADYNE in the US), a product marketed worldwide by Janssen, with the exception of the United Kingdom and the Republic of Ireland where Shire acquired the exclusive marketing rights from May 2004.
Sales of REMINYL/RAZADYNE, a treatment for mild to moderately severe dementia of the Alzheimer’s type, are growing well in the Alzheimer’s market.
Cost of product sales
For the six months to June 30, 2005, the cost of product sales was 12% of product sales (2004: 12%).
41
Research and development (R&D)
R&D expenditure increased from $86.0 million in the six months to June 30, 2004 to $177.0 million in the six months to June 30, 2005. Expressed as a percentage of total revenues, R&D expenditure was 23% for the six months to June 30, 2005 (2004: 13%). This increase included an initial payment to New River of $50 million in respect on NRP104, which has been expensed in accordance with the Company’s accounting policy. R&D expenditure other than the New River payment comprised 17% of total revenues. The level of expenditure for items other than the New River payment in the six months to June 30, 2004 was below normal levels partially due to the phasing of project spend and partially as a result of the accounting applied to the impending disposal of the vaccines business. Shire’s pipeline is now well advanced with five projects in late stage development or registration.
Selling, general and administrative (SG&A)
SG&A expenses increased from $251.1 million in the six months to June 30, 2004 to $344.8 million in the six months to June 30, 2005, an increase of 37%. As a percentage of product sales, SG&A expenses were 56% (2004: 48%).
| 6 months to June 30, | | 2005 | | 2004 | | Change |
| | $M | | $M | | % |
| |
| |
| |
|
| Sales costs | | 97.5 | | 73.3 | | +33 |
| Marketing costs | | 130.8 | | 95.0 | | +38 |
| Other SG&A costs | | 82.8 | | 57.2 | | +45 |
| |
| |
| |
|
| Total SG&A costs | | 311.1 | | 225.5 | | +38 |
| Depreciation and amortization1 | | 33.7 | | 25.6 | | +32 |
| |
| |
| |
|
| Total SG&A costs | | 344.8 | | 251.1 | | +37 |
| |
| |
| |
|
| | | | | | | |
1 Excludes depreciation from manufacturing plants of $1.7 million (2004: $1.3 million) which is included in cost of product sales.
Sales, marketing and other SG&A costs in the six months to June 30, 2005 increased 38% to $311.1 million (2004: $225.5 million). This increase was expected with additional costs in the six months to June 30, 2005 attributable to four product launches in the first half of 2005. In addition there is an incremental cost in 2005 associated with the FOSRENOL and EQUETRO sales forces.
The depreciation charge for the six months to June 30, 2005 was $15.5 million (2004: $6.5 million) which includes a write-down of property, plant and equipment of $5.9 million. Amortization charges were $18.2 million for the six months to June 30, 2005 (2004: $19.1 million).
Intangible asset impairment
The intangible asset impairment charge for the six months to June 30, 2005 was $3.0 million (2004: $nil). The impairment charge arose as a result of the economic value and strategic worth of the product concerned being less than its carrying value.
| Reorganization costs | | | | |
| | | | | |
| 6 months to 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 $9 million in respect of the reorganization relating to duplicate facilities. These costs will be booked when the Company ceases to use its Newport facility, which is expected to occurby the end of 2005. For further information see Note 2 to the condensed consolidated financial statements in this Form 10-Q.42
Interest income and expense
For the six months to June 30, 2005, the Company received interest income of $21.0 million (2004: $8.4 million). This increase in interest income is primarily due to higher interest rates the Company's US cash deposits.
For the six months to June 30, 2005, the Company had interest expense of $1.2 million which primarily related to costs of a bridging loan to finance the TKT transaction (2004: interest on convertible loan notes: $4.2 million).
Other income, net
For the six months to June 30, 2005, other income was $0.7 million (2004: $9.3 million). In 2004, other income, net was primarily attributable to the realized gain on the sale of a portfolio investment offset by the write down of certain portfolio investments.
Taxation
The effective rate of tax for the six months to June 30, 2005 was 25% (2004: 28%). The Company’s effective tax rate was 3% lower than in the first half of 2004. The reduction in rate follows the conclusion of a routine tax audit in the second quarter of 2005. At June 30, 2005, net deferred tax assets of $87.5 million were recognized (December 31, 2004: $78.1 million). Realization is dependent upon generating sufficient taxable income to utilize such assets. Although realization of these assets is not assured, management believe it is more likely than not that the deferred tax assets will be realized.
Equity in earnings of equitymethod investees
Earnings of $0.7 million were recorded for the six months to June 30, 2005 (2004: $2.2 million). Earnings of $2.7 million, representing a 50% share of earnings from the antiviral commercialization partnership with GSK in Canada (2004: $2.2 million) were offset by the share of losses in the GeneChem and EGS Healthcare Funds of $2.0 million (2004: $nil).
Discontinued operations
During the period a provision for $3.1 million, recorded in 2004 as part of the sale of the vaccines business to IDB, was released and this positively impacted net income for the year to date. This adjustment arose from the finalization of the working capital agreement with IDB. For further information of this transaction see Note 2 to the condensed consolidated financial statements in this Form 10-Q.
Liquidity and capital resourcesGeneral
The Company’s funding requirements depend on a number of factors, including its development programs; corporate, business and product acquisitions; the level of resources required for the expansion of marketing capabilities as the product base expands; increases in accounts receivable and inventory which may arise as sales levels increase; competitive and technological developments; the timing and cost of obtaining required regulatory approvals for new products; the timing of tax payments and the continuing cash generated from sales of Shire’s key products.
An important part of Shire’s business strategy is to protect its products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The Company intends to defend its intellectual property, and as a result may need cash for funding litigation expenses incurred.
The Company ordinarily finances its activities through cash generated from operating activities, private and public offerings of equity and debt securities and the proceeds of asset or investment disposals.
In connection with the acquisition of TKT, Shire entered into a Multicurrency Revolving Facilities Agreement (the “Facilities Agreement”) with ABN AMRO Bank N.V., Barclays Bank PLC, Citicorp International Plc, HSBC Bank plc and The Royal Bank of Scotland plc (the “Lenders”) on June 15, 2005. The Facilities Agreement includes two credit facilities: (i) a multicurrency three year revolving loan facility in an aggregate amount of $500 million (“Facility A”) and (ii) a 364 day revolving loan facility in an aggregate amount of $300 million (“Facility B” and together with Facility A, the “Facilities”) see Note 9 to the condensed consolidated financial statements in this Form 10-Q.
Shire anticipates that its operating cash flow together with available cash, cash equivalents and short-term investments and the above mentioned debt facility will be sufficient to meet its anticipated future operating expenses, the cost ofacquiring TKT, capital expenditures and debt service and lease obligations as they become due over the next twelve months.
43
If the Company decides to seek to acquire other businesses, it expects to fund these acquisitions from existing cash resources, the debt facility discussed above and possibly through new borrowings and the issue of new equity if necessary.
Sources and uses of cash
The following table provides an analysis of the Company’s gross and net cash funds, including restricted cash, as at June 30, 2005 and December 31, 2004:
| | June 30, | | December 31, |
| | 2005 | | 2004 |
| | $’000 | | $’000 |
| |
| |
|
| Cash and cash equivalents | | 1,502,179 | | 1,111,477 |
| Restricted cash | | 21,943 | | 21,627 |
| Short-term investments | | 76,486 | | 324,411 |
| |
| |
|
| Gross cash funds, including restricted cash | | 1,600,608 | | 1,457,515 |
| Total debt | | (116) | | (116) |
| |
| |
|
| Net cash funds | | 1,600,492 | | 1,457,399 |
| |
| |
|
Cash flow activityNet cash provided by operating activities for the six months to June 30, 2005 was $187.5 million compared to $215.7 million for the six months to June 30, 2004. The reduction in cash generation is primarily due to the $50 million upfront payment to New River and the timing of working capital payments.
Net cash provided by investing activities was $206.8 million in the six months to June 30, 2005. Decreases in short-term investments of $244.0 million along with proceeds of $60 million for the redemption by IDB of it subscription receipts were offset primarily by loans made to IDB of $29.9 million, capital expenditure on property, plant and equipment of $44.2 million and on intangible assets of $20.0 million. Capital expenditure on property, plant and equipment included $21.8 million leasehold building improvements, $4.7 million on computer equipment and $3.1 million on furniture and fittings for the new Shire US headquarters at Wayne, $5.1 million on software purchases at the Basingstoke Head Office, $5.7 million of factory construction work and $1.3 million of plant equipment for Shire Manufacturing Inc. in the US.Capital expenditure on intangible assets included the final paymentof the acquisition of the exclusive commercialization rights to REMINYL in the UK and Republic of Ireland in 2004.
Net cash provided by investing activities was $23.8 million in the six months to June 30, 2004. This was primarily due to outflows of $31.5 million of net capital expenditure on long-term investments, intangible assets and property, plant and equipment and $12.7 million from discontinued operations, offset by a reduction of $32.0 million of cash placed on short-term deposit and proceeds from the sale of a listed investment of $26.7 million. Capital expenditure on plant and equipment for the six months to June 30, 2004 was $14.0 million, with the main expenditure being in relation to the manufacturing facility in Owing Mills ($6.0 million) and computer software ($3.9 million). Other capital expenditure related to the purchase of long-term investments ($5.5 million) and the purchase of intangible assets ($12.0 million) relating to the purchase of the commercialization rights of REMINYL in the UK and Ireland.
Net cash provided by financing activities was $0.8 million for the six months to June 30, 2005. This was due to inflows of $19.9 million from the exercise of employee stock options being offset by the dividend payment of $19.1 million in respect of the six months to December 31, 2004. Net cash provided by financing activities was $5.5 million for the six months to June 30, 2004 primarily due to the exercise of employee stock options.
The total cash consideration for the acquisition of TKT, which completed on July 27, 2005 is expected to be approximately $1.6 billion. Shareholders owning 23.8 million TKT shares have accepted the offer and approximately $1.1 billion will be paid to them upon the presentation of appropriate certificates. Following the exercise of appraisal rights by shareholders owning the remaining 12.3 million shares, the remaining $0.5 billion will be paid subject to the appraisal process outlined below.
As a result of the acquisition of TKT, cash balances have been significantly reduced and interest receivable will decrease accordingly.
44
Cash requirements
Aggregate contractual obligations
Contractual obligations
As of June 30, 2005 the Company’s contractual obligations had altered from those disclosed in the Table of Contractual Obligations in the Company’s 2004 Form 10-K as follows:
Interests in companies and partnershipsThe Company has undertaken to subscribe for interests in companies and partnerships for amounts totaling $16.2 million (December 31, 2004: $22.0 million) of which $8.3 million is committed to be paid in 2005 and a further $3.5 million could be payable in 2005, depending on the timing of capital calls.
Manufacturing facilityThe Company has committed to the expansion and modification of its manufacturing facility at Owings Mills, Maryland to facilitate the production and packaging of additional strategic products. The Company has committed to spend a further $1.0 million by the end of 2005 and has an additional commitment of $3.0 million for the design and construction of a technology center at Owings Mills, which is expected to be incurred in 2005.
Wayne, Pennsylvania fit outThe Company is in the process of fitting out its new US headquarters at Wayne, Pennsylvania. At June 30, 2005 the Company had an outstanding commitment of $2.4 million, which is expected to be incurred in 2005.
REMINYLDuring the six months to June 30, 2005 the Company paid the remaining $19 million due in connection with the acquisition of the exclusive commercialization rights to REMINYL in the UK and Republic of Ireland in 2004.
IDBAs part of the sale of the vaccines business on September 9, 2004, Shire entered into an agreement to provide IDB with a loan facility of up to $100 million, which can be drawn down over the four years following completion. As of June 30, 2005 IDB had drawn down $86.7 million under the facility. The remaining $13.3 million was drawn down in July 2005.
Other
The Company has assumed that other long-term liabilities, which comprise primarily insurance provisions ($10.7 million), SERP liabilities ($2.8 million) and long-term bonuses ($2.6 million), are due before 2008.
In addition to contractual obligations referred to above the Company has certain milestones and other commitments. The most significant are as follows:
NRP104In connection with the Company’s collaboration with New River to commercialize NRP104, the Company has an obligation to make certain payments on the achievement of the following milestones: $50 million upon the FDA’s acceptance of filing of the NDA;up to $300 million following the first commercial sale of the product, depending on the characteristics of the approved product labelling; $100 million as a sales bonus on achieving a significant sales target; and $5 million following the first commercial sale in certain specified EU markets. An upfront payment of $50 million was expensed as an R&D cost during the first quarter of 2005. Regulatory submission is currently expected in the last quarter of 2005.
MTSIn connection with the Company’s purchase of MTS in 2003, Shire has an obligation to make certain payments on the achievement of the following milestones: $50 million upon regulatory approval of the product, which will be capitalized and amortized over its useful economic life; and up to $75 million, linked to future sales performance. Regulatory approval is currently expected in the last quarter of 2005.
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FOSRENOL patent rightsIn connection with the Company’s purchase of the global patents for FOSRENOL, Shire now owns the FOSRENOL patents in the US and throughout the world (excluding Europe and Japan) and has agreed to pay AnorMED Inc. $6 million when FOSRENOL is approved in certain European countries for the assignment of the European patents and $6 million upon receipt of regulatory approval in Japan for the Japanese patents.
Other R&D commitmentsAs of June 30, 2005, the Company had commitments of $9.7 million on achievement of specified milestones.
TKT acquisition
Appraisal rights
In connection with the merger, the holders of 12,318,765 shares of TKT common stock submitted written demands for appraisal of their shares and have, as a result, elected not to accept the $37.00 per share merger consideration. To the extent that these demands were validly asserted in accordance with the applicable requirements of Delaware law and these holders perfect their rights thereunder, such holders will be entitled to receive the fair value of their shares as determined by the Delaware Court of Chancery. The determination of fair value of the TKT shares will be made excluding any element of value arising from the transaction, such as cost savings or business synergies. The Delaware Court of Chancery may ascribe a valuation to the shares that is greater than, less than or equal to $37.00 per share and may award interest on the amount determined in the appraisal process. TKT shareholders who have asserted appraisal rights may within 60 days after the effective time of the Merger withdraw their demand for appraisal and accept the $37.00 per share Merger consideration in cash.
Total consideration, including amounts payable in respect of stock options and convertible securities, is approximately $1.6 billion at the Merger price of $37.00 per share. This could change if Shire is required to pay a different amount of consideration in respect of the 12,318,765 TKT shareholders who have exercised appraisal rights. The consideration paid by Shire to TKT shareholders at completion who did not exercise appraisal rights was funded from Shire’s existing cash resources.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company’s market risk exposure since December 31, 2004. Item 7A of the Company’s Annual Report on Form 10-K for the year to December 31, 2004 contains a detailed discussion of the Company’s market risk exposure in relation to interest rate market risk and foreign exchange market risk.
ITEM 4. Controls and ProceduresAs of June 30, 2005, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, had performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable level of assurance for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.
There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
There are various legal proceedings brought by and against the Company that are discussed in the Company’s Annual Report on Form 10-K for the year to December 31, 2004. Material updates to the proceedings discussed in the Company’s Annual Report on Form 10-K are described below. There is no assurance that the Company will be successful in these proceedings and if it is not, there may be a material impact on the Company’s results and financial position.
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ADDERALL XR
(a) Barr Laboratories, Inc.
Shire’s extended release "once daily" version of ADDERALL, ADDERALL XR is covered by US patent No. 6,322,819 (the ‘819 Patent) and US patent No. 6,605,300 (the ‘300 Patent). In January 2003 the Company was notified that Barr had submitted an Abbreviated New Drug Application (ANDA) under the Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR (Barr’s ANDA products) prior to the expiration date of the Company’s ‘819 Patent, and alleging that the ‘819 Patent is not infringed by Barr's ANDA products. In August 2003 Shire was notified that Barr also was seeking permission to market its ANDA products prior to the expiration date of the ‘300 Patent and alleging that the ‘300 Patent is invalid. Shire Laboratories Inc (Shire Laboratories) filed suit against Barr for infringement of the ‘819 Patent in February 2003 and for infringement of the ‘300 Patent in September 2003. The schedules for the lawsuits against Barr with respect to the ‘819 and ‘300 Patents were consolidated in December 2003 and a trial date is scheduled for January 2006. The Company is seeking a ruling that Barr’s ANDA and ANDA products infringe the ‘819 and ‘300 Patents and its ANDA should not be approved before the expiration date of the patents. The Company is also seeking injunctions to prevent Barr from commercializing its ANDA products before the expiration of the ‘819 and ‘300 Patents, damages in the event that Barr should engage in such commercialization, and its attorneys’ fees and costs. On September 27, 2004 Barr filed an amended Answer, Affirmative Defense and Counterclaim in which Barr added the following counterclaims: invalidity of the ‘819 patent, non-infringement of the ‘300 Patent and unenforceability of the ‘819 and ‘300 Patents due to inequitable conduct. Shire has asserted affirmative defenses, alleging, among other things, that Barr has waived its right to assert the counterclaims set forth in its September 27, 2004 amended answers.
(b) Impax Laboratories, Inc.In November 2003, Shire was notified that Impax had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 30mg strength of ADDERALL XR (Impax’s ANDA product) prior to the expiration date of the ‘819 and ‘300 Patents. In December 2003, Shire Laboratories filed suit against Impax for infringement of the ‘819 and ‘300 Patents. The Company is seeking a ruling that Impax’s ANDA product infringes the ‘819 and ‘300 Patents and that its ANDA should not be approved before the expiration date of the ‘819 and ‘300 Patents. The Company is also seeking injunctions to prevent Impax from commercializing its ANDA product before the expiration of the ‘819 and ‘300 Patents, damages in the event that Impax should engage in such commercialization, and its attorneys’ fees and costs. Impax’s affirmative defenses include non-infringement and invalidity of both the ‘819 and ‘300 Patents.
In December 2004, Shire received an additional notification from Impax advising of the filing of an amendment to its ANDA for a generic version of the 5mg, 10mg, 15mg, 20mg and 25mg strengths of ADDERALL XR in addition to the 30mg strength, the subject of Impax’s initial ANDA. In January 2005, Shire Laboratories filed suit against Impax for infringement of the ‘819 and ‘300 Patents. The Company is seeking a ruling that Impax’s amended ANDA infringes the ‘819 and ‘300 patents and should not be approved before the expiration dates of the ‘819 and ‘300 Patents. The Company is also seeking an injunction to prevent Impax from commercializing its amended ANDA products before the expiration of the ‘819 and ‘300 Patents, damages in the event that Impax should engage in such commercialization, as well as its attorneys’ fees and costs. Impax’s affirmative defenses include non-infringement, invalidity and unenforceability of both the ‘819 and ‘300 Patents. Impax is also requesting that costs be assessed against the Company.
The Delaware District Court had set an October 11, 2005 trial date for the first Impax case. Following a scheduling conference with the same Court in the second case, a consolidated February 23, 2006 trial date has now been set for both cases.
(c) Colony Pharmaceuticals Inc.
In December 2004, Shire was notified that Colony had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Company’s ‘819 and ‘300 Patents. Shire has chosen not to sue Colony.
(d) Teva Pharmaceuticals USA, Inc.In February 2005, Shire was notified that Teva had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 10mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Company’s ‘819 and ‘300 Patents. In June 2005, Shire was notified that Teva had amended it's ANDA to seek permission to market additional strengths of 5mg, 15mg and 20mg of ADDERALL XR prior to the expiration of the '819 and '300 Patents. Shire has chosen not to sue Teva.
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None of Barr, Impax, Colony or Teva may launch their generic versions of ADDERALL XR before they receive final FDA approval of their respective ANDAs. In respect of Barr’s and Impax’s ANDAs, the lawsuits triggered stays of final FDA approval of up to 30 months from the date of the Company’s receipt of, respectively, Barr’s and Impax’s notice letters. Even if Barr and/or Impax receive tentative FDA approval of their ANDAs, neither of them can lawfully launch their generic versions of ADDERALL XR before the earlier of the expiration of the respective stays (Barr - February 2006; Impax - May 2006 in the case of the 30mg strength and June 2007 in the case of the 5mg, 10mg,15mg, 20mg and 25mg strengths) or a district court decision in its favor. In the event that the Company does not prevail in the Barr suit, Barr could be in a position to market its ANDA products upon FDA final approval of its ANDA. In the event the Company does not prevail in the Impax suit, Impax could be in a position to market its ANDA product upon FDA final approval of its ANDA and upon expiry of any exclusivity that Barr may hold. The FDA may grant 180 days of generic market exclusivity to the “first to file”.
Neither Colony nor Teva may market their ANDA products until FDA final approval of their ANDAs and upon the expiration of the first to file’s exclusivity rights.
The Hatch-Waxman exclusivity period for ADDERALL XR expired on April 11, 2005.
CARBATROLIn August 2003 the Company was notified that Nostrum had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 300mg strength of CARBATROL (Nostrum’s ANDA product) prior to the expiration date of the Company’s US patents for CARBATROL, US patent No. 5,912,013 (the ‘013 Patent) and US patent No. 5,326,570 (the ‘570 Patent). The notification alleges that the ‘013 and ‘570 Patents are not infringed by Nostrum’s ANDA product. On September 18, 2003 Shire Laboratories filed suit against Nostrum in the United States District Court for the District of New Jersey alleging infringement of these two patents by Nostrum’s ANDA and ANDA product. The Company was seeking a ruling that Nostrum’s ANDA infringes the ‘013 and ‘570 Patents and should not be approved before the expiration date of the ‘013 and ‘570 Patents. The Company was also seeking an injunction to prevent Nostrum from commercializing its ANDA product before the expiration of the ‘013 and ‘570 Patents, damages in the event that Nostrum should engage in such commercialization, as well as its attorneys’ fees and costs. On January 23, 2004 the Company amended the complaint to delete the allegations with respect to the ‘013 Patent while maintaining the suit with respect to the ‘570 Patent. By way of counterclaims Nostrum is seeking a declaration that the ‘570 and ‘013 Patents are not infringed by Nostrum’s ANDA product. Nostrum also was seeking actual and punitive damages for alleged abuse of process by Shire. On July 12, 2004 the Court dismissed Nostrum’s abuse of process counterclaim for failure to state a claim upon which relief can be granted. On December 10, 2004 Nostrum filed a summary judgment motion seeking a declaration of non-infringement of the ‘570 Patent. Shire’s opposition to this motion was filed on January 14, 2005. Summary judgment arguments were presented to the Court on July 15, 2005. The Court ruled during the hearing that Nostrum's motion for summary judgment was denied. Expert discovery will now continue. The Court will also set a new discovery and pretrial schedule. No trial date has been set.
Nostrum may not launch a generic version of CARBATROL before it receives final approval of its ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30 months from Shire’s receipt of Nostrum’s notice letter. Even if Nostrum receives tentative approval from the FDA for its ANDA, it cannot lawfully launch its generic version before the earlier of the expiration of the stay (February 2006) or a district court decision in its favor. In the event that the Company does not prevail, then Nostrum could be in a position to market its 300mg extended-release carbamazepine product upon FDA final approval of its ANDA.
TKTShire completed its acquisition of TKT on July 27, 2005. In its Annual Report on Form 10-K for the year ended December 31, 2004 and its Quarterly Report on Form 10-Q for the three months ended March 31, 2005, TKT described certain legal proceedings to which it is a party.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None48
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
An Annual General Meeting of Shareholders was held on June 22, 2005. The resolutions were approved on a show of hands at the meeting. Had the resolutions been put to a poll, the proxy votes which would have been voted at the meeting are described below:
1. Ordinary resolution to receive and consider the report of the directors’ and the accounts for the year ended December 31, 2004.
| For | Against | Abstentions |
| 390,982,100 | 652,340 | 3,146,277 |
2. Ordinary resolution to re-elect Mr Matthew William Emmens as a Director.
| For | Against | Abstentions |
| 389,563,578 | 3,279,709 | 1,937,430 |
3. Ordinary resolution to re-elect Mr Ronald Maurice Nordmann as a Director.
| For | Against | Abstentions |
| 387,779,176 | 3,082,640 | 3,918,901 |
4. Ordinary resolution to elect Dr Barry John Price as a Director.
| For | Against | Abstentions |
| 386,034,142 | 3,946,865 | 4,799,710 |
5. Ordinary resolution to re-appoint Deloitte & Touche LLP as Auditors.
| For | Against | Abstentions |
| 387,710,401 | 4,642,337 | 2,427,979 |
6. Ordinary resolution to authorize the Audit Committee of the Board to determine the remuneration of the Auditors.
| For | Against | Abstentions |
| 392,716,407 | 1,103,374 | 960,936 |
7. Ordinary resolution to approve the Directors’ remuneration report for the financial year ended December 31, 2004.
| For | Against | Abstentions |
| 379,661,987 | 6,796,998 | 8,321,732 |
8. Ordinary resolution to generally and unconditionally authorize the directors, in substitution for all existing authorities (save to the extent the same may have been exercised by the issue of relevant securities (within the meaning of Section 80 of the Companies Act 1985 (as amended) (the ‘Act’)) prior to June 22, 2005 or by reason of any offer or agreement made prior to June 22, 2005 which would or might require relevant securities to be allotted on or after June 22, 2005), to exercise all or any of the powers of the Company to allot relevant securities up to an aggregate nominal amount equal to £8,203,026 for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on the earlier of twelve months from the date of the passing of this resolution or the conclusion of the Annual General Meeting of the Company to be held in 2006 save that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities pursuant to any such offer or agreement as if the authority conferred hereby had not expired.
| For | Against | Abstentions |
| 390,798,549 | 2,930,801 | 1,051,367 |
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9. Special resolution subject to the passing of the previous resolution, and in substitution for all existing authorities, to empower the directors pursuant to Section 95 of the Act to allot equity securities (within the meaning of Section 94(2) of the Act) for cash pursuant to the authority conferred by the passing of the previous resolution and/or where such allotment constitutes an allotment of equity securities by virtue of Section 94(3A) of the Act as if Section 89(1) of the Act did not apply to such allotments provided that this power:
| | (a) | shall expire after the earlier of twelve months from the date of the passing of this resolution or the conclusion of the Annual General Meeting of the Company to be held in 2006, save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities pursuant to any such offer or agreement as if the power conferred hereby had not expired; and |
| | | |
| | (b) | shall be limited to: |
| | | | | |
| | | (i) | the allotment of equity securities in connection with a rights issue, open offer or other pre- emptive offer to holders of ordinary shares (excluding any shareholder holding shares as treasury shares) and to holders of non-voting exchangeable shares in the capital of Shire Acquisition Inc. (“Exchangeable Shares”) in proportion (as nearly as may be, and on the basis that each Exchangeable Share is equivalent to three ordinary shares) to their existing holdings, or to holders of ordinary shares alone in proportion (as nearly as may be) to their existing holdings of ordinary shares, but subject in each case to the directors having a right to make such exclusions or other arrangements in connection with such offerings as the directors may deem necessary or expedient: |
| | | | | |
| | | | (1) | to deal with equity securities representing fractional entitlements; |
| | | | | |
| | | | (2) | to deal with ordinary shares represented by depositary receipts; and |
| | | | | |
| | | | (3) | to deal with legal or practical problems under the laws of, or requirements of any recognized regulatory body or any stock exchange in, any territory or any other matter whatsoever; and |
| | | | | |
| | | (ii) | the allotment of equity securities for cash otherwise than pursuant to paragraph (b)(i) up to an aggregate nominal amount of £1,230,577. |
| | | | |
| For | Against | Abstentions |
| 390,522,104 | 3,182,677 | 1,075,936 |
10. Special resolution to generally and unconditionally authorize the directors for the purposes of Section 166 of the Act to make market purchases (within the meaning of Section 163(3) of the Act) of ordinary shares in the capital of the Company, provided that:
| | (a) | the maximum number of ordinary shares authorized to be purchased is 49,223,083 (representing 10% of the Company’s issued share capital at May 4, 2005); |
| |
| | (b) | the minimum price, exclusive of any expenses, which may be paid for an ordinary share is 5 pence; |
| |
| | (c) | the maximum price, exclusive of any expenses, which may be paid for an ordinary share is an amount equal to 5% above the average of the middle market quotations for an ordinary share in the Company taken from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which such shares are contracted to be purchased; |
| |
| | (d) | the authority hereby conferred shall expire at the conclusion of the next Annual General Meeting of the Company to be held after June 22, 2005 (except that the Company may make a contract to purchase ordinary shares under this authority before the expiry of this authority, which will or may be executed wholly or partly after the expiry of this authority, and may make purchases of ordinary shares in pursuance of any such contract as if such authority had not expired). |
| |
| For | Against | Abstentions |
| 393,533,510 | 172,481 | 1,074,726 |
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| 11. | Ordinary resolution to authorize the Company, in accordance with section 347C of the Act: |
| |
| | (a) | to make donations to EU political organizations, as defined by Section 347A of the Act, not exceeding £25,000 in total; and |
| |
| | (b) | to incur EU political expenditure as defined by Section 347A of the Act not exceeding £25,000 in total, |
during the period beginning June 22, 2005 and ending on the earlier of 15 months after the date of this resolution and the conclusion of the Company’s Annual General Meeting to be held in 2006.
| For | Against | Abstentions |
| 384,375,349 | 7,229,220 | 3,176,148 |
Matthew Emmens, Angus Russell, Dr James Cavanaugh, Dr Barry Price, David Kappler, Robin Buchanan, Ronald Nordmann and the Hon. James Andrews Grant continued in their term of office subsequent to the Annual General Meeting.
ITEM 5. Other InformationThe following information is being provided pursuant to Item 1.01 “Entry into a Material Definitive Agreement” and Item 2.03 “Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant” of Form 8-K with respect to Shire’s entry into a Multicurrency Revolving Facilities Agreement (the “Facilities Agreement”) on June 15, 2005. There have been no draw downs under the Facilities Agreement. A full description of the Facilities Agreement is included in Note 9 to the condensed consolidated financial statements in this Form 10-Q.
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ITEM 6. EXHIBITS
(a) Exhibits
| 2.1 | Agreement and Plan of Merger by and among Shire Pharmaceuticals Group plc, Transkaryotic Therapies, Inc. and Sparta Acquisition Corporation, dated as of April 21, 2005.(1) |
| | |
| 10.1 | Multicurrency Revolving Facilities Agreement by and among Shire Pharmaceuticals Group plc, ABN AMRO Bank N.V., Barclays Bank plc., Citicorp USA, Inc., HSBC Bank plc and The Royal Bank of Scotland plc, dated as of June 15, 2005. |
| | |
| 10.2 | Exclusive License Agreement between Shire Pharmaceuticals Group plc and Transkaryotic Therapies, Inc., dated as of April 21,2005.(2) |
| | |
| 31.1 | Certification of Matthew Emmens pursuant to Rule 13a – 14 under The Exchange Act. |
| | |
| 31.2 | Certification of Angus Russell pursuant to Rule 13a – 14 under The Exchange Act. |
| | |
| 32. | Certification of Matthew Emmens and Angus Russell pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
| (1) | Incorporated by reference to Exhibit 99.02 to Shire’s Form 8-K filed on April 25, 2005. |
| |
| (2) | Incorporated by reference to Exhibit 99.03 to Shire’s Form 8-K filed on April 25, 2005. |
| |
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SIGNATURESPursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SHIRE PHARMACEUTICALS GROUP PLC |
| | (Registrant) |
| | | |
| Date: August 5, 2005 | |
| | /s/ Matthew Emmens |
|
|
| | By: | Matthew Emmens |
| | | Chief Executive Officer |
| | | |
| Date: August 5, 2005 | |
| | /s/ Angus Russell |
|
|
| | By: | Angus Russell |
| | | Chief Financial Officer |
| | | |
| | | |
| | | |
