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 unaudited consolidated financial statements and related notes appearing elsewhere in this report.
Overview
Shire’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), human genetic therapies (HGT) and general products (GP). The structure is sufficiently flexible to allow Shire to target new therapeutic areas to the extent opportunities arise through 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. Shire’s in-licensing, merger and acquisition efforts are focused on products in niche markets with strong intellectual property protection either in the US or Europe.
Significant events in the three months to March 31, 2006
ADDERALL XR patent litigation
Barr Laboratories, Inc.
On March 10, 2006, the Company announced that in its pending litigation with Barr, involving alleged infringement of certain Shire patents, the court scheduled the bench trial to commence on October 30, 2006.
Third notice letter from Teva
In January 2006, Shire received a third notice letter that Teva Pharmaceuticals, Inc. (Teva) had further amended its initial ANDA filed in January 2005, to seek permission to market the 25mg strength generic version of ADDERALL XR prior to the expiration of the Shire US patents, No’s 6,322,819 (the ‘819 Patent) and 6,605,300 (the ‘300 Patent). On March 2, 2006 Shire filed a lawsuit in the Eastern District of Pennsylvania alleging that all of Teva’s ANDA products infringe both the ‘819 and ‘300 Patents. The lawsuit will trigger a stay of FDA approval of Teva’s 25mg strength product for up to 30 months from the date of Shire’s receipt of Teva’s notice.
Settlement of Impax litigations
On January 19, 2006, Shire settled its ADDERALL XR patent infringement lawsuits with Impax. The litigations involved Shire US patents, Nos. 6,322,819 (the ‘819 Patent), 6,605,300 (the ‘300 Patent) and 6,913,768 (the ‘768 Patent). As part of the settlement, Impax has confirmed that its proposed generic ADDERALL XR product infringes Shire’s ‘819, ‘300 and ‘768 Patents and that the three patents are valid and enforceable. Under the terms of the settlement, Impax will be permitted to market generic versions of ADDERALL XR in the US no later than January 1, 2010 and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shire’s authorized generic. No payments to Impax are involved in the settlement agreement.
NRP104
On January 26, 2006, the FDA accepted New River’s NDA for NRP104 for review. As a result, a $50 million milestone payment due from the Company to New River was paid in February 2006.
ELAPRASE
In November 2005, the Company submitted a Biologics License Application (BLA) to the FDA which was accepted for priority review in January 2006. The expected Prescription Drug User Fee Act (PDUFA) date is May 25, 2006.
MESAVANCE
The Company submitted applications for marketing approval to a number of European regulatory agencies in February 2006 and also filed a New Drug Submission with Health Canada in January 2006.
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IDB loan repayment
On February 10, 2006, the Company received notice from IDB that it intended to repay in full all of its loan drawings for injectable flu development of $70.6 million, together with accrued and capitalized interest of $8.1 million, see Note 3 to the Company’s consolidated financial statements. The Company received the $78.7 million outstanding on February 14, 2006. The $29.4 million pipeline developement tranche of the loan facility is still outstanding.
CARBATROL litigation
On March 30, 2006, the Company was notified that Corepharma had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 100mg, 200mg and 300mg strengths of CARBATROL prior to the expiration date of US patent No. 5,912,013 (the ‘013 Patent) and US patent No. 5,326,570 (the ‘570 Patent). Shire is currently reviewing the details of Corepharma’s Paragraph IV notice letter.
CARBATROL
A promotional services agreement for the US market with Impax was signed in January 2006. The agreement will take effect from July 2006.
Acquisition of Orpham Labs SA
On March 23, 2006, Shire acquired Orpham Labs SA, an Argentine company, for $0.8 million to be used in the registration, quality control and distribution of HGT products in South America. Shire has filed a registration application for its lead product REPLAGAL for Fabry disease with Administracion Nacional Medicamentos, Alimentos y Tecnologia Medica, the health authority in Argentina. Shire anticipates continued growth in the Latin American market, with the addition of new employees and the eventual market entry of its drug ELAPRASE for Hunter syndrome.
SFAS No. 123R adoption
From January 1, 2006, Shire has been required to adopt SFAS No. 123R in accounting for share-based compensation. This accounting standard applies a fair value methodology in quantifying the accounting charge associated with the grant of share-based compensation to employees which will be allocated across cost of product sales, R&D, and selling, general and administrative costs. The Company has adopted SFAS No. 123R according to the modified retrospective method. As a result, 2005 comparative figures have been retrospectively adjusted.
Recent developments
ADDERALL XR - Citizen Petition
On April 20, 2006, Shire received correspondence from the FDA informing Shire that the FDA has not yet resolved the issues raised in Shire’s pending ADDERALL XR Citizen Petition. The correspondence states that, due to the complex issues raised requiring extensive review and analysis by the FDA’s officials, a decision cannot be reached at this time. The FDA’s interim response is in accordance with FDA regulations concerning Citizen Petitions.
DAYTRANA for ADHD was approved by the FDA on April 6, 2006. As part of the agreement between Shire and Noven for DAYTRANA, Shire paid $50 million to Noven upon FDA approval shortly thereafter.
Research and development
Products in pre-launch at March 31, 2006
DYNEPO: DYNEPO was approved in the EU in March 2002 and is indicated in the treatment of anemia in patients with chronic renal failure. Shire expects to commence a staged launch in Europe of the product in the first half of 2007.
Products in registration at March 31, 2006
DAYTRANA : On December 23, 2005, the Company received an approvable letter from the FDA for DAYTRANA. Following this, Shire made a complete Class 1 resubmission on February 9, 2006. The Company received final regulatory approval for DAYTRANA from the FDA on April 6, 2006 and expects to commence launch in mid 2006.
Products in registration at March 31, 2006
| ELAPRASE: On November 23, 2005, the Company submitted a BLA with the FDA for idursulfase. In January 2006 the filing was accepted for Priority Review by the FDA. The expected PDUFA date is May 25, 2006. |
| | | |
| ELAPRASE: On December 1, 2005, the Company submitted a MAA to the EMEA for idursulfase for the treatment of Hunter Syndrome. Review of a MAA by the EMEA typically takes 12 months. |
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| NRP104: On December 6, 2005, New River filed a NDA with the FDA for NRP104 for the treatment of ADHD in pediatric populations (ages 6-12). |
| | | |
| MESAVANCE: On December 22, 2005, the Company submitted a NDA to the FDA for MESAVANCE for the treatment of ulcerative colitis. The PDUFA date is set for October 2006. |
| | | |
| MESAVANCE: The Company submitted applications for marketing approval to a number of European regulatory agencies and also filed a New Drug Submission with Health Canada for MESAVANCE for the treatment of ulcerative colitis in February and January 2006 respectively. |
Products in late stage development as at March 31, 2006
| SPD503 for ADHD (P3): FDA filing is anticipated in 2006 and; |
| SPD465 for ADHD (P3): FDA filing is anticipated in 2006. |
Products in early stage development as at March 31, 2006
| GA-GCB for Gaucher disease (P1/P2): In April 2004, TKT initiated a clinical trial to evaluate the safety and clinical activity of GA-GCB, its enzyme replacement therapy for the treatment of Gaucher disease. Results from this study were announced in the last quarter of 2005 and, based on these positive results, Shire intends to commence a pivotal P3 clinical trial in 2006. |
Results of operations for the three months to March 31, 2006 and 2005
The results for the three months to March 31, 2005 have been retrospectively adjusted to reflect the adoption of SFAS 123R.
Total revenues
The following table provides an analysis of the Company’s total revenues by source:
| | | 3 months to | | 3 months to | | |
| | | March 31, | | March 31, | | |
| | | 2006 | | 2005 | | change |
| | | $M | | $M | | % |
| |
| |
| |
|
| Product sales | | 346.0 | | 269.4 | | +28 |
| Royalties | | 61.0 | | 58.3 | | +5 |
| Other | | 4.0 | | 6.0 | | -33 |
| |
| |
| |
|
| Total | | 411.0 | | 333.7 | | +23 |
| |
| |
| |
|
All product sales are reported in the Pharmaceutical Products segment, all royalties are reported in the Royalty segment.
Product sales
The following table provides an analysis of the Company’s key product sales:
| | | 3 months to | | 3 months to | | | | |
| | | March 31, | | March 31, | | Product sales | | US prescription |
| | | 2006 | | 2005 | | growth | | growth |
| | | $M | | $M | | % | | % |
| |
| |
| |
| |
|
| CNS | | | | | | | | |
| ADDERALL XR | | 206.1 | | 145.6 | | +42 | | +10 |
| ADDERALL | | 9.1 | | 9.4 | | -3 | | n/a |
| CARBATROL | | 14.1 | | 16.9 | | -17 | | -13 |
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| GI | | | | | | | | |
| PENTASA | | 28.1 | | 26.2 | | +7 | | -1 |
| COLAZIDE | | 2.3 | | 2.1 | | +10 | | n/a |
| |
| GP | | | | | | | | |
| AGRYLIN/XAGRID | | | | | | | | |
| NORTH AMERICA | | 1.4 | | 19.9 | | -93 | | -90 |
| ROW | | 12.1 | | 12.1 | | - | | n/a |
| FOSRENOL | | 7.8 | | 4.9 | | +59 | | +128 |
| CALCICHEW | | 10.4 | | 8.1 | | +28 | | n/a |
| REMINYL/REMINYL XL | | 4.2 | | 2.9 | | +45 | | n/a |
| SOLARAZE | | 3.3 | | 2.4 | | +38 | | n/a |
| LODINE | | 3.0 | | 3.0 | | - | | n/a |
| |
| HGT | | | | | | | | |
| REPLAGAL * | | 25.8 | | - | | n/a | | n/a |
| |
| |
| Other product sales | | 18.3 | | 15.9 | | +15 | | n/a |
| |
| |
| |
| | |
| Total product sales | | 346.0 | | 269.4 | | +28 | | |
| |
| |
| |
| | |
* REPLAGAL was acquired in the acquisition of TKT which was completed on July 27, 2005.
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, March 2006. IMS Health is a leading global provider of business intelligence for the pharmaceutical and healthcare industries.
ADDERALL XR
ADDERALL XR is the leading brand in the US ADHD market with a market share of 26% in March 2006 (2005: 25%). The US ADHD market grew 5% overall compared to the same period in 2005. These factors contributed to a 10% growth in US prescriptions for ADDERALL XR for the three months to March 31, 2006 compared to the same period in 2005.
Sales of ADDERALL XR for the three months to March 31, 2006 were $206.1 million, an increase of 42% compared to the same period in 2005 (2005: $145.6 million). Product sales growth was higher than prescription growth due mainly to the impact of price increases in August 2005 and significantly lower levels of pipeline de-stocking compared with Q1 2005.
During October 2005 Shire filed a Citizen Petition with the FDA requesting that the FDA require more rigorous bioequivalence testing or additional clinical testing for generic or follow-on drug products that reference ADDERALL XR before they can be approved. Shire believes that these requested criteria will ensure that generic formulations of ADDERALL XR or follow-on drug products will be clinically effective and safe. In January 2006 Shire chose to file a supplemental amendment to its original Citizen Petition, which included additional clinical data in support of the original filing. On April 20, 2006 Shire received correspondence from the FDA informing Shire that the FDA has not yet resolved the issues raised in Shire’s pending ADDERALL XR Citizen Petition. The correspondence states that, due to the complex issues raised requiring extensive review and analysis by the FDA’s officials, a decision cannot be reached at this time. The FDA’s interim response is in accordance with FDA regulations concerning Citizen Petitions.
On February 9, 2006 an FDA Advisory Committee recommended to the FDA that risk information about cardiovascular events be included in a "black box warning" for all stimulant medicines used to treat ADHD. In making its recommendation, the Advisory Committee recognized that the reported incidence rates of the rare serious cardiovascular adverse events that were discussed by the Committee are generally within the rates that would be expected from the untreated general population. ADDERALL XR and ADDERALL already include a "black box warning" in their labels for safety concerns related to amphetamine abuse or misuse and also warn of the risk of sudden death in patients with structural cardiac abnormalities. On March 22, 2006 another FDA Advisory Committee met and discussed the same issue, as well as psychiatric adverse events for all medicines used to treat ADHD. This second Advisory Committee determined that a "black box warning," as recommended at the February 9, 2006 meeting, was not
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warranted. In addition, this second Advisory Committee recommended that increased warnings for certain psychiatric events should be incorporated as class labeling for all ADHD medicines. The FDA is not obligated to follow the recommendations of the Advisory Committees. Shire will work with the FDA to continue to ensure that the prescribing information for ADDERALL and ADDERALL XR is appropriate and takes into account the available safety data.
In October 2005 Shire announced that it had filed a lawsuit against Barr and Impax with respect to US patent No. 6,913,768 (‘768). Shire believes that both Barr’s and Impax’s generic ADDERALL XR products infringe the ‘768 patent claims. The case was filed in the Southern District of New York. On January 19, 2006 Shire settled all of its ADDERALL XR patent infringement lawsuits with Impax. There will be no 30-month stay associated with the filing of the ‘768 patent case. The ‘768 patent is directed to pharmaceutical compositions comprising a once-a-day sustained release formulation of at least one amphetamine salt for the treatment of ADHD. Barr has moved to dismiss the ‘768 lawsuit action asserting that there is no subject matter jurisdiction. A hearing on this motion was held on February 17, 2006. No decision has yet been made. The earlier filed case against Barr involving the ‘819 and ‘300 patents is scheduled to go to trial on October 30, 2006.
For further information about the litigation proceedings relating to the Company’s ADDERALL XR patents see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings. Any decrease in the sales of ADDERALL XR would significantly reduce revenues and earnings.
CARBATROL
US prescriptions for the three months to March 31, 2006 were down 13% compared to the same period in 2005. This was primarily due to limited promotion of the product and supply constraints during 2005 leading to a 3% decrease in Shire’s market share of the total US extended release carbamazepine prescription market to 42% in March 2006 (2005: 45%) and a 6% decrease in that market as a whole.
Sales of CARBATROL for the three months to March 31, 2006 were $14.1 million, a decrease of 17% compared to the same period in 2005 (2005: $16.9 million). The difference between the decrease in sales and the lower levels of prescriptions is due to higher sales deductions in Q1 2006.
Patent litigation proceedings with Nostrum Pharmaceuticals, Inc. (Nostrum) relating to CARBATROL are ongoing. No trial date has been set. Nostrum’s 30-month stay under the Hatch-Waxman Act expired on February 6, 2006. Accordingly, the FDA may approve Nostrum’s ANDA.
On March 30, 2006 the Company was notified that Corepharma LLC had filed an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of carbamazepine extended release products in 100mg, 200mg and 300mg strengths. Shire is currently reviewing the details of the notice letter.
For further information see ITEM 1 of Part II of this Form 10-Q: Legal Proceedings.
PENTASA
PENTASA had a 17% share of the total US oral mesalamine prescription market in March 2006 (March 2005: 18%), a market that grew 4% compared with the same period in 2005. US prescriptions for the three months to March 31, 2006, were down 1% compared to the same period in 2005, due to reduced promotional activity in Q1 2006.
Sales of PENTASA for the three months to March 31, 2006 were $28.1 million, an increase of 7% compared to the same period in 2005 (2005: $26.2 million). The difference between sales growth and the lower levels of prescriptions is due to the impact of the January 2006 price increase and a change in the product sales mix from the 250mg to 500mg dose strength.
AGRYLIN and XAGRID
AGRYLIN/XAGRID sales worldwide for the three months to March 31, 2006 were $13.5 million, down 58% compared to the same period in 2005 (2005: $32.0 million).
North American sales were $1.4 million (2005: $19.9 million). This reduction was expected following the approval of generic versions of AGRYLIN in the US market in April 2005.
For the Rest of the World (all sales outside North America) sales were $12.1 million (2005: $12.1 million). The impact of unfavorable exchange rate movements during the quarter offset a 6% increase in sales as expressed in the transaction currencies (XAGRID is primarily sold in Euros).
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FOSRENOL
US prescriptions for the three months to March 31, 2006 were up 128% compared to the same period in 2005. This was primarily due to FOSRENOL increasing its share of the total US phosphate binding market, which in March 2006 was 9% (2005: 6%), in a market that had itself grown 10% over the same period. FOSRENOL was launched in the US in January 2005.
Sales of FOSRENOL for the three months to March 31, 2006 were $7.8 million, an increase of 59% compared to the same period in 2005. The difference between sales growth and prescription growth is due mainly to a decrease in pipeline inventory as the new higher dose strengths launch stocks shipped to wholesalers in the US in December 2005 were sold in Q1 2006, and higher sales deductions.
FOSRENOL was launched in Austria, Ireland, Sweden and Denmark in December 2005. Shire continues its discussions relating to FOSRENOL with regulatory authorities and reimbursement agencies across Europe and other regions and further launches are expected in European markets over the next few months, subject to obtaining national approvals and concluding pricing and reimbursement negotiations.
REPLAGAL
REPLAGAL was acquired by Shire as part of the TKT acquisition, which was completed on July 27, 2005. Product sales for the three months to March 31, 2006 were $25.8 million. The majority of REPLAGAL sales are in Europe. Pre-acquisition sales for the three months to March 31, 2005 were $22.5 million. The increase in sales of 15% is primarily due to greater European coverage by an increased number of sales representatives.
Foreign exchange effect
As many of the Company’s sales revenues are earned in currencies other than US dollars (primarily Canadian Dollars, Pounds Sterling, Swedish Kronor and Euros), revenue growth reported in US dollars includes the impact of translating the sales made in a local currency, into US dollars. The table below shows the effect of foreign exchange translations on the revenue growth of the key affected products as well as the underlying performance of key products in their local currency:
| | | | | 3 months to | | | | | | | |
| | | 3 months to | | March 31, | | | | | | 3 months to | |
| | | March 31, | | 2006 sales | | | | | | March 31, | |
| | | 2006 sales in | | growth in | | | Impact of | | | 2006 sales | |
| | | US dollars | | local | | | translation | | | growth in US | |
| | | $M | | currency | | | to US dollars | | | dollars | |
| |
| |
| | |
| | |
| |
| AGRYLIN/XAGRID sales in Euros | | 7.5 | | +11 | % | | -10 | % | | +1 | % |
| AGRYLIN/XAGRID sales in Pounds sterling | | 4.6 | | +7 | % | | -8 | % | | -1 | % |
| CALCICHEW sales in Pounds sterling | | 9.3 | | +35 | % | | -10 | % | | +25 | % |
| REMINYL and REMINYL XL sales in Pounds | | | | | | | | | | | |
| sterling | | 3.9 | | +58 | % | | -11 | % | | +47 | % |
| | |
| |
| | |
| | |
| |
Notes
Revenue growth analysis does not include sales of:
- ADDERALL XR in Canadian Dollars due to the fact that sales of ADDERALL XR in Canada were suspended for most of 2005; and
- REPLAGAL sales of $25.8 million in Euros and Swedish Kronor. There is no comparative data for REPLAGAL as it was acquired with TKT in July 2005.
Royalties
Royalty revenue increased by 5% to $61.0 million for the three months to March 31, 2006 (2005: $58.3 million) as a result of growth in sales. The following table provides an analysis of Shire’s royalty income:
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| | | 3 months to | | 3 months to | | |
| | | March 31, | | March 31, | | |
| | | 2006 | | 2005 | | change |
| | | $M | | $M | | % |
| |
| |
| |
|
| 3TC | | 39.5 | | 39.4 | | - |
| ZEFFIX | | 7.7 | | 6.5 | | +18 |
| Others | | 13.8 | | 12.4 | | +10 |
| |
| |
| |
|
| Total | | 61.0 | | 58.3 | | 5 |
| |
| |
| |
|
3TC
Royalties from sales of 3TC for the three months to March 31, 2006 were $39.5 million (2005: $39.4 million). This increase was due to the continued growth in the nucleoside analog market for HIV, offset by the impact of unfavorable exchange rate movements during the quarter.
Shire receives royalties from GSK on worldwide 3TC sales. GSK’s worldwide sales of 3TC for the three months to March 31, 2006 were $305 million, an increase of 2% compared to the same period in 2005 (2005: $298 million).
ZEFFIX
Royalties from sales of ZEFFIX for the three months to March 31, 2006 were $7.7 million (2005: $6.5 million). This increase was primarily due to strong growth in the Chinese, Japanese and Korean markets.
Shire receives royalties from GSK on worldwide ZEFFIX sales. GSK’s worldwide sales of ZEFFIX for the three months to March 31, 2006 were $67 million, an increase of 20% compared to the same period in 2005 (2005: $56 million).
Other
Other royalties are primarily in respect of REMINYL and REMINYL XL (now marketed as RAZADYNE and RAZADYNE ER in the US), a product marketed worldwide by Janssen Pharmaceutical N.V. (Janssen), an affiliate of Johnson and Johnson, with the exception of the United Kingdom and the Republic of Ireland where Shire previously co-promoted REMINYL with Janssen and acquired the exclusive marketing rights from May 2004.
Sales of the REMINYL/RAZADYNE range, for the symptomatic treatment of mild to moderately severe dementia of the Alzheimer’s type, are growing well in the Alzheimer’s market.
Cost of product sales
For the three months to March 31, 2006 the cost of product sales amounted to 18% of product sales (2005: 12%). The decrease in gross margin is primarily due to the addition of REPLAGAL to Shire’s product portfolio following the acquisition of TKT. REPLAGAL’s cost of product sales relates entirely to acquired inventories, which in accordance with US GAAP have been accounted for at fair value, estimated to be 97% of the expected sales price of REPLAGAL. Accordingly, little or no margin will be reflected for REPLAGAL sales until all acquired finished goods have been sold (anticipated Q3 2006). For the three months to March 31, 2006 the cost of product sales for REPLAGAL included a $23.6 million adjustment in respect of the acquired inventory. This fair value adjustment increased Shire’s cost of product sales by 7%.
Research and development (R&D)
R&D expenditure increased from $112.1 million in the three months to March 31, 2005 to $127.4 million for the three months to March 31, 2006. The increase was primarily due to the addition of two significant R&D projects following the acquisition of TKT (ELAPRASE and GA-GCB).
Expressed as a percentage of total revenues, R&D expenditure was 31% for the three months to March 31, 2006 (2005: 34%). In both periods payments have been made to New River of $50 million for in-licensing NRP104; these have been expensed in accordance with the Company’s accounting policy. The New River payment in the three months to March 31, 2006, represented 12% of total revenues (2005: 15%).
Shire’s pipeline is now well advanced with six projects in late stage development or registration.
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Selling, general and administrative (SG&A) expenses
Total SG&A costs increased from $176.8 million in the three months to March 31, 2005 to $204.9 million in the three months to March 31, 2006, an increase of 16%. As a percentage of product sales, SG&A expenses were 59% (2005: 66%).
| 3 months to March 31, | | | | Adjusted | | |
| | | 2006 | | 2005 | | Change |
| | | $M | | $M | | % |
| |
| |
| |
|
| Sales costs | | 51.0 | | 45.3 | | +13 |
| Marketing costs | | 74.9 | | 69.7 | | +7 |
| Other SG&A costs | | 56.1 | | 48.2 | | +16 |
| |
| |
| |
|
| | | 182.0 | | 163.2 | | +12 |
| Depreciation and amortization(1) | | 22.9 | | 13.6 | | +68 |
| |
| |
| |
|
| Total SG&A costs | | 204.9 | | 176.8 | | +16 |
| | |
| |
| |
|
(1) Excludes depreciation from manufacturing plants of $1.1 million (2005: $0.8 million) which is included in cost of product sales.
SG&A expenses increased from $163.2 million in the three months to March 31, 2005 to $182.0 million in the three months to March 31, 2006 an increase of 12%. As a percentage of product sales, SG&A expenses were 53% (2005: 61%) reflecting the increased ADDERALL XR sales for the quarter.
The depreciation charge for the three months to March 31, 2006 was $9.2 million (2005: $4.4 million). Amortization charges, including the amortization on acquired products, were $13.7 million for the three months to March 31, 2006 (2005: $9.2 million). The increase in both depreciation and amortization is primarily due to the increase in the asset base as a result of the TKT acquisition.
Integration costs
For the three months to March 31, 2006 the Company incurred $2.3 million of costs associated with the integration of the TKT business into the Shire group (2005: $nil). This included retention payments for key staff of $1.6 million, IT costs of $0.3 million and other costs of $0.4 million.
Interest income
For the three months to March 31, 2006 the Company received interest income of $14.2 million (2005: $9.7 million).
In Q1 2005, interest income primarily related to interest received on Shire’s cash balances.
In Q1 2006, interest income comprised $7.9 million of interest received on cash balances together with $6.3 million of interest recognized following the repayment by IDB of a $70.6 million loan (of the $8.1 million of interest received from IDB in the quarter, $1.8 million was recognized in previous periods). Interest received on cash balances is lower than in Q1 2005 due to the interest foregone on net TKT acquisition payments of $1.1 billion being partially offset by higher interest rates in Q1 2006.
Interest expense
For the three months to March 31, 2006 the Company incurred interest expense of $5.6 million (2005: $nil). In 2006, this expense primarily relates to a provision for interest, which may be awarded by the court in respect of amounts due to those ex-TKT shareholders who have requested appraisal of the acquisition consideration payable for their TKT shares.
Taxation
The effective rate of tax for the three months to March 31, 2006 was 28% (2005: 30%). At March 31, 2006 net deferred tax assets of $126.0 million were recognized (December 2005: $116.2 million).
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Equity in earnings/(losses) of equity method investees
Net earnings of $3.5 million were recorded for the three months to March 31, 2006 (2005: net losses of $0.2 million). This comprised earnings of $1.6 million from the 50% share of the antiviral commercialization partnership with GSK in Canada (2005: $1.4 million), and $1.9 million being the Company’s share of earnings in the GeneChem and EGS Healthcare Funds (2005: loss of $1.6 million).
Discontinued operations
During the three months to March 31, 2006, IDB repaid $70.6 million, being the injectable flu development tranche of the $100.0 million development loan facility provided to IDB as part of their acquisition of Shire’s vaccine business. The repayment followed GSK’s acquisition of IDB, after which IDB was provided with resources by GSK to fund the early repayment of the injectable flu tranche. The $29.4 million pipeline development tranche of the loan facility is still outstanding.
At the time of the disposal, a provision of $70.0 million was charged to discontinued operations on the basis that there was no certainty of recovery of this amount. The $70.0 million provision was allocated against all of the pipeline development tranche ($29.4 million) and against $40.6 million of the $70.6 million injectable flu development tranche. Accordingly, a gain on disposition of discontinued operations of $40.6 million (2005: $3.1 million) was recognized on repayment of the loan by IDB.
The repayment of the $70.6 million injectable flu tranche had no tax effect.
Liquidity and capital resources
General
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 Capital, Citigroup Global Markets Limited, 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”).
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 remaining costs of acquiring TKT, capital expenditures and debt service and lease obligations as they become due over the next twelve months.
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 (excluding restricted cash), as at March 31 2006 and March 31, 2005:
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| | | March 31, | | December 31, | |
| | | 2006 | | 2005 | |
| | | $’M | | $’M | |
| |
| |
| |
| Cash and cash equivalents | | 842.4 | | 656.5 | |
| Short term investments | | 1.5 | | 6.9 | |
| |
| |
| |
| Gross cash funds | | 843.9 | | 663.4 | |
| Total debt | | - | | (0.1 | ) |
| |
| |
| |
| Net cash funds | | 843.9 | | 663.3 | |
| | |
| |
| |
Cash flow activity
Net cash provided by operating activities for the three months to March 31, 2006 was $123.4 million compared to $6.3 million for the three months to March 31, 2005. The increase in cash generation is primarily due to the timing of working capital payments.
Net cash provided by investing activities was $47.8 million in the three months to March 31, 2006. Decreases in short-term investments of $5.5 million and proceeds of $70.6 million from the repayment of loans made to IDB were mainly offset by capital expenditure on property, plant and equipment of $26.5 million. Capital expenditure on property, plant and equipment included $10.0 million on IT projects in the US; $4.0 million on buildings, $2.6 million on computer equipment, and $1.3 on software at the Basingstoke Head office; $1.0 million on computer equipment for the Shire US headquarters at Wayne, Pennsylvania; and $3.5 million of factory construction work and $0.7 million of plant equipment for Shire US Manufacturing Inc. in the US.
Net cash provided by investing activities was $8.5 million in the three months to March 31, 2005. Proceeds of $60 million for the redemption by IDB of its subscription receipts and $8.3 million of decreases in short-term investments and restricted cash were offset primarily by loans made to IDB of $20.3 million, capital expenditure on property, plant and equipment of $20.0 million and a $19.0 million final payment in respect of the acquisition of the exclusive commercialization rights to REMINYL in the UK and Republic of Ireland in 2004. Capital expenditure on property, plant and equipment included $10.6 million leasehold building improvements and $2.1 million on computer equipment for the new Shire US headquarters at Wayne, Pennsylvania; $2.9 million on software purchases at the Basingstoke Head Office; and $2.7 million of factory construction work and $0.7 million of plant equipment for Shire Manufacturing Inc. in the US.
Net cash provided by financing activities was $12.9 million for the three months to March 31, 2006. This was primarily due to proceeds of $13.8 million from the exercise of employee stock options offset by payments to acquire treasury stock of $2.0 million. Net cash provided by financing activities was $16.4 million for the three months to March 31, 2005 due mainly to proceeds from the exercise of employee stock options.
The total cash consideration for the acquisition of TKT is expected to be approximately $1.6 billion, subject to change as may be required by the appraisal rights process. As at March 31, 2006 shareholders owning approximately 24.8 million TKT shares had accepted the offer and $916.9 million had been paid to them, $83.9 million was paid in connection with TKT stock options and $170.1 million in connection with convertible notes, outstanding at the date of acquisition. Following the exercise of appraisal rights by former holders of approximately the 11.3 million shares of TKT common stock, the remaining $419.9 million, together with any interest that the Court may award, will be paid subject to the appraisal process outlined in Item 1 of Part II of this Form 10-Q. For every $1 increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million.
As a result of the acquisition of TKT, cash balances have been significantly reduced and interest receivable on available cash balances has decreased accordingly.
Obligations and commitments
Contractual obligations
At March 31, 2006 the Company’s contractual obligations had altered from those disclosed in the Table of Contractual Obligations in the Company’s 2005 Form 10-K as follows:
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Investment commitments
The Company has undertaken to subscribe for interests in companies and partnerships for amounts totaling $24.8 million (December 31, 2005: $25.2 million) of which $5.1 million is committed to be paid in 2006 and a further $19.7 million could be payable in 2006, depending on the timing of capital calls.
Manufacturing facilities
The Company has committed to the expansion and modification of its two manufacturing facilities at Owings Mills, Maryland and Cambridge, Massachusetts to facilitate the production and packaging of additional strategic products. The Company has committed to spend $3.1 million in 2006, and has an additional commitment of $1.7 million for the design and construction of a technology center at Owings Mills, which will be incurred in 2006.
Basingstoke, UK expansion
The Company is in the process of expanding its UK headquarters at Basingstoke, UK. As at March 31, 2006, the Company had an outstanding commitment of $7.0 million, which will be incurred in 2006.
In addition to contractual obligations referred to above the Company has certain milestones and other commitments. The most significant are as follows:
DAYTRANA
In connection with the Company’s acquisition in 2003 from Noven of the worldwide sales and marketing rights to DAYTRANA (MTS) Shire has an obligation to make certain payments to Noven on the achievement of the following milestones: $50 million upon FDA 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. The Company received final regulatory approval from the FDA on April 6, 2006 and the Company paid the $50 million milestone to Noven shortly thereafter.
NRP104
In 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: up to $300 million following the first commercial sale of the product, depending on the characteristics of the approved product labeling; $100 million on achieving a significant sales target; and $5 million following the first commercial sale in certain specified EU markets. In December 2005, New River filed a NDA for NRP104, which was accepted for review by the FDA in January 2006, triggering a $50 million milestone payment, which the Company paid to New River in February 2006.
FOSRENOL patent rights
In connection with the Company’s purchase of the global patents for FOSRENOL from AnorMED Inc. in 2004, the Company has outstanding commitments 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.
R&D milestones
As at March 31, 2006, the Company had commitments of $15.5 million (December 31, 2005: $18.0 million) on achievement of specified milestones payable for products under development in-licensed from third parties, of which $4.1 million is committed to be paid in 2006.
Contract manufacturing
As at December 31, 2005 the Company had committed to pay approximately $27.2 million in respect of contract manufacturing over the next twelve months.
TKT shareholders seeking appraisal rights
As at March 31, 2006, appraisal rights had been asserted in respect of approximately 11.3 million shares of TKT common stock. For further information see Part II: Legal Proceedings. As at March 31, 2006 the Company recorded a liability of $419.9 million based on the merger consideration of $37 per share for the 11.3 million shares outstanding at that time plus a provision for interest of $13.0 million that may be awarded by the Court. Until such time as the appraisal process is complete the Company is unable to determine the extent of its liability.
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For every $1 increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million. In April 2006, Shire filed a motion for partial summary judgment in respect of approximately 8 million shares, claiming that the petitioners were not entitled to assert appraisal rights in connection with such shares.
Critical accounting estimates
The preparation of interim financial statements, in conformity with US GAAP and SEC regulations for interim reporting, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
During the period covered by this quarterly report the Company adopted SFAS No. 123R, which requires the Company to measure stock-based compensation cost at the grant date, based on the estimated fair value of the award, and recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the employee requisite service period. Management estimates the fair value of stock options and SARs without market-based performance conditions using a Black-Scholes valuation model.
No stock options or stock-settled share appreciation rights were granted in the three months to March 31, 2006. In the three months to December 31, 2005 (the most recent quarter stock awards were granted), the following assumptions were used to estimate the fair value of stock-based compensation:
| Three months to December 31, | | 2005 | |
| |
| |
| Risk-free interest rate | | 4.52 – 4.59% | |
| Expected dividend yield | | 0.6% | |
| Expected life | | SARs:4years | |
| | | Options: 7years | |
| Weighted average expected volatility | | 44-49% | |
| Forfeiture rate | | 5% per annum | |
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Group’s interest rate or market risk of investments exposure since December 31, 2005. The acquisition of TKT has increased the Group’s exposure to foreign exchange market risk due to an increase in the amount of non US Dollar net assets and earnings. This is being managed in line with the Company’s existing treasury policies. Item 7A of the Group’s Annual Report on Form 10-K for the year ended December 31, 2005 contains a detailed discussion of the Group’s market risk exposure in relation to interest rate market risk and foreign exchange market risk.
ITEM 4. Controls and Procedures
As at March 31, 2006, 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various legal proceedings brought by and against Shire that are discussed in Shire’s Annual Report on Form 10-K for the year to December 31, 2005. Material updates to the proceedings discussed in Shire’s Annual Report on Form 10-K are described below. There is no assurance that the Group will be successful in any of these proceedings and if it is not, there may be a material impact on the Group’s results and financial position.
ADDERALL XR
(i) 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 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. The Company is seeking a ruling that Barr’s ANDA and ANDA products infringe the ‘819 and ‘300 Patents and that 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 Answer. Under the Court’s schedule summary judgment motions were to be filed and fully briefed by October 14, 2005. Neither Shire nor Barr filed summary judgment motions. On December 9, 2005, the Court continued the final pre-trial conference to March 10, 2006. On March 10, 2006 a trial date was set for October 30, 2006.
Shire’s lawsuits triggered stays of final FDA approval of Barr’s ANDA of up to 30 months from the date of the Company’s receipt of Barr’s notice letters. The second and final 30 month stay related to the lawsuit regarding the ‘300 Patent expired on February 18, 2006. As the stay has expired, the FDA may approve Barr's ANDA, subject to satisfaction by Barr of the FDA's requirements. Barr could be in a position to market its ANDA products upon receipt of final FDA approval.
On October 19, 2005 Shire brought another lawsuit against Barr in the Southern District of New York alleging infringement of US Patent No. 6,913,768 (the ‘768 Patent), which issued on July 5, 2005. The Company is seeking an injunction to prevent Barr from infringing the ‘768 Patent, damages in the event that Barr should commercialize its ANDA Products, attorneys’ fees and costs. Barr has moved to dismiss this action asserting that there is no subject matter jurisdiction. A hearing on this motion was held on February 17, 2006. No decision on this motion has yet been made.
(ii) 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.
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 submission. In January 2005, Shire Laboratories filed suit against Impax for infringement of the ‘819 and ‘300 Patents in respect of the additional strengths.
As part of the October 19, 2005 lawsuit against Barr, Shire also brought suit in the Southern District of New York against Impax for infringing the ‘768 Patent. Impax filed a declaratory judgment action in Delaware alleging that the ‘768 Patent was invalid and that its ANDA did not infringe the ‘768 Patent.
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On January 19, 2006, Shire and Impax announced that all pending litigation in connection with Impax’s ANDA had been settled. As part of the settlement, Impax confirmed that its proposed generic products infringe Shire’s ‘819, ‘300 and ‘768 Patents and that the three patents are valid and enforceable.
Under the terms of the settlement agreement, Impax will be permitted to market generic versions of ADDERALL XR in the United States no later than January 1, 2010 and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shire’s authorized generic. No payments to Impax are involved in the settlement agreement. The settlement agreement, which was effective January 19, 2006, was submitted to the United States Federal Trade Commission (FTC) for its review, as required by law, and the FTC has not taken any action to date.
(iii) Teva Pharmaceuticals USA, Inc.
In February 2005, Shire was notified that Teva Pharmaceuticals, 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 its ANDA to seek permission to market additional strengths of 5mg, 15mg and 20mg of its generic ADDERALL XR prior to the expiration of the '819 and '300 Patents. In January 2006, Shire received a third notice letter that Teva had further amended its ANDA to seek permission to market the 25mg strength generic version of ADDERALL XR prior to the expiration of the ‘819 and ‘300 Patents. On March 2, 2006 Shire filed a lawsuit in the Eastern District of Pennsylvania alleging that all of Teva’s ANDA products infringe both the ‘819 and the ‘300 Patents. The lawsuit triggered a stay of FDA approval of Teva’s 25 mg strength product for 30 months from the date of the Company’s receipt of Teva’s third notice letter. Teva has yet to file an answer. There is no such stay with respect to Teva’s 5mg, 10mg, 15mg, 20mg and 30 mg strengths versions of ADDERALL XR.
CARBATROL
(i) Nostrum Pharmaceuticals, Inc.
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 drop 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. The Court heard arguments with respect to Nostrum’s motion on July 15, 2005. At the conclusion of the hearing the Court denied Nostrum's motion for summary judgment of non-infringement. The parties have been directed by the Court to propose a schedule for expert depositions and claim construction briefing. 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. The 30 month stay expired on February 6, 2006. Following expiry of the stay, Nostrum could be in a position to market its 300mg extended-release carbamazepine product upon FDA final approval of its ANDA.
(ii) Corepharma LLC
On March 30, 2006 the Company was notified by a Paragraph IV letter that Corepharma LLC had filed an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of carbamazepine extended release products in 100mg, 200mg and 300mg strengths prior to the expiration date of the ‘013 and ‘570 Patents. Shire is currently reviewing the details of Corepharma’s Paragraph IV notice letter.
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Gene Activated Glucocerebrosidase (“GA-GCB”)
In January 2005, Genzyme Corporation (Genzyme) filed suit against TKT in the District Court of Tel Aviv-Jaffa, Israel, claiming that TKT's Phase 1/2 clinical trial in Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one or more claims of Genzyme’s Israeli Patent No. 100,715. In addition, Genzyme filed a motion for preliminary injunction, including a request for an ex parte hearing and relief on the merits, to immediately seize and destroy all GA-GCB being used to treat patients and to prevent TKT from submitting data generated from the clinical trial to regulatory agencies. In March 2005 the District Court refused to grant Genzyme's motion for a preliminary injunction. The lawsuit was dismissed in January 2006.
Appraisal Rights
In connection with Shire’s merger with TKT, former holders of approximately 11.7 million shares of TKT common stock submitted written demands to the Delaware Court of Chancery for appraisal of these shares and, as a result, elected not to accept the $37 per share merger consideration. On October 10, 2005, at the request of one of the holders to tender 365,000 shares at the merger price of $37 per share, TKT filed a motion to dismiss the holder’s demand. On October 12, 2005, the Delaware Court of Chancery granted this motion, and the holder tendered the shares at the merger consideration of $37 per share. Therefore, as at March 31, 2006, former holders of approximately 11.3 million shares of TKT common stock maintained written demands for appraisal of these shares and have elected not to accept the $37 merger consideration. In November 2005, the Delaware Court of Chancery approved a consolidation order filed by TKT whereby actions brought by all petitioners have been consolidated as one case. In April 2006, Shire filed a motion for partial summary judgment in respect of approximately 8 million shares, claiming that the petitioners were not entitled to assert appraisal rights in connection with such shares. To the extent that the remaining demands were validly asserted in accordance with the applicable requirements of Delaware law and the former holders perfect their rights thereunder, such former holders will be entitled to receive the fair value of these shares as determined by the Delaware Court of Chancery. The determination of fair value 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 per share and may award interest on the amount determined in the appraisal process.
The total consideration for the acquisition of TKT, including amounts payable in respect of stock options and convertible securities, is approximately $1.6 billion at the merger price of $37 per share. This could change if Shire is required to pay a different amount of consideration in respect of the approximately 11.3 million shares for which holders have asserted appraisal rights. Until such time as the appraisal process is complete, the Company is unable to determine the extent of its liability.
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ITEM 1A. RISK FACTORS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
Exhibits
| 3.1 | Articles of Association of Shire Pharmaceuticals Group plc as amended by special resolution on October 28, 2005(1). |
| |
| 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. |
| |
| 32.1 | Certification of Matthew Emmens and Angus Russell pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
(1) Incorporated by reference to Exhibit 3.1 to Shire’s Form 10Q filed on November 9, 2005.
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SIGNATURES
Pursuant 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 PLC |
| | | | |
| | | (Registrant) |
| | | | |
| | | | |
| | | | |
| Date: | | | |
| | | | |
| May 5, 2006 | | | /s/ Matthew Emmens |
| | |
|
| | | By: | Matthew Emmens |
| | | | Chief Executive Officer |
| |
| Date: | | | |
| | | | |
| May 5, 2006 | | | /s/ Angus Russell |
| | |
|
| | | By: | Angus Russell |
| | | | Chief Financial Officer |
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