Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As at July 26, 2013 the number of outstanding ordinary shares of the Registrant was 562,861,459.
THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, that:
The following are trademarks either owned or licensed by Shire plc or its subsidiaries, which are the subject of trademark registrations in certain territories, or which are owned by third parties as indicated and referred to in this Form 10-Q:
The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | 3 months to | | | 3 months to | | | 6 months to | | | 6 months to | |
| | | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | | $'M | | | $'M | | | $'M | | | $'M | |
| Net income | | | 258.1 | | | | 237.8 | | | | 322.9 | | | | 476.2 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | 1.6 | | | | (54.3 | ) | | | (34.5 | ) | | | (17.7 | ) |
| Unrealized holding gain/(loss) on available-for-sale securities (net of taxes of $0.9 million, $2.9 million, $1.1 million and $2.9 million) | | | 1.5 | | | | 3.1 | | | | (0.2 | ) | | | 6.0 | |
| Comprehensive income | | | 261.2 | | | | 186.6 | | | | 288.2 | | | | 464.5 | |
The components of accumulated other comprehensive income as at June 30, 2013 and December 31, 2012 are as follows:
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Foreign currency translation adjustments | | | 50.6 | | | | 85.1 | |
| Unrealized holding gain on available-for-sale securities, net of taxes | | | 1.6 | | | | 1.8 | |
| Accumulated other comprehensive income | | | 52.2 | | | | 86.9 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In millions of US dollars except share data)
| | | Shire plc shareholders' equity | |
| | | Common stock Number of shares M's | | | Common stock $'M | | | Additional paid-in capital $’M | | | Treasury stock $'M | | | Accumulated other comprehensive income $'M | | | Retained earnings $'M | | | Total equity $'M | |
| As at January 1, 2013 | | | 562.5 | | | | 55.7 | | | | 2,981.5 | | | | (310.4 | ) | | | 86.9 | | | | 995.5 | | | | 3,809.2 | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 322.9 | | | | 322.9 | |
| Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | (34.5 | ) | | | - | | | | (34.5 | ) |
| Options exercised | | | 0.3 | | | | 0.1 | | | | - | | | | - | | | | - | | | | - | | | | 0.1 | |
| Share-based compensation | | | - | | | | - | | | | 37.2 | | | | - | | | | - | | | | - | | | | 37.2 | |
| Tax benefit associated with exercise of stock options | | | - | | | | - | | | | 5.4 | | | | - | | | | - | | | | - | | | | 5.4 | |
| Shares purchased by employee benefit trust ("EBT") | | | - | | | | - | | | | - | | | | (50.0 | ) | | | - | | | | - | | | | (50.0 | ) |
| Shares purchased under share buy-back program | | | - | | | | - | | | | - | | | | (179.3 | ) | | | - | | | | - | | | | (179.3 | ) |
| Shares released by EBT to satisfy exercise of stock options | | | - | | | | - | | | | - | | | | 62.8 | | | | - | | | | (62.9 | ) | | | (0.1 | ) |
| Unrealized holding loss on available-for-sale securities, net of taxes | | | - | | | | - | | | | - | | | | - | | | | (0.2 | ) | | | - | | | | (0.2 | ) |
| Dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | (79.2 | ) | | | (79.2 | ) |
| As at June 30, 2013 | | | 562.8 | | | | 55.8 | | | | 3,024.1 | | | | (476.9 | ) | | | 52.2 | | | | 1,176.3 | | | | 3,831.5 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Dividends per share
During the six months to June 30, 2013 Shire plc declared and paid dividends of 14.60 US cents per ordinary share (equivalent to 43.80 US cents per ADS) totalling $79.2 million.
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| 6 months to June 30, | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net income | | | 322.9 | | | | 476.2 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 151.2 | | | | 152.4 | |
| Share based compensation | | | 36.4 | | | | 43.4 | |
| Impairment of intangible assets | | | 19.9 | | | | 27.0 | |
Goodwill impairment charge1 | | | 198.9 | | | | - | |
| Gain on sale of product rights | | | (11.0 | ) | | | (10.8 | ) |
| Other | | | 20.9 | | | | 4.3 | |
| Movement in deferred taxes | | | 21.2 | | | | (24.1 | ) |
| Equity in earnings of equity method investees | | | (0.9 | ) | | | (0.3 | ) |
| | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | |
| (Increase)/decrease in accounts receivable | | | (102.6 | ) | | | 22.4 | |
| Increase in sales deduction accrual | | | 40.0 | | | | 27.6 | |
| Increase in inventory | | | (53.9 | ) | | | (67.0 | ) |
| (Increase)/decrease in prepayments and other assets | | | (66.5 | ) | | | 32.1 | |
| (Decrease)/increase in accounts and notes payable and other liabilities | | | (160.7 | ) | | | 34.7 | |
| Returns on investment from joint venture | | | 3.2 | | | | 4.9 | |
Net cash provided by operating activities (A) | | | 419.0 | | | | 722.8 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Movements in restricted cash | | | (0.5 | ) | | | 6.2 | |
| Purchases of subsidiary undertakings and businesses, net of cash acquired | | | (227.8 | ) | | | (97.0 | ) |
| Purchases of property, plant and equipment ("PP&E") | | | (65.0 | ) | | | (64.4 | ) |
| Purchases of intangible assets | | | - | | | | (43.5 | ) |
| Proceeds received on sale of product rights | | | 10.3 | | | | 10.4 | |
| Returns from equity investments | | | 3.7 | | | | 8.4 | |
Net cash used in investing activities (B) | | | (279.3 | ) | | | (179.9 | ) |
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Payments to acquire shares under share buy-back program | | | (177.7 | ) | | | - | |
| Payment of dividend | | | (79.2 | ) | | | (70.7 | ) |
| Payments to acquire shares by the Employee Benefit Trust ("EBT") | | | (50.0 | ) | | | (10.7 | ) |
| Excess tax benefit associated with exercise of stock options | | | 6.1 | | | | 35.2 | |
| Contingent consideration payments | | | (8.8 | ) | | | - | |
| Other | | | (7.5 | ) | | | (2.4 | ) |
Net cash used in financing activities(C) | | | (317.1 | ) | | | (48.6 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents (D) | | | (2.9 | ) | | | (1.6 | ) |
Net (decrease)/increase in cash and cash equivalents (A+B+C+D) | | | (180.3 | ) | | | 492.7 | |
| Cash and cash equivalents at beginning of period | | | 1,482.2 | | | | 620.0 | |
| Cash and cash equivalents at end of period | | | 1,301.9 | | | | 1,112.7 | |
Supplemental information associated with continuing operations: | | | | | | | | |
| 6 months to June 30, | | | 2013 | | | | 2012 | |
| | | | $’M | | | | $’M | |
| Interest paid | | | (16.9 | ) | | | (17.3 | ) |
| Income taxes paid | | | (196.8 | ) | | | (68.3 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Summary of Significant Accounting Policies |
These interim financial statements of Shire plc and its subsidiaries (collectively “Shire” or the “Company”) and other financial information included in this Form 10-Q, are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and US Securities and Exchange Commission (“SEC”) regulations for interim reporting.
The balance sheet as at December 31, 2012 was derived from audited financial statements but does not include all disclosures required by US GAAP.
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year to December 31, 2012.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.
| (b) | Use of estimates in interim financial statements |
The preparation of interim financial statements, in conformity with US GAAP and SEC regulations, 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. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, the valuation of equity investments, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, contingent consideration receivable from product divestments and contingent consideration payable in respect of business combinations and asset purchases. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.
| (c) | New accounting pronouncements |
Adopted during the period
Indefinite-Lived Intangible Assets (Other than Goodwill) Impairment Testing
In July 2012 the Financial Accounting Standard Board (“FASB”) issued guidance on the testing of indefinite-lived intangible assets for impairment. The guidance permits an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, performing the impairment test is unnecessary. The more-likely-than-not threshold is defined as a likelihood of more than 50 percent. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the impairment test and may resume performing the qualitative assessment in any subsequent period. The guidance has been adopted prospectively from January 1, 2013. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
Disclosure about offsetting assets and liabilities
In December 2011 the FASB issued guidance on disclosures about offsetting assets and liabilities. In January 2013 the FASB amended the previous guidance to clarify the scope of guidance issued in December 2011. The amended guidance requires entities to disclose both gross and net information about derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions
that are either offset in accordance with FASB guidance on topics “Balance Sheet” and “Derivatives and Hedging” or subject to an enforceable master netting arrangement or similar agreement; to enable users of financial statements to understand the effects or potential effects of those arrangements on its financial position. The guidance has been adopted prospectively from January 1, 2013. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows. Enhanced disclosure of balance sheet offsetting as required by this guidance is included in Note 15.
Amounts reclassified out of Comprehensive Income
In February 2013 the FASB issued guidance on reporting amounts reclassified out of accumulated other comprehensive income. The guidance requires entities to provide information about the amount reclassified out of comprehensive income by component and presents either on the face of the financial statements or in the notes, significant amounts reclassified out of other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under US GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under US GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under US GAAP that provide additional detail about those amounts. The guidance has been adopted prospectively from January 1, 2013. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
Acquisition of SARcode Bioscience Inc. (“SARcode”)
On April 17, 2013 Shire completed the acquisition of 100% of the outstanding share capital of SARcode. The acquisition date fair value of the consideration totaled $368 million, comprising cash consideration paid on closing of $151 million and the fair value of contingent consideration payable of $217 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $525 million dependent upon achievement of certain clinical, regulatory and net sales milestones.
This acquisition brings the new Phase 3 compound, Lifitegrast, currently under development for the signs and symptoms of dry eye disease, into Shire’s portfolio. Shire anticipates launching Lifitegrast in the United States as early as 2016 pending a positive outcome of the Phase 3 clinical development program and regulatory approvals. Shire is acquiring the global rights to Lifitegrast and will evaluate an appropriate regulatory filing strategy for markets outside of the United States.
The acquisition of SARcode has been accounted as a business combination using the acquisition method. The assets and liabilities assumed from SARcode have been recorded at their preliminary fair values at the date of acquisition, being April 17, 2013. The Company’s consolidated financial statement and results of operations include the result of SARcode from April 17, 2013.
The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities assumed. The purchase price has been allocated on a preliminary basis to acquired in process research and development (“IPR&D”) in respect of Lifitegrast ($412 million), net current liabilities assumed ($8.2 million), net non-current liabilities assumed (including deferred tax liabilities) ($122.4 million) and goodwill ($86.6 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill arising of $86.6 million, which is not deductible for tax purposes, has been assigned to the SP operating segment. Goodwill includes the value of the assembled workforce and the related scientific expertise in ophthalmology which allows for potential expansion into a new therapeutic area.
In the six months to June 30, 2013 the Company has expensed costs of $4.6 million (2012: $nil) relating to the SARcode acquisition, which have been recorded within integration and acquisition costs in the Company’s consolidated income statement.
Acquisition of Premacure AB (“Premacure”)
On March 8, 2013 Shire completed the acquisition of 100% of the outstanding share capital of Premacure. The acquisition date fair value of the consideration totaled $140.2 million, comprising cash consideration paid on closing of $30.6 million, and the fair value of contingent consideration payable of $109.6 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods, dependent upon the successful completion of certain development and commercial milestones, is $169 million. Shire will also pay royalties on relevant net sales.
Premacure is developing a protein replacement therapy (“PREMIPLEX”), currently in Phase 2 development, for the prevention of Retinopathy of Prematurity (“ROP”). ROP is a rare and potentially blinding eye disorder that primarily affects premature infants and is one of the most common causes of visual loss in childhood. Together, the acquisitions of SARcode and Premacure build Shire’s presence in the ophthalmology therapeutic area.
The acquisition of Premacure has been accounted for as a business combination using the acquisition method. The assets and the liabilities assumed from Premacure have been recorded at their preliminary fair values at the date of acquisition, being March 8, 2013. The Company’s consolidated financial statements and results of operations include the results of Premacure from March 8, 2013.
The purchase price allocation is preliminary pending final determination of the fair values of certain assets acquired and liabilities assumed. The purchase price has been allocated on a preliminary basis to acquired IPR&D in respect of PREMIPLEX ($151.8 million), net current liabilities assumed ($11.7 million), net non-current liabilities assumed (including deferred tax liabilities) ($29.5 million) and goodwill ($29.6 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill arising of $29.6 million, which is not deductible for tax purposes, has been assigned to the HGT operating segment.
In the six months to June 30, 2013 the Company expensed costs of $4.2 million (2012: nil) relating to the Premacure acquisition, which have been recorded within integration and acquisition costs in the Company’s consolidated income statement.
Acquisition of Lotus Tissue Repair, Inc (“Lotus”)
On February 12, 2013 Shire completed the acquisition of 100% of the outstanding share capital of Lotus. The acquisition date fair value of consideration totaled $174.2 million, comprising cash consideration paid on closing of $49.4 million, and the fair value of contingent consideration payable of $124.8 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $275 million. The amount of contingent cash consideration ultimately payable by Shire is dependent upon achievement of certain pre-clinical and clinical development milestones.
Lotus is developing a proprietary recombinant form of human collagen Type VII (“rC7”) as the first and only intravenous protein replacement therapy currently being investigated for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”). DEB is a devastating orphan disease for which there is no currently approved treatment option other than palliative care. The acquisition adds to Shire’s pipeline a late stage pre-clinical product for the treatment of DEB with global rights. This acquisition is complementary to Shire’s existing investment in developing ABH001, which is currently being investigated as a dermal substitute therapy for the treatment of non-healing wounds in patients with Epidermolysis Bullosa (“EB”).
The acquisition of Lotus has been accounted for as a business combination using the acquisition method. The assets and the liabilities assumed from Lotus have been recorded at their preliminary fair values at the date of acquisition, being February 12, 2013. The Company’s consolidated financial statements and results of operations include the results of Lotus from February 12, 2013.
The purchase price allocation is preliminary pending final determination of the fair values of certain assets acquired and liabilities assumed. The purchase price has been allocated on a preliminary basis to acquired IPR&D in respect of rC7 ($176.7 million), net current assets assumed ($6.8 million), net non-current liabilities assumed (including deferred tax liabilities) ($63.4 million) and goodwill ($54.1 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill arising of $54.1 million, which is not deductible for tax purposes, has been assigned to the HGT operating segment.
In the six months to June 30, 2013 the Company expensed costs of $3.7 million (2012: $nil) relating to the Lotus acquisition, which have been recorded within integration and acquisition costs in the Company’s consolidated income statement.
Supplemental disclosure of pro forma information
The unaudited pro forma financial information to present the combined results of the operations of Shire, SARcode Premacure and Lotus are not provided as the collective impacts of these acquisitions were not material to the Company’s results of operations for any period presented.
Turnhout, Belgium Site Closure
On January 23, 2013 Shire announced that it had decided to proceed with a collective dismissal and business closure at its site in Turnhout, Belgium. This decision follows the conclusion of an information and consultation process. Shire will continue to sell RESOLOR in Europe and the supply of RESOLOR for patients in Europe who rely on the medicine will not be affected. In the three and six months to June 30, 2013 the Company incurred reorganization costs totaling $1.7 million and $19.2 million, respectively relating to employee involuntary termination benefits and other re-organization costs (of which $0.4 million is accrued at June 30, 2013). The closure of the Turnhout site is expected to be completed by the end of 2013.
“One Shire” business re-alignment
On May 2, 2013 the Company announced that there would be a re-alignment of the business to integrate the three divisions into a simplified “One Shire” organization in order to drive future growth and innovation. In the three and six months to June 30, 2013, the Company incurred reorganization costs totaling $24.7 million, relating to contract termination and other re-organization costs (of which $0.4 million is accrued at June 30, 2013). This re-alignment is ongoing and the Company is continuing to evaluate the total costs expected to be incurred and the timeframe.
| 4. | Accounts receivable, net |
Accounts receivable at June 30, 2013 of $915.2 million (December 31, 2012: $824.2 million), are stated net of a provision for discounts and doubtful accounts of $41.8 million (December 31, 2012: $41.7 million).
Provision for discounts and doubtful accounts:
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| As at January 1, | | | 41.7 | | | | 31.1 | |
| Provision charged to operations | | | 150.8 | | | | 135.0 | |
| Provision utilization | | | (150.7 | ) | | | (129.5 | ) |
| As at June 30, | | | 41.8 | | | | 36.6 | |
At June 30, 2013 accounts receivable included $34.8 million (December 31, 2012: $38.5 million) related to royalty income.
Inventories are stated at the lower of cost or market and comprise:
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Finished goods | | | 155.0 | | | | 124.4 | |
| Work-in-progress | | | 245.3 | | | | 220.6 | |
| Raw materials | | | 91.9 | | | | 91.9 | |
| | | | | | | | | |
| | | | 492.2 | | | | 436.9 | |
| 6. | Prepaid expenses and other current assets |
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Prepaid expenses | | | 49.2 | | | | 31.7 | |
| Income tax receivable | | | 175.3 | | | | 130.6 | |
| Value added taxes receivable | | | 20.4 | | | | 20.9 | |
| Other current assets | | | 44.2 | | | | 38.6 | |
| | | | 289.1 | | | | 221.8 | |
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Goodwill arising on businesses acquired | | | 611.6 | | | | 644.5 | |
In the six months to June 30, 2013 the Company completed the acquisitions of SARcode, Premacure and Lotus, which resulted in goodwill with a value of $86.6 million, $29.6 million and $54.1 million, respectively (see Note 2). On an Interim basis the goodwill of SARcode has been assigned to the SP operating segment and the goodwill of Premacure and Lotus has been assigned to the HGT operating segment.
At June 30, 2013 goodwill of $376.8 million (December 31, 2012: $291.1 million) is held in the SP segment, $234.8 million (December 31, 2012: $154.5 million) in the HGT segment and $nil (December 31, 2012: $198.9 million) is held in the RM segment. The Company is continuing to assess the impact of the ongoing “One Shire” realignment on its operating and reportable segments (see note 18 for details) and the related impact on the allocation of goodwill.
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| As at January 1, | | | 644.5 | | | | 592.6 | |
| Acquisitions | | | 170.3 | | | | 48.1 | |
| Goodwill impairment charge | | | (198.9 | ) | | | - | |
| Foreign currency translation | | | (4.3 | ) | | | (4.7 | ) |
| As at June 30, | | | 611.6 | | | | 636.0 | |
Goodwill is tested for impairment at least annually as at October 1 each year. This assessment is also performed whenever there is a change in circumstances that indicates the carrying value of these assets may be impaired.
As at October 1, 2012 the Company determined that the fair value of all reporting units exceeded their book value, indicating that the goodwill allocated to each reporting unit was not impaired.
In the first quarter of 2013 the Company identified circumstances which indicated that the carrying value of goodwill in the RM reporting unit may not be recoverable, which triggered an impairment test in advance of the annual testing date.
These circumstances included the results of an independent market research study of the DERMAGRAFT sales potential, commissioned by the Company, which was finalized late in the first quarter of 2013. In addition, while the Company still expects DERMAGRAFT to return to growth over coming quarters, the recently completed restructuring of the RM sales and marketing organization and the implementation of a new commercial model had a more pronounced impact than previously expected. As a result of these and other factors forecast future sales are now lower than at the time of acquisition.
The results of the Company’s March 31, 2013 impairment test showed that the carrying amount of the RM reporting unit exceeded its fair value and the implied value of the goodwill was $nil. As a result the Company recorded an impairment charge of $198.9 million related to the goodwill allocated to the RM reporting unit. The RM goodwill impairment charge is not deductible for tax purposes. This is the primary reason that the effective rate of tax in the first half of 2013 (29%) is higher than the same period in 2012 (18%). Accumulated goodwill impairment as at June 30, 2013 was $198.9 million (December 31, 2012: $nil).
Key assumptions used to determine the fair value of the RM reporting unit included expected cash flows for the period from March 31, 2013 to December 31, 2023 and the associated discount rate of 15.1%, which was derived from management’s best estimate of the after-tax weighted average cost of capital for the RM reporting unit.
The Company determined the estimated fair value of the RM reporting unit using discounted cash flow analyses. Discounted cash flow analyses are dependent upon a number of quantitative and qualitative factors including estimates of forecasted revenue, profitability, earnings before interest, taxes, depreciation and amortization, and terminal values. The discount rates applied in the discounted cash flow analyses also have an impact on the estimates of fair value, as use of a higher rate will result in a lower estimate of fair value.
| 8. | Other intangible assets, net |
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Amortized intangible assets | | | | | | | | |
| Intellectual property rights acquired for currently marketed products | | | 2,446.6 | | | | 2,462.0 | |
| Acquired product technology | | | 710.0 | | | | 710.0 | |
| Other intangible assets | | | 44.5 | | | | 44.5 | |
| | | | 3,201.1 | | | | 3,216.5 | |
| Intellectual property rights acquired for IPR&D | | | 945.8 | | | | 231.0 | |
| | | | 4,146.9 | | | | 3,447.5 | |
| Less: Accumulated amortization | | | (1,148.8 | ) | | | (1,059.4 | ) |
| | | | 2,998.1 | | | | 2,388.1 | |
As at June 30, 2013 the net book value of intangible assets allocated to the SP segment was $1,582.4 million (December 31, 2012: $1,238.0 million), to the HGT segment was $760.3 million (December 31, 2012: $474.6 million) and to the RM segment was $655.4 million (December 31, 2012: $675.5 million).
The change in the net book value of other intangible assets for the six months to June 30, 2013 and 2012 is shown in the table below:
| | | Other intangible assets | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| As at January 1, | | | 2,388.1 | | | | 2,493.0 | |
| Acquisitions | | | 732.8 | | | | 272.5 | |
| Amortization charged | | | (91.7 | ) | | | (97.3 | ) |
| Impairment charges | | | (19.9 | ) | | | (27.0 | ) |
| Foreign currency translation | | | (11.2 | ) | | | (15.6 | ) |
| As at June 30, | | | 2,998.1 | | | | 2,625.6 | |
In the six months to June 30, 2013 the Company acquired intangible assets totaling $732.8 million, relating to intangible assets acquired with SARcode, Premacure and Lotus (see Note 2 for further details).
In the second quarter of 2013 the Company reviewed certain IPR&D intangible assets acquired through Movetis N.V. (“Movetis”) for impairment and recognized an impairment charge of $19.9 million (2012: $27.0 million) recorded within R&D in the consolidated income statement, to write-down these IPR&D assets to their fair value. These impairment charges have been recorded in the SP operating segment. The fair values of these assets were determined using the income approach, which used significant unobservable (Level 3) inputs (see Note 16 for further details).
Management estimates that the annual amortization charge in respect of intangible assets held at June 30, 2013 will be approximately $170 million for each of the five years to June 30, 2018. Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of acquired IPR&D projects, foreign exchange movements and the technological advancement and regulatory approval of competitor products.
| 9. | Accounts payable and accrued expenses |
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Trade accounts payable and accrued purchases | | | 201.7 | | | | 208.1 | |
| Accrued rebates – Medicaid | | | 454.6 | | | | 455.6 | |
| Accrued rebates – Managed care | | | 226.2 | | | | 184.9 | |
| Sales return reserve | | | 93.1 | | | | 90.5 | |
| Accrued bonuses | | | 70.5 | | | | 109.0 | |
| Accrued employee compensation and benefits payable | | | 74.4 | | | | 64.5 | |
| R&D accruals | | | 70.9 | | | | 73.5 | |
| Provisions for litigation losses and other claims | | | 73.5 | | | | 118.2 | |
| Other accrued expenses | | | 191.8 | | | | 197.2 | |
| | | | 1,456.7 | | | | 1,501.5 | |
Shire 2.75% Convertible Bonds due 2014
On May 9, 2007 Shire issued $1,100 million in principal amount of 2.75% convertible bonds due in 2014 and convertible into fully paid ordinary shares of Shire plc (the “Bonds”). The Bonds were issued at 100% of their principal amount, and unless previously purchased and cancelled, redeemed or converted, will be redeemed on May 9, 2014 (the “Final Maturity Date”) at their principal amount.
The Bonds are repayable in US dollars, but also contain provisions entitling the Company to settle redemption amounts in Pounds sterling or in the case of Final Maturity Date by delivery of the underlying ordinary shares and, if necessary, a cash top-up amount. As the Bonds will be redeemed within twelve months of the balance sheet date, the Bonds have been presented as a current liability at June 30, 2013.
| 11. | Other current liabilities |
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Income taxes payable | | | 24.9 | | | | 78.4 | |
| Value added taxes | | | 18.5 | | | | 23.6 | |
| Contingent consideration payable | | | 86.4 | | | | 16.0 | |
| Other current liabilities | | | 29.0 | | | | 26.1 | |
| | | | 158.8 | | | | 144.1 | |
| 12. | Other non-current liabilities |
| | | June 30, | | | December 31, | |
| | �� | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
| Income taxes payable | | | 63.3 | | | | 58.9 | |
| Deferred revenue | | | 10.7 | | | | 11.4 | |
| Deferred rent | | | 11.2 | | | | 11.9 | |
| Insurance provisions | | | 12.4 | | | | 12.3 | |
| Contingent consideration payable | | | 499.0 | | | | 120.4 | |
| Other non-current liabilities | | | 27.9 | | | | 26.7 | |
| | | | 624.5 | | | | 241.6 | |
| 13. | Commitments and contingencies |
Future minimum lease payments under operating leases at June 30, 2013 are presented below:
| | | Operating | |
| | | leases | |
| | | | $’M | |
| 2013 | | | 21.6 | |
| 2014 | | | 40.3 | |
| 2015 | | | 31.2 | |
| 2016 | | | 23.0 | |
| 2017 | | | 17.3 | |
| 2018 | | | 11.8 | |
| Thereafter | | | 82.8 | |
| | | | 228.0 | |
The Company leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2032. Lease and rental expense amounted to $25.4 million and $21.5 million for the six months to June 30, 2013 and 2012 respectively, which is predominately included in SG&A expenses in the Company’s consolidated income statement.
| (b) | Letters of credit and guarantees |
At June 30, 2013 the Company had irrevocable standby letters of credit and guarantees with various banks and insurance companies totaling $48.7 million, providing security for the Company’s performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations and supply commitments.
| (c) | Collaborative arrangements |
Details of significant updates in collaborative arrangements are included below:
In-licensing arrangements
Collaboration with Acceleron Pharma Inc. (“Acceleron”) for activin receptor type IIB class of molecules
In April 2013, following the results of toxicology studies, Shire discontinued development of HGT4510 and returned Shire’s rights in the asset to Acceleron.
Out-licensing arrangements
Shire has entered into various collaborative arrangements under which the Company has out-licensed certain product or intellectual property rights for consideration such as up-front payments, development milestones, sales milestones and/or royalty payments. In some of these arrangements Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success. Under the terms of these arrangements, the Company may receive development milestone payments up to an aggregate amount of $39.0 million and sales milestones up to an aggregate amount of $71.5 million. The receipt of these substantive milestones is uncertain and contingent on the achievement of certain development milestones or the achievement of a specified level of annual net sales by the licensee. In the six months to June 30, 2013 Shire received up-front and milestone payments totaling $3.0 million (2012: $6.0 million). In the six months to June 30, 2013 Shire recognized up-front and milestone income of $4.0 million (2012: $6.0 million) in other revenues and $26.3 million (2012: $38.0 million) in product sales for shipment of product to the relevant licensee.
At June 30, 2013 the Company had committed to pay approximately $398 million (December 31, 2012: $425 million) to contract vendors for administering and executing clinical trials. The timing of these payments is dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities.
| (ii) | Contract manufacturing |
At June 30, 2013 the Company had committed to pay approximately $80 million (December 31, 2012: $125 million) in respect of contract manufacturing. The Company expects to pay all of these commitments in 2013.
| (iii) | Other purchasing commitments |
At June 30, 2013 the Company had committed to pay approximately $144 million (December 31, 2012: $145 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Company expects to pay $134 million of these commitments in 2013.
| (iv) | Investment commitments |
At June 30, 2013 the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $17 million (December 31, 2012: $15 million) which may all be payable in 2013, depending on the timing of capital calls.
At June 30, 2013 the Company had committed to spend $82 million (December 31, 2012: $97 million) on capital projects.
| (e) | Legal and other proceedings |
The Company expenses legal costs as they are incurred.
The Company recognizes loss contingency provisions for probable losses when management is able to reasonably estimate the loss. When the estimated loss lies within a range, the Company records a loss contingency provision based on its best estimate of the probable loss. If no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. Estimates of losses may be developed substantially before the ultimate loss is known, and are therefore refined each accounting period as additional information becomes known. In instances where the Company is unable to develop a reasonable estimate of loss, no loss contingency provision is recorded at that time. As information becomes known a loss contingency provision is recorded when a reasonable estimate can be made. The estimates are reviewed quarterly and the estimates are changed when expectations are revised. An outcome that deviates from the Company’s estimate may result in an additional expense or release in a future accounting period. At June 30, 2013 provisions for litigation losses, insurance claims and other disputes totaled $85.9 million (December 31, 2012: $130.5 million).
The Company’s principal pending legal and other proceedings are disclosed below. The outcomes of these proceedings are not always predictable and can be affected by various factors. For those legal and other proceedings for which it is considered at least reasonably possible that a loss has been incurred, the Company discloses the possible loss or range of possible loss in excess of the recorded loss contingency provision, if any, where such excess is both material and estimable.
VYVANSE
In May and June 2011, Shire was notified that six separate Abbreviated New Drug Applications ("ANDAs") were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of VYVANSE. The notices were from Sandoz, Inc. ("Sandoz"); Amneal Pharmaceuticals LLC ("Amneal"); Watson Laboratories, Inc.; Roxane Laboratories, Inc. ("Roxane"); Mylan Pharmaceuticals, Inc.; and Actavis Elizabeth LLC and Actavis Inc. (collectively, "Actavis"). Within the requisite 45 day period, Shire filed lawsuits for infringement of certain of Shire's VYVANSE patents in the US District Court for the District of New Jersey against each of Sandoz, Roxane, Amneal and Actavis; in the US District Court for the Central District of California against Watson Laboratories, Inc.; and in the US District Court for the Eastern District of New York against Mylan Pharmaceuticals, Inc. and Mylan Inc. (collectively "Mylan"). On December 9, 2011, the District Court of New Jersey consolidated the Sandoz, Roxane, Amneal and Actavis cases. The filing of the lawsuits triggered a stay of approval of all six ANDAs for up to 30 months from the expiration of the new chemical entity exclusivity, which will expire on August 23, 2014. In December 2011 and February 2012, Shire received additional notifications that Mylan had filed further certifications challenging other VYVANSE patents listed in the Orange Book. Within the requisite 45 day period, Shire filed a new lawsuit against Mylan, Johnson Matthey Pharmaceutical Materials and Johnson Matthey Inc. in New Jersey. In May 2012, the Mylan case that was filed in the Eastern District of New York was transferred and consolidated with the Mylan, Sandoz, Roxane, Amneal and Actavis cases in New Jersey. In December 2012, the parties completed a Markman briefing but no ruling has been rendered. A Markman hearing is scheduled to take place on August 5, 2013. No trial dates have been set. In February 2013, Shire withdrew its lawsuit against Watson following Watson’s withdrawal of its ANDA.
INTUNIV
Between March 2010 and March 2011, Shire was notified that seven separate ANDAs had been submitted to the FDA under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of INTUNIV. The ANDA filers were Actavis Inc., Teva Pharmaceuticals USA, Inc., Anchen, Inc., Watson Pharmaceuticals, Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Sandoz, Inc., and certain of their respective affiliates. Shire filed lawsuits against each of these ANDA filers. All of the lawsuits have now been settled. Under the terms of the Actavis settlement, Actavis has a license to make and market Actavis' generic versions of INTUNIV in the United States on December 1, 2014. Such sales will require the payment of a royalty of 25% of gross profits to Shire during the 180 day period of Actavis' exclusivity. All other parties with whom Shire has settled will be able to enter the market with their respective ANDA-approved products after Actavis’ 180 day exclusivity period has expired. Each of the settlements included a consent judgment confirming that the proposed ANDA products infringe the patents-in-suit, U.S. Patents 6,287,599 and 6,811,794, and that those patents are valid and enforceable with respect to their respective proposed ANDA products. U.S. Patent 5,854,290, which was originally asserted in some of the litigations, has been dedicated to the public.
FOSRENOL
Between February 2009 and December 2010 Shire was notified that four separate ANDAs had been submitted to the FDA under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of FOSRENOL. The ANDA filers were Barr Laboratories, Inc.; Mylan, Inc.; Natco Pharma Limited and Alkem Laboratories Ltd., and
certain of their respective affiliates. Shire filed lawsuits against each of these ANDA filers. In April 2011, Shire and Barr reached a settlement and the lawsuit against Barr was dismissed. The settlement provides Barr with a license to market its own generic version of FOSRENOL upon receiving FDA approval in the US on the earlier of the date of entry of another company’s generic version of FOSRENOL to the US market, or October 1, 2021. Shire’s lawsuits against Mylan, Alkem and Natco have each been dismissed, and consequently, each of Mylan, Alkem and Natco may enter the US market upon FDA approval of their respective ANDA products.
LIALDA
In May 2010 Shire was notified that Zydus Pharmaceuticals USA, Inc. (“Zydus”) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of Delaware against Zydus and Cadila Healthcare Limited, doing business as Zydus Cadila. As of February 22, 2013, the case has been administratively closed. No further activity will take place until after one of the parties files a motion to reopen the case.
In February 2012, Shire was notified that Osmotica Pharmaceutical Corporation ("Osmotica") had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Northern District of Georgia against Osmotica. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months. The court has appointed a special master to assist with a Markman hearing and to preside over any discovery disputes. A Markman hearing date is scheduled to take place on August 22, 2013.
In March 2012, Shire was notified that Watson Laboratories Inc.-Florida had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Southern District of Florida against Watson Laboratories Inc.-Florida and Watson Pharmaceuticals, Inc. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months. In August 2012, Shire filed an amended complaint adding Watson Pharma, Inc. and Watson Laboratories, Inc. as defendants. A Markman hearing was held on December 20, 2012 and a written Markman decision was given by the court on January 17, 2013. A trial took place in April, 2013 and on May 9, 2013 the trial court issued a decision finding that the proposed generic product infringes the patent-in-suit and that the patent is not invalid. Watson has appealed the trial court’s ruling to the Court of Appeals of the Federal Circuit but no date for the hearing has been set.
In April 2012, Shire was notified that Mylan Pharmaceuticals, Inc. (“Mylan”) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Middle District of Florida against Mylan. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months. No date for a Markman hearing has been set. A trial is scheduled to begin on June 2, 2014.
ADDERALL XR
On November 1, 2010 Impax Laboratories, Inc. (“Impax”) filed suit against Shire in the US District Court for the Southern District of New York claiming that Shire was in breach of its supply contract for the authorized generic version of ADDERALL XR. On February 7, 2013 Shire and Impax settled this dispute and agreed to discontinue all court and related proceedings. Under the terms of the settlement Shire made a one-time cash payment to Impax of $48 million in the first quarter of 2013. Also as part of the settlement, the parties have entered into an amended supply agreement which will govern the supply of authorized generic ADDERALL XR from Shire to Impax until the end of the supply term on September 30, 2014.
In February 2011, Shire was notified that Watson Laboratories, Inc.-Florida had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of all approved strengths of ADDERALL XR. Shire filed a lawsuit in the U.S. District Court for the Southern District of New York against Watson Pharmaceuticals, Inc. and certain of its affiliates for infringement of certain of Shire’s ADDERALL XR patents. Par Pharmaceutical, Inc. (the successor in interest to Watson's ANDA for ADDERALL XR) has withdrawn its ANDA, and the litigation was dismissed on January 23, 2013 by agreement between Shire, Watson and Par Pharmaceutical, Inc..
In February 2013, Shire was notified that Neos Therapeutics, Inc. had submitted a New Drug Application under section 505(b)(2) of the Hatch Waxman Act (“505(b)(2) Application”). The 505(b)(2) Application was submitted with a paragraph IV certification for U.S. Reissued Patent Nos. RE41,148 and 42,096 listed in the Orange Book. Within the requisite 45 day period, Shire filed a lawsuit in the Northern District of Texas against Neos Therapeutics, Inc. for infringement of those patents. The filing of the lawsuit triggered a stay of final approval of the 505(b)(2) Application for 30 months. No trial date has been set.
Subpoena related to ADDERALL XR, DAYTRANA and VYVANSE
On September 23, 2009 the Company received a civil subpoena from the US Department of Health and Human Services Office of Inspector General in coordination with the US Attorney for the Eastern District of Pennsylvania seeking production of documents related to the sales and marketing of ADDERALL XR, DAYTRANA and VYVANSE. The investigation covered whether Shire engaged in off-label promotion and other conduct that may implicate the civil False Claims Act.
On February 1, 2013 the Company announced it had reached an agreement in principle to resolve this matter. The agreement also addresses sales and marketing practices relating to LIALDA and PENTASA pursuant to a subsequent voluntary disclosure made by the Company. Shire cooperated with the US Government throughout the process that led to this agreement in principle.
The Company has recorded a $57.5 million charge comprised of the agreement in principle amount, interest and costs, which has been charged to SG&A in the fourth quarter of 2012. The agreement in principle is subject to change until this matter is finally resolved. Discussions between the Company and the US Government are ongoing to establish a final resolution to the investigation.
Investigation related to DERMAGRAFT
Shire understands that the Department of Justice, including the US Attorney’s Office for the Middle District of Florida, Tampa Division and the US Attorney’s Office for Washington, DC, is conducting civil and criminal investigations into the sales and marketing practices of Advanced BioHealing Inc. (“ABH”) relating to DERMAGRAFT. Shire is cooperating fully with these investigations. Shire is not in a position at this time to predict the scope, duration or outcome of these investigations.
Civil Investigative Demand for ADDERALL XR, ADDERALL XR Authorized Generics and VYVANSE
On April 5, 2012 Shire received a Civil Investigative Demand (“CID”) from the United States Federal Trade Commission (“FTC”) requesting that Shire provide it with certain information regarding the supply and reported shortages of ADDERALL XR and its authorized generics and the marketing and sale of ADDERALL XR, its authorized generics and VYVANSE. Shire believes the CID was triggered by reports of product shortages of ADDERALL XR and the authorized generic products in 2011. Shire is cooperating fully with the FTC. At this time, Shire is unable to predict the outcome or duration of this investigation.
| 14. | Accumulated Other Comprehensive Income |
The changes in accumulated other comprehensive income, net of their related tax effects, in the six months to June 30, 2013 are included below:
| | | Foreign currency translation adjustment | | | Unrealized holding gain/(loss) on available-for- sale securities | | | Accumulated other comprehensive income | |
| | | | $M | | | | $M | | | | $M | |
| As at January 1, 2013 | | | 85.1 | | | | 1.8 | | | | 86.9 | |
| Current period change: | | | | | | | | | | | | |
| Other Comprehensive income before reclassification | | | (34.5 | ) | | | (2.1 | ) | | | (36.6 | ) |
| Gain recognized in the income statement (within Other (expense)/income, net) on disposal of available-for-sale securities | | | - | | | | 1.9 | | | | 1.9 | |
| Net current period other comprehensive income | | | (34.5 | ) | | | (0.2 | ) | | | (34.7 | ) |
| As at June 30, 2013 | | | 50.6 | | | | 1.6 | | | | 52.2 | |
| 15. | Financial instruments |
Treasury policies and organization
The Company’s principal treasury operations are coordinated by its corporate treasury function. All treasury operations are conducted within a framework of policies and procedures approved annually by the Board. As a matter of policy, the Company does not undertake speculative transactions that would increase its currency or interest rate exposure.
Interest rate risk
The Company is exposed to interest rate risk on restricted cash, cash and cash equivalents and on foreign exchange contracts on which interest is at floating rates. This exposure is primarily related to US dollar, Pounds sterling, Euro and Canadian dollar interest rates. As the Company maintains all of its cash, liquid investments and foreign exchange contracts on a short term basis for liquidity purposes, this risk is not actively managed. In the six months to June 30, 2013 the average interest rate received on cash and liquid investments was less than 1% per annum. The largest proportion of these cash and liquid investments was in US dollar money market and liquidity funds.
The Company incurs interest at a fixed rate of 2.75% on its $1,100 million in principal amount convertible bonds due 2014.
No derivative instruments were entered into during the six months to June 30, 2013 to manage interest rate exposure. The Company continues to review its interest rate risk and the policies in place to manage the risk.
Credit risk
Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, derivative contracts and trade accounts receivable (from product sales and from third parties from which the Company receives royalties). Cash is invested in short-term money market instruments, including money market and liquidity funds and bank term deposits. The money market and liquidity funds in which Shire invests are all triple A rated by both Standard and Poor’s and by Moody’s credit rating agencies.
The Company is exposed to the credit risk of the counterparties with which it enters into derivative instruments. The Company limits this exposure through a system of internal credit limits which vary according to ratings assigned to the counterparties by the major rating agencies. The internal credit limits are approved by the Board and exposure against these limits is monitored by the corporate treasury function. The counterparties to these derivatives contracts are major international financial institutions.
The Company’s revenues from product sales in the US are mainly governed by agreements with major pharmaceutical wholesalers and relationships with other pharmaceutical distributors and retail pharmacy chains. For the year to December 31, 2012 there were three customers in the US that accounted for 50% of the Company’s product sales. However, such customers typically have significant cash resources and as such the risk from concentration of credit is considered acceptable. The Company has taken positive steps to manage any credit risk associated with these transactions and operates clearly defined credit evaluation procedures. However, an inability of one or more of these wholesalers to honor their debts to the Company could have an adverse effect on the Company’s financial condition and results of operations.
A substantial portion of the Company’s accounts receivable in countries outside of the United States is derived from product sales to government-owned or government-supported healthcare providers. The Company’s recovery of these accounts receivable is therefore dependent upon the financial stability and creditworthiness of the relevant governments. In recent years the creditworthiness and general economic condition of a number of Eurozone countries (including Greece, Ireland, Italy, Portugal and Spain (the “Relevant Countries”)) has deteriorated. As a result, in some of these countries the Company is experiencing delays in the remittance of receivables due from government-owned or government-supported healthcare providers. The Company continued to receive remittances in relation to government-owned or government-supported healthcare providers in all the Relevant Countries in the six months to June 30, 2013, including receipts of $37.9 million and $48.6 million in respect of Spanish and Italian receivables, respectively.
To date the Company has not incurred significant losses on accounts receivable in the Relevant Countries, and continues to consider that such accounts receivable are recoverable. The Company will continue to evaluate all its accounts receivable for potential collection risks and has made provision for amounts where collection is considered to be doubtful. If the financial condition of the Relevant Countries or other Eurozone countries suffer significant deterioration, such that their ability to make payments becomes uncertain, or if one or more Eurozone member countries withdraws from the Euro, additional allowances for doubtful accounts may be required, and losses may be incurred, in future periods. Any such loss could have an adverse effect on the Company’s financial condition and results of operations.
Foreign exchange risk
The Company trades in numerous countries and as a consequence has transactional and translational foreign exchange exposures.
Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. The main trading currencies of the Company are the US dollar, Pounds Sterling, Swiss Franc and the Euro. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency.
Where significant exposures remain, the Company uses foreign exchange contracts (being spot, forward and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary. These assets and liabilities relate predominantly to intercompany financing and specific external receivables. The foreign exchange contracts have not been designated as hedging instruments. Cash flows from derivative instruments are presented within net cash provided by operating activities in the consolidated cash flow statement, unless the derivative instruments are economically hedging specific investing or financing activities.
Translational foreign exchange exposure arises on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.
At June 30, 2013 the Company had 25 swap and forward foreign exchange contracts outstanding to manage currency risk. The swaps and forward contracts mature within 90 days. The Company did not have credit risk related contingent features or collateral linked to the derivatives. The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the consolidated balance sheet. As at June 30, 2013 the potential effect of rights of set off associated with the foreign exchange contracts would be an offset to both assets and liabilities of $0.7 million, resulting in net derivative assets and derivative liabilities of $2.3 million and $2.0 million, respectively. Further details are included below:
| | | Fair value | | | Fair value | |
| | | | June 30, | | | December 31, | |
| | | | 2013 | | | 2012 | |
| | | | | $’M | | | | $’M | |
| Assets | Prepaid expenses and other current assets | | | 3.0 | | | | 1.3 | |
| Liabilities | Other current liabilities | | | 2.7 | | | | 3.0 | |
Net (losses)/ gains (both realized and unrealized) arising on foreign exchange contracts have been classified in the consolidated statements of income as follows:
| | Location of net (loss)/gain recognized in income | | Amount of net (loss)/gain recognized in income | |
| In the six months to | | | June 30, | | | June 30, | |
| | | | 2013 | | | 2012 | |
| | | | | $’M | | | | $’M | |
| Foreign exchange contracts | Other income, net | | | (3.8 | ) | | | 6.9 | |
These net foreign exchange (losses)/gains are offset within Other income, net by net foreign exchange gains/(losses) arising on the balance sheet items that these contracts were put in place to manage.
| 16. | Fair value measurement |
Assets and liabilities that are measured at fair value on a recurring basis
As at June 30, 2013 and December 31, 2012 the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
| | | | Carrying | | | Fair value | |
| | | | value | | | | | | | | | | | | | |
| | | | | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| At June 30, 2013 | | | $'M | | | $'M | | | $'M | | | $'M | | | $'M | |
| Financial assets: | | | | | | | | | | | | | | | | |
Available-for-sale securities(1) | | | | 12.3 | | | | 12.3 | | | | 12.3 | | | | - | | | | - | |
Contingent consideration receivable (2) | | | | 38.6 | | | | 38.6 | | | | - | | | | - | | | | 38.6 | |
| Foreign exchange contracts | | | | 3.0 | | | | 3.0 | | | | - | | | | 3.0 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | | | | 2.7 | | | | 2.7 | | | | - | | | | 2.7 | | | | - | |
Contingent consideration payable(3) | | | | 585.4 | | | | 585.4 | | | | - | | | | - | | | | 585.4 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| At December 31, 2012 | | | $'M | | | $'M | | | $'M | | | $'M | | | $'M | |
| Financial assets: | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities(1) | | | | 14.2 | | | | 14.2 | | | | 14.2 | | | | - | | | | - | |
Contingent consideration receivable (2) | | | | 38.3 | | | | 38.3 | | | | - | | | | - | | | | 38.3 | |
| Foreign exchange contracts | | | | 1.3 | | | | 1.3 | | | | - | | | | 1.3 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | | | | | | | | |
| Foreign exchange contracts | | | | 3.0 | | | | 3.0 | | | | - | | | | 3.0 | | | | - | |
Contingent consideration payable(3) | 1 | | | 136.4 | | | | 136.4 | | | | - | | | | - | | | | 136.4 | |
| (1) | Available-for-sale securities are included within Investments in the consolidated balance sheet. |
| (2) | Contingent consideration receivable is included within Prepaid expenses and other current assets and Other non-current assets in the consolidated balance sheet. |
| (3) | Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in the consolidated balance sheet. |
Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
| | · | Available-for-sale securities – the fair values of available-for-sale securities are estimated based on quoted market prices for those investments. |
| | · | Contingent consideration receivable – the fair value of the contingent consideration receivable has been estimated using the income approach (using a probability weighted discounted cash flow method). |
| | · | Foreign exchange contracts – the fair values of the swap and forward foreign exchange contracts have been determined using an income approach based on current market expectations about the future cash flows. |
| | · | Contingent consideration payable – the fair value of the contingent consideration payable has been estimated using the income approach (using a probability weighted discounted cash flow method). |
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The change in the fair value of the Company’s contingent consideration receivable and payables, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3), are as follows:
Contingent consideration receivable
| | | 2013 | | | 2012 | |
| | | $'M | | | $'M | |
| Balance at January 1, | | | 38.3 | | | | 37.8 | |
| Gain recognized in the income statement (within Gain on sale of product rights) due to change in fair value during the period | | | 11.0 | | | | 10.8 | |
| Reclassification of amounts to Other receivables within Other current assets | | | (9.7 | ) | | | (10.0 | ) |
| Amounts recorded to other comprehensive income (within foreign currency translation adjustments) | | | (1.0 | ) | | | (0.7 | ) |
| Balance at June 30, | | | 38.6 | | | | 37.9 | |
| | | | | | | | | |
| Contingent consideration payable | | | | | | | | |
| | | | 2013 | | | | 2012 | |
| | | $'M | | | $'M | |
| Balance at January 1, | | | 136.4 | | | | - | |
| Initial recognition of contingent consideration payable | | | 451.4 | | | | 127.8 | |
| Loss recognized in the income statement (within Integration and acquisition costs) due to change in fair value during the period | | | 13.7 | | | | 2.1 | |
| Reclassification of amounts to Other current liabilities | | | (8.4 | ) | | | (2.7 | ) |
| Change in fair value during the period with corresponding adjustment to the associated intangible asset | | | (7.7 | ) | | | - | |
| Balance at June 30, | | | 585.4 | | | | 127.2 | |
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Quantitative information about the Company’s recurring Level 3 fair value measurements is included below:
| Financial assets: | Fair Value at the Measurement Date |
| | | | | | | | |
| At June 30, 2013 | Fair value | | Valuation Technique | | Significant unobservable Inputs | | Range |
| | $'M | | | | | | |
| | | | | | | | |
| Contingent consideration receivable ("CCR") | 38.6 | | Income approach (probability weighted discounted cash flow) | | • Probability weightings applied to different sales scenarios | | • 10 to 40% |
| | | | | | | | |
| | | | | | • Future forecast royalties receivable at relevant contractual royalty rates | | • $10 million to $171 million |
| | | | | | | | |
| | | | | | • Assumed market participant discount rate | | • 6.0% |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Financial liabilities: | Fair Value at the Measurement Date |
| | | | | | | | |
| At June 30, 2013 | Fair value | | Valuation Technique | | Significant unobservable Inputs | | Range |
| | $'M | | | | | | |
| | | | | | | | |
| Contingent consideration payable | 585.4 | | Income approach (probability weighted discounted cash flow) | | • Cumulative probability of milestones being achieved | | • 18 to 57% (Weighted average) |
| | | | | | | | |
| | | | | | • Assumed market participant discount rate | | • 2.1 to 8.8% (Weighted average) |
| | | | | | | | |
| | | | | | • Periods in which milestones are expected to be achieved | | • 2014 to 2024 |
| | | | | | | | |
| | | | | | • Forecast quarterly royalties payable on net sales of relevant products | | • $1.7 to $7.6 million |
The Company re-measures the CCR (relating to contingent consideration due to the Company following divestment of one of the Company’s products) at fair value at each balance sheet date, with the fair value measurement based on forecast cash flows, over a number of scenarios which vary depending on the expected performance outcome of the product following divestment. The forecast cash flows under each of these differing outcomes have been included in probability weighted estimates used by the Company in determining the fair value of the CCR.
Contingent consideration payable represents future milestones the Company may be required to pay in conjunction with various business combinations and future royalties payable as a result of certain business combinations and licenses. The amount ultimately payable by Shire in relation to business combinations is dependent upon the achievement of specified future milestones, such as the achievement of certain future development, regulatory and sales milestones. The Company assesses the probability, and estimated timing, of these milestones being achieved and re-measures the related contingent consideration to fair value each balance sheet date. The amount of contingent consideration which may ultimately be payable by Shire in relation to future royalties is dependent upon future net sales of the relevant products over the life of the royalty term. The Company assesses the present value of forecast future net sales of the relevant products and re-measures the related contingent consideration to fair value each balance sheet date.
The fair value of the Company’s contingent consideration receivable and payable could significantly increase or decrease due to changes in certain assumptions which underpin the fair value measurements. Each set of assumptions and milestones are specific to the individual contingent consideration receivable or payable. The assumptions include, among other things, the probability and expected timing of certain milestones being achieved, the forecast future net sales of the relevant products and related future royalties payable, the probability weightings applied to different sales scenarios of one of the Company’s divested products and forecast future royalties receivable under scenarios developed by the Company, and the discount rates used to determine the present value of contingent future cash flows. The Company regularly reviews these assumptions, and makes adjustments to the fair value measurements as required by facts and circumstances.
Assets Measured At Fair Value on a Non-Recurring Basis in the period using Significant Unobservable Inputs (Level 3)
In the second quarter of 2013 the Company reviewed certain IPR&D intangible assets acquired through Movetis for impairment and recognized an impairment charge of $19.9 million, recorded within R&D in the consolidated income statement, to write-down these assets to their fair value. The fair value of these assets was determined using the income approach, which used significant unobservable (Level 3) inputs. These unobservable inputs included, among other things, risk-adjusted forecast future cash flows to be generated by these assets and the determination of an appropriate discount rate to be applied in calculating the present value of forecast future cash flows. The fair value of these assets, determined at the time of the impairment review, was $20.3 million.
Quantitative information about Non-Recurring Level 3 Fair Value Measurements which occurred in the period is included below:
| | Fair Value at the Measurement Date |
| | | | | | | | |
| At June 30, 2013 | Fair value | | Valuation Technique | | Significant unobservable Inputs | | Rate used |
| | $'M | | | | | | |
| | | | | | | | |
| Movetis-related IPR&D intangible assets | 20.3 | | Income approach (discounted cash flow) | | • Decline in forecast peak sales since last impairment test | | • 50% |
| | | | | | | | |
| | | | | | • Assumed market participant discount rate | | • 8.9% |
| | | | | | | | |
Financial assets and liabilities that are not measured at fair value on a recurring basis
The carrying amounts and estimated fair values as at June 30, 2013 and December 31, 2012 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:
| | | June 30, 2013 | | | December 31, 2012 | |
| | | Carrying | | | | | | Carrying | | | | |
| | | amount | | | Fair value | | | amount | | | Fair value | |
| | | | $’M | | | | $’M | | | | $’M | | | | $’M | |
| Financial liabilities: | | | | | | | | | | | | | | | | |
| Convertible bonds (Level 1) | | | 1,100.0 | | | | 1,211.3 | | | | 1,100.0 | | | | 1,228.2 | |
| Building financing obligation (Level 3) | | | 7.8 | | | | 10.5 | | | | 8.0 | | | | 10.3 | |
Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
| | · | Convertible bonds – the fair value of Shire’s $1,100 million 2.75% convertible bonds due 2014 is determined by reference to the market price of the instrument as the convertible bonds are publicly traded. |
| | · | Building finance obligations - the fair value of building finance obligations are estimated based on the present value of future cash flows, and an estimate of the residual value of the underlying property at the end of the lease term, associated with these obligations. |
The carrying amounts of other financial assets and liabilities materially approximate to their fair value because of the short-term maturity of these amounts.
The following table reconciles net income 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, | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | | | | $’M | | | | $’M | |
| Numerator for basic earnings per share | | | 258.1 | | | | 237.8 | | | | 322.9 | | | | 476.2 | |
| Interest on convertible bonds, net of tax | | | 7.5 | | | | 7.8 | | | | 15.1 | | | | 16.2 | |
| Numerator for diluted earnings per share | | | 265.6 | | | | 245.6 | | | | 338.0 | | | | 492.4 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Weighted average number of shares: | | | | | | | | | | | | | | | | |
| | | Millions | | | Millions | | | Millions | | | Millions | |
Basic 1 | | | 549.6 | | | | 557.0 | | | | 550.5 | | | | 555.2 | |
| Effect of dilutive shares: | | | | | | | | | | | | | | | | |
Share based awards to employees 2 | | | 2.6 | | | | 4.4 | | | | 3.3 | | | | 6.1 | |
Convertible bonds 2.75% due 2014 3 | | | 33.8 | | | | 33.5 | | | | 33.7 | | | | 33.5 | |
| Diluted | | | 586.0 | | | | 594.9 | | | | 587.5 | | | | 594.8 | |
| 1. | Excludes shares purchased by the EBT and under the share buy-back program and presented by Shire as treasury stock. |
| 2. | Calculated using the treasury stock method. |
| 3. | Calculated using the ‘if-converted’ method. |
The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:
| | | 3 months to | | | 3 months to | | | 6 months to | | | 6 months to | |
| | | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | | 2013 | | | 2012 | | | 2013 | | | 2012 | |
| | | No. of shares | | | No. of shares | | | No. of shares | | | No. of shares | |
| | | Millions | | | Millions | | | Millions | | | Millions | |
Share based awards to employees1 | | | 11.0 | | | | 6.3 | | | | 9.1 | | | | 4.5 | |
| 1. | Certain stock options have been excluded from the calculation of diluted EPS because (a) their exercise prices exceeded Shire plc’s average share price during the calculation period or (b) the required performance conditions were not satisfied as at the balance sheet date. |
For the six months to June 30, 2013 Shire’s internal financial reporting is in line with its existing business unit and management reporting structure. The Company has three business units and three reportable segments: SP, HGT and RM. The SP, HGT and RM reportable segments represent the Company’s revenues and costs for currently promoted and sold products, together with the costs of developing products for future commercialization. ‘All Other’ has been included in the table below in order to reconcile the three segments to the total consolidated figures.
The Company evaluates performance based on revenue and operating income. The Company does not have inter-segment transactions. Assets that are directly attributable or allocable to the segments have been separately disclosed.
On May 2, 2013 the Company announced that there would be a re-alignment of the Company’s business to integrate the three divisions into a simplified “One Shire” organization in order to drive future growth and innovation. The Company is continuing to evaluate the timing and impact that this re-alignment will have on its operating and reportable segments.
| | | SP | | | HGT | | | RM | | | All Other | | | Total | |
| 3 months to June 30, 2013 | | | $’M | | | | $’M | | | | $’M | | | | $’M | | | | $’M | |
| Product sales | | | 813.2 | | | | 394.9 | | | | 22.1 | | | | - | | | | 1,230.2 | |
| Royalties | | | 24.8 | | | | - | | | | - | | | | 11.5 | | | | 36.3 | |
| Other revenues | | | 4.8 | | | | 3.2 | | | | - | | | | - | | | | 8.0 | |
| Total revenues | | | 842.8 | | | | 398.1 | | | | 22.1 | | | | 11.5 | | | | 1,274.5 | |
| | | | | | | | | | | | | | | | | | | | | |
Cost of product sales(1) | | | 95.0 | | | | 69.4 | | | | 11.3 | | | | - | | | | 175.7 | |
Research and development(1) | | | 181.9 | | | | 70.7 | | | | 7.5 | | | | - | | | | 260.1 | |
Selling, general and administrative(1) | | | 242.2 | | | | 103.3 | | | | 47.1 | | | | 65.0 | | | | 457.6 | |
| Gain on sale of product rights | | | (4.5 | ) | | | - | | | | - | | | | - | | | | (4.5 | ) |
| Reorganization costs | | | - | | | | - | | | | - | | | | 26.4 | | | | 26.4 | |
| Integration and acquisition costs | | | 9.9 | | | | 6.6 | | | | 0.9 | | | | - | | | | 17.4 | |
| Total operating expenses | | | 524.5 | | | | 250.0 | | | | 66.8 | | | | 91.4 | | | | 932.7 | |
| Operating income/(loss) | | | 318.3 | | | | 148.1 | | | | (44.7 | ) | | | (79.9 | ) | | | 341.8 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 3,058.6 | | | | 2,220.2 | | | | 748.1 | | | | 1,876.0 | | | | 7,902.9 | |
Long-lived assets(2) | | | 117.2 | | | | 684.2 | | | | 52.5 | | | | 102.1 | | | | 956.0 | |
Capital expenditure on long-lived assets(2) | | | 9.5 | | | | 13.5 | | | | 15.0 | | | | 5.3 | | | | 43.3 | |
| (1) | Depreciation from manufacturing plants ($10.0 million) is included in Cost of product sales; depreciation of research and development assets ($4.3 million) and impairment of IPR&D intangible assets in the SP reporting segment ($19.9 million) is included in Research and development; and all other depreciation and amortization charges ($61.9 million) is included in Selling, general and administrative. |
| (2) | Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments). |
| | | SP | | | HGT | | | RM | | | All Other | | | Total | |
| 3 months to June 30, 2012 | | | $’M | | | | $’M | | | | $’M | | | | $’M | | | | $’M | |
| Product sales | | | 735.5 | | | | 359.8 | | | | 52.4 | | | | - | | | | 1,147.7 | |
| Royalties | | | 45.4 | | | | - | | | | - | | | | 10.9 | | | | 56.3 | |
| Other revenues | | | 3.6 | | | | 0.2 | | | | - | | | | - | | | | 3.8 | |
| Total revenues | | | 784.5 | | | | 360.0 | | | | 52.4 | | | | 10.9 | | | | 1,207.8 | |
| | | | | | | | | | | | | | | | | | | | | |
Cost of product sales(1) | | | 84.8 | | | | 50.7 | | | | 17.0 | | | | - | | | | 152.5 | |
Research and development(1) | | | 158.3 | | | | 76.0 | | | | 4.3 | | | | - | | | | 238.6 | |
Selling, general and administrative(1) | | | 311.5 | | | | 95.9 | | | | 42.6 | | | | 61.0 | | | | 511.0 | |
| Gain on sale of product rights | | | (3.6 | ) | | | - | | | | - | | | | - | | | | (3.6 | ) |
| Integration and acquisition costs | | | 2.8 | | | | - | | | | 4.3 | | | | - | | | | 7.1 | |
| Total operating expenses | | | 553.8 | | | | 222.6 | | | | 68.2 | | | | 61.0 | | | | 905.6 | |
| Operating income/(loss) | | | 230.7 | | | | 137.4 | | | | (15.8 | ) | | | (50.1 | ) | | | 302.2 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 2,534.6 | | | | 1,931.1 | | | | 980.5 | | | | 1,594.8 | | | | 7,041.0 | |
Long-lived assets(2) | | | 130.1 | | | | 707.9 | | | | 25.0 | | | | 64.2 | | | | 927.2 | |
Capital expenditure on long-lived assets(2) | | | 12.1 | | | | 18.3 | | | | 0.1 | | | | 5.8 | | | | 36.3 | |
| (1) | Depreciation from manufacturing plants ($7.0 million) is included in Cost of product sales; depreciation of research and development assets ($6.4 million) and impairment of IPR&D intangible assets in the SP reporting segment ($27.0 million) is included in Research and development; and all other depreciation and amortization charges ($65.5 million) is included in Selling, general and administrative. |
| (2) | Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments). |
| | | SP | | | HGT | | | RM | | | All Other | | | Total | |
| 6 months to June 30, 2013 | | | $’M | | | | $’M | | | | $’M | | | | $’M | | | | $’M | |
| Product sales | | | 1,559.3 | | | | 746.8 | | | | 40.8 | | | | - | | | | 2,346.9 | |
| Royalties | | | 50.3 | | | | - | | | | - | | | | 24.5 | | | | 74.8 | |
| Other revenues | | | 11.2 | | | | 3.5 | | | | - | | | | - | | | | 14.7 | |
| Total revenues | | | 1,620.8 | | | | 750.3 | | | | 40.8 | | | | 24.5 | | | | 2,436.4 | |
| | | | | | | | | | | | | | | | | | | | | |
Cost of product sales(1) | | | 180.8 | | | | 130.9 | | | | 19.8 | | | | 0.1 | | | | 331.6 | |
Research and development(1) | | | 329.3 | | | | 140.3 | | | | 14.7 | | | | - | | | | 484.3 | |
Selling, general and administrative(1) | | | 500.1 | | | | 208.8 | | | | 94.9 | | | | 92.5 | | | | 896.3 | |
| Goodwill impairment charge | | | - | | | | - | | | | 198.9 | | | | - | | | | 198.9 | |
| Gain on sale of product rights | | | (11.0 | ) | | | - | | | | - | | | | - | | | | (11.0 | ) |
| Reorganization costs | | | - | | | | - | | | | - | | | | 43.9 | | | | 43.9 | |
| Integration and acquisition costs | | | 11.8 | | | | 8.0 | | | | 1.7 | | | | - | | | | 21.5 | |
| Total operating expenses | | | 1,011.0 | | | | 488.0 | | | | 330.0 | | | | 136.5 | | | | 1,965.5 | |
| Operating income/(loss) | | | 609.8 | | | | 262.3 | | | | (289.2 | ) | | | (112.0 | ) | | | 470.9 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 3,058.6 | | | | 2,220.2 | | | | 748.1 | | | | 1,876.0 | | | | 7,902.9 | |
Long-lived assets(2) | | | 117.2 | | | | 684.2 | | | | 52.5 | | | | 102.1 | | | | 956.0 | |
Capital expenditure on long-lived assets(2) | | | 16.9 | | | | 22.8 | | | | 24.3 | | | | 12.2 | | | | 76.2 | |
| (1) | Depreciation from manufacturing plants ($17.8 million) is included in Cost of product sales; depreciation of research and development assets ($8.9 million) and impairment of IPR&D intangible assets in the SP reporting segment ($19.9 million) is included in Research and development; and all other depreciation and amortization charges ($124.5 million) is included in Selling, general and administrative. |
| (2) | Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments). |
| | | SP | | | HGT | | | RM | | | All Other | | | Total | |
| 6 months to June 30, 2012 | | | $’M | | | | $’M | | | | $’M | | | | $’M | | | | $’M | |
| Product sales | | | 1,442.2 | | | | 711.2 | | | | 101.2 | | | | - | | | | 2,254.6 | |
| Royalties | | | 87.8 | | | | - | | | | - | | | | 24.8 | | | | 112.6 | |
| Other revenues | | | 11.9 | | | | 0.5 | | | | - | | | | - | | | | 12.4 | |
| Total revenues | | | 1,541.9 | | | | 711.7 | | | | 101.2 | | | | 24.8 | | | | 2,379.6 | |
| | | | | | | | | | | | | | | | | | | | | |
Cost of product sales(1) | | | 171.9 | | | | 112.0 | | | | 27.0 | | | | - | | | | 310.9 | |
Research and development(1) | | | 289.3 | | | | 162.3 | | | | 7.3 | | | | - | | | | 458.9 | |
Selling, general and administrative(1) | | | 611.6 | | | | 200.4 | | | | 84.2 | | | | 114.8 | | | | 1,011.0 | |
| Gain on sale of product rights | | | (10.8 | ) | | | - | | | | - | | | | - | | | | (10.8 | ) |
| Integration and acquisition costs | | | 4.4 | | | | - | | | | 8.0 | | | | - | | | | 12.4 | |
| Total operating expenses | | | 1,066.4 | | | | 474.7 | | | | 126.5 | | | | 114.8 | | | | 1,782.4 | |
| Operating income/(loss) | | | 475.5 | | | | 237.0 | | | | (25.3 | ) | | | (90.0 | ) | | | 597.2 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 2,534.6 | | | | 1,931.1 | | | | 980.5 | | | | 1,594.8 | | | | 7,041.0 | |
Long-lived assets(2) | | | 130.1 | | | | 707.9 | | | | 25.0 | | | | 64.2 | | | | 927.2 | |
Capital expenditure on long-lived assets(2) | | | 19.2 | | | | 26.3 | | | | 0.1 | | | | 8.2 | | | | 53.8 | |
| (1) | Depreciation from manufacturing plants ($14.2 million) is included in Cost of product sales; depreciation of research and development assets ($12.8 million) and impairment of IPR&D intangible assets in the SP reporting segment ($27.0 million) is included in Research and development; and all other depreciation and amortization charges ($124.7 million) is included in Selling, general and administrative. |
| (2) | Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments). |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Shire’s unaudited consolidated financial statements and related notes appearing elsewhere in this report.
Significant events in the three months to June 30, 2013 and recent developments
Pipeline
INTUNIV – for the treatment of Attention Deficit Hyperactivity Disorder (“ADHD”) in Canada
| · | On July 5, 2013 Shire received approval from Health Canada for INTUNIV XR (guanfacine hydrochloride extended-release tablets) as monotherapy for the treatment of ADHD in children aged 6 to 12 years and as adjunctive therapy to psychostimulants for the treatment of ADHD in children, aged 6 to 12 years, with a sub-optimal response to psychostimulants. The targeted launch date is November 2013. |
SPD602 – for the treatment of transfusion-dependent iron overload
| · | In June 2013 data from an on-going phase 2 study was presented at the 18th Congress of the European Hematology Association. Seventy-two-week data in patients with hereditary anemias indicate that the safety, tolerability and efficacy profile of SPD602 supports its continued development. Full data from the ongoing phase 2 proof-of-concept program will be available mid-2014. |
SPD557 – for the treatment of refractory gastroesophageal reflux disease (“rGERD”)
| · | This program has been discontinued following review of headline data from the proof-of-concept study which did not support continued development. |
SPD554 (selective α2A agonist) – for the treatment of various central nervous system disorders
| · | This program has been discontinued as part of ongoing portfolio prioritization assessments. |
OTHER DEVELOPMENTS
Legal Proceedings
LIALDA patent litigation
| · | On May 9, 2013 Shire announced that it had prevailed in its litigation against Watson Pharmaceuticals Inc., Watson Laboratories, Inc.-Florida, Watson Pharma, Inc. and Watson Laboratories, Inc. in connection with their ANDA for a generic version of Shire’s LIALDA. Following a bench trial, the US Court for the Southern District of Florida upheld the validity of US Patent No. 6,773,720 and ruled that the proposed generic product infringes that patent. Watson has appealed this ruling to the Court of Appeals of the Federal Circuit. |
Share Buy-Back Program
| · | In the fourth quarter of 2012 Shire commenced a share buy-back program, for the purpose of returning funds to shareholders, of up to $500 million, through both direct purchases of Ordinary Shares and through the purchase of Ordinary Shares underlying American Depositary Receipts. As of July 24, 2013 Shire had made on-market repurchases totaling 9,567,253 Ordinary Shares at a cost of $ 289.9 million (excluding transaction costs). |
DIVIDEND
In respect of the six months ended June 30, 2013 the Board resolved to pay an interim dividend of 3.00 US cents per Ordinary Share (2012: 2.73 US cents per Ordinary Share).
Dividend payments will be made in Pounds Sterling to holders of Ordinary Shares and in US Dollars to holders of ADSs. A dividend of 1.95 pence per Ordinary Share (an increase of 12% compared to 2012: 1.74 pence) and 9.00 US cents per ADS (an increase of 10% compared to 2012: 8.19 US cents) will be paid on October 3, 2013 to shareholders on the register as at the close of business on September 6, 2013.
Research and development
Products in registration as at June 30, 2013
VYVANSE for the treatment of ADHD in the US
On May 1, 2013, Shire announced that the FDA had approved VYVANSE as a maintenance treatment in children and adolescents with ADHD. With this new approval, VYVANSE is currently the only stimulant approved for maintenance treatment in children and adolescents ages 6 to 17 years with ADHD, as well as in adults with ADHD.
INTUNIV for the treatment of ADHD in Canada
On July 5, 2013, Shire received the Notice of Compliance from Health Canada for INTUNIV XR (guanfacine hydrochloride extended-release tablets) as monotherapy for the treatment of ADHD in children aged 6 to 12 years and as adjunctive therapy to psychostimulants for the treatment of ADHD in children, aged 6 to 12 years, with a sub-optimal response to psychostimulants.
Products in clinical development as at June 30, 2013
Phase 3
Lisdexamfetamine dimesylate (“LDX”)1 for the treatment of inadequate response in major depressive disorder (“MDD”)
A Phase 3 clinical program to assess the efficacy and safety of LDX as adjunctive therapy in patients with MDD was initiated in the fourth quarter of 2011 and is ongoing.
1 Currently marketed as VYVANSE in the US and ELVANSE in certain countries in the EU for the treatment of ADHD.
LDX for the treatment of binge eating disorder (“BED”)
A Phase 3 clinical program to evaluate the efficacy and safety of LDX in adults with BED was initiated in the fourth quarter of 2012 and is ongoing.
INTUNIV for the treatment of ADHD in the EU
INTUNIV for the treatment of ADHD in children aged 6 to 17 in the EU was initiated in the fourth quarter of 2011 and is ongoing.
INTUNIV for the treatment of ADHD in Japan
Under a collaboration agreement, Shionogi and Shire will co-develop and sell ADHD products in Japan, including INTUNIV. A Phase 3 clinical program to evaluate the efficacy and safety of INTUNIV in Japanese patients aged 6 to 17 was initiated in the second quarter of 2013.
SPD-606 Lifitegrast for the treatment of signs and symptoms of dry eye disease
Added to the Shire pipeline as part of the SARcode acquisition in the second quarter of 2013, a Phase 3 clinical program to further assess the efficacy of SPD 606 for the treatment of signs and symptoms of dry eye disease was initiated in the US in the fourth quarter of 2012 and is on-going.
XAGRID for the treatment of essential thrombocythaemia in Japan
A Phase 3 clinical program in Japan was initiated in the fourth quarter of 2010 to assess the safety and efficacy of XAGRID in adult essential thrombocythaemia patients treated with cytoreductive therapy who have become intolerant to their current therapy or whose platelet counts have not been reduced to an acceptable level. The program is ongoing.
RESOLOR for the treatment of chronic constipation in males
A Phase 3 European clinical trial to further assess the efficacy of RESOLOR for the treatment of chronic constipation in males was initiated in 2010 and is ongoing.
SPD-555 (prucalopride; marketed as RESOLOR in the EU) for the treatment of chronic constipation in the US
On January 10, 2012, Shire announced that it had acquired the rights to develop and market prucalopride in the US in an agreement with Janssen Pharmaceutica N.V. This product is Phase 3-ready and definitive plans will be implemented following discussions with regulatory authorities.
FIRAZYR for the treatment for Acute Angiotensin Converting Enzyme Inhibitor-Induced Angioedema (ACE-I AE)
In December 2012, Shire submitted a supplemental Marketing Authorization Application (“MAA”), to the European Medicines Agency (“EMA”) seeking approval for FIRAZYR for the treatment of ACE-I AE in Europe. Following discussions with the FDA a US Phase 3 study is expected to commence in the fourth quarter of 2013.
ABH001 for the treatment of epidermolysis bullosa (“EB”)
ABH001 is in development for the treatment of EB, a rare genetic skin disease that causes the skin to be so fragile that the slightest friction results in painful blisters and open wounds. The company initiated a Phase 3 study in the fourth quarter of 2012 and enrolled the first patient in January 2013. The FDA has granted Fast Track designation for this program.
Phase 2
LDX for the treatment of ADHD in Japan
Under a collaboration agreement, Shionogi and Shire will co-develop and sell ADHD products in Japan, including LDX. A Phase 2 clinical program to evaluate the efficacy and safety of LDX in Japanese patients aged 6 to 17 was initiated in the second quarter of 2013.
SPD-554 (selective α2A agonist) for the treatment of various central nervous system (“CNS”) disorders
This program has been discontinued as part of ongoing portfolio prioritization assessments.
SPD-557 for the treatment of refractory gastroesophageal reflux disease (“rGERD”)
This program has been discontinued following review of headline data from the proof-of-concept study which did not support continued development.
SPD- 602 iron chelating agent for the treatment of iron overload secondary to chronic transfusion
A Phase 2 trial in pediatric and adult patients with transfusional iron overload is ongoing. This product has received orphan drug designation by the EMA and the FDA for the treatment of chronic iron overload requiring chelation therapy.
HGT-2310 for the treatment of Hunter syndrome with CNS symptoms
HGT-2310 is in development as an enzyme replacement therapy (“ERT”) delivered intrathecally for Hunter syndrome patients with CNS symptoms. The Company initiated a Phase 1/2 clinical trial in the first quarter of 2010 which has now completed. Shire is currently planning a pivotal clinical trial which is expected to initiate in the second half of 2013, subject to customary regulatory interactions with the FDA and EMA. This product has been granted orphan designation in the US.
HGT-1410 for Sanfilippo A Syndrome (Mucopolysaccharidosis IIIA)
HGT-1410 is in development as an ERT delivered intrathecally for the treatment of Sanfilippo A Syndrome, a Lysosomal Storage Disorder (“LSD”). The Company initiated a Phase 1/2 clinical trial in August 2010 which has now completed. Shire is currently planning the next clinical trial for HGT-1410, designed to measure a clinical response, which is expected to initiate in the second half of 2013, subject to customary regulatory interactions with the FDA and EMA. The product has been granted orphan drug designation in the US and in the EU.
SRM-003 (formerly referred to as VASCUGEL) for the treatment of improvement in patency of arteriovenous (“AV”) access in hemodialysis patients
SRM-003 is a novel endothelial cell based therapy in development for enhancing blood vessel repair and improving hemodialysis access for patients with end-stage renal disease (“ESRD”). This product has been granted orphan drug designation in the US and the EU. In March 2013, Shire enrolled the first patients in its two Phase 2 studies designed to evaluate the efficacy and safety of SRM-003 (VASCUGEL) in improving Arteriovenous Fistula (AVF) maturation and AV Graft (“AVG”) patency to facilitate hemodialysis in patients with ESRD.
Phase 1
HGT-1110 for the treatment of Metachromatic Leukodystrophy (“MLD”)
HGT-1110 is in development as an ERT delivered intrathecally for the treatment of MLD. This product has been granted orphan drug designation in the US and the EU. The Company initiated a Phase 1/2 clinical trial in August 2012. This trial is ongoing.
Other pre-clinical development projects
A number of additional projects are underway in various stages of pre-clinical development.
Results of operations for the three months to June 30, 2013 and 2012
Financial highlights for the three months to June 30, 2013 are as follows:
| · | Product sales in the second quarter of 2013 were $1,230 million, up 7%, when compared against a strong set of comparatives in the second quarter of 2012. On a Constant Exchange Rate (“CER”) basis, which is a Non GAAP measure, product sales were up 8%. |
Six of Shire’s top ten products delivered double digit growth: VYVANSE (up 13% to $300 million), ELAPRASE (up 22% to $149 million), LIALDA/MEZAVANT (up 46% to $138 million), INTUNIV (up 31% to $90 million), PENTASA (up 15% to $74 million), and FIRAZYR (up 56% to $50 million).
LIALDA/MEZAVANT sales in the second quarter of 2013 were particularly strong due in part to new managed care contracts in the US. ELAPRASE sales in the second quarter of 2013 benefited from the timing of shipments to markets with large infrequent orders.
Growth in total product sales was moderated by DERMAGRAFT (down 57% to $22 million), ADDERALL XR (down 16% to $112 million) and REPLAGAL (down 7% to $114 million; down 5% on a CER basis). The second quarter of 2013 sales for all three products compare against strong prior year comparatives that will ease over the second half of the year.
The return of competition to the Fabry market in Europe was a factor in the lower REPLAGAL product sales, as was the timing of shipments which have distorted quarter on quarter growth rates in both 2013 and 2012. However, recent positive trends in patient dynamics indicate that the impact of switches to the competitor product is diminishing and Shire continues to see strong growth in the number of new naïve patients starting on REPLAGAL globally. Sales of $114 million in the second quarter of 2013 were flat against the first quarter of 2013 and Shire expects similar levels in the third quarter of 2013 with sequential growth in the final quarter of the year.
| · | Total revenues were up 6% to $1,275 million (2012: $1,208 million) as the growth in product sales was partially offset, as expected, by lower royalties, particularly from ADDERALL XR. |
| · | Operating income was up 13% to $342 million (2012: $302 million), as the good underlying operating leverage in the second quarter of 2013 further benefited from lower legal and litigation costs and lower impairment charges, only partially offset by higher reorganization and acquisition costs compared to the second quarter of 2012. R&D expenditure was up 15% as Shire continues to progress a number of promising pipeline programs. The increase was moderated by lower SG&A expenditure (down 5%) as the Company focuses on simplifying its business, delivering efficient growth and with that enhanced margins. |
| · | Diluted earnings per ordinary share increased 10% to $0.45 (2012: $0.41), due to higher operating income partially offset by a higher effective tax rate of 22% (2012: 18%). |
Results of operations for the three months to June 30, 2013 and 2012
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, | | | | |
| | | 2013 | | | 2012 | | | change | |
| | | $'M | | | $'M | | | % | |
| Product sales | | | 1,230.2 | | | | 1,147.7 | | | | +7 | |
| Royalties | | | 36.3 | | | | 56.3 | | | | -36 | |
| Other revenues | | | 8.0 | | | | 3.8 | | | | +111 | |
| Total | | | 1,274.5 | | | | 1,207.8 | | | | +6 | |
Product sales
The following table provides an analysis of the Company’s key product sales:
| | | 3 months to | | | 3 months to | | | | | | | | | | | | | |
| | | June 30, | | | June 30, | | | Product sales | | | Non-GAAP CER | | | US prescription | | | Exit market | |
| | | 2013 | | | 2012 | | | growth | | | growth4 | | | growth1 | | | share1 | |
| Net product sales: | | $'M | | | $'M | | | % | | | % | | | % | | | % | |
| VYVANSE | | | 300.3 | | | | 266.2 | | | | 13 | % | | | +13 | | | | +7 | | | | 16 | |
| ELAPRASE | | | 149.2 | | | | 122.2 | | | | 22 | % | | | +25 | | | | n/a | 2 | | | n/a | 2 |
| LIALDA/MEZAVANT | | | 137.5 | | | | 94.1 | | | | 46 | % | | | +46 | | | | +17 | | | | 26 | |
| REPLAGAL | | | 114.1 | | | | 123.2 | | | | -7 | % | | | -5 | | | | n/a | 3 | | | n/a | 3 |
| ADDERALL XR | | | 112.3 | | | | 133.9 | | | | -16 | % | | | -16 | | | | -11 | | | | 5 | |
| INTUNIV | | | 90.4 | | | | 69.1 | | | | 31 | % | | | +31 | | | | +10 | | | | 5 | |
| VPRIV | | | 82.5 | | | | 82.7 | | | | 0 | % | | | +1 | | | | n/a | 2 | | | n/a | 2 |
| PENTASA | | | 73.6 | | | | 63.9 | | | | 15 | % | | | +15 | | | | -1 | | | | 14 | |
| FIRAZYR | | | 49.5 | | | | 31.7 | | | | 56 | % | | | +56 | | | | n/a | 2 | | | n/a | 2 |
| FOSRENOL | | | 42.1 | | | | 43.2 | | | | -3 | % | | | -2 | | | | -19 | | | | 4 | |
| XAGRID | | | 26.5 | | | | 25.5 | | | | 4 | % | | | +5 | | | | n/a | 2 | | | n/a | 2 |
| DERMAGRAFT | | | 22.3 | | | | 52.4 | | | | -57 | % | | | -57 | | | | n/a | 2 | | | n/a | 2 |
| Other product sales | | | 29.9 | | | | 39.6 | | | | -24 | % | | | -23 | | | | n/a | | | | n/a | |
| Total product sales | | | 1,230.2 | | | | 1,147.7 | | | | 7 | % | | | | | | | | | | | | |
| (1) | Data provided by IMS Health National Prescription Audit (“IMS NPA”) relates solely to US-based prescriptions. Exit market share represents the average monthly US market share in the month ended June 30, 2013. |
| (2) | IMS NPA Data not available. |
| (3) | Not sold in the US in the second quarter of 2013. |
| (4) | The Company’s management analyzes product sales and revenue growth for certain products sold in markets outside of the US on a constant exchange rate (“CER”) basis, so that product sales and revenue growth can be considered excluding movements in foreign exchange rates. Product sales and revenue growth on a CER basis is a Non-GAAP financial measure (“Non-GAAP CER”), computed by comparing 2013 product sales and revenues restated using 2012 average foreign exchange rates to 2012 actual product sales and revenues. Average exchange rates for the three months and six months to June 30, 2013 were $1.53:£1.00 and $1.30:€1.00 (2012: $1.59:£1.00 and $1.30:€1.00) and $1.55:£1.00 and $1.31:€1.00 (2012: $1.59:£1.00 and $1.30:€1.00). |
VYVANSE – ADHD
VYVANSE product sales showed strong growth (up 13%) in the second quarter of 2013 compared to the second quarter of 2012, primarily as a result of higher prescription demand (up 7%) and to a lesser extent1 the effect of a price increase taken since the second quarter of 2012, the benefit of which was partially offset by higher destocking in the second quarter of 2013 compared to the second quarter of 2012.
Litigation proceedings regarding Shire’s VYVANSE patents are ongoing. Further information about this litigation can be found in PART I: ITEM 1 of this Form 10-Q.
ELAPRASE – Hunter syndrome
Product sales from ELAPRASE in the second quarter of 2013 were up 22% (up 25% on a CER basis) compared to the second quarter of 2012 primarily due to the impact of the timing of large orders to certain markets which order less frequently in addition to underlying growth in patient numbers.
LIALDA/MEZAVANT – Ulcerative Colitis
Product sales for LIALDA/MEZAVANT in the second quarter of 2013 were up 46%. New Managed Care contracts in the US contributed to increased prescription demand (up 17%) and stocking in the second quarter of 2013 compared to destocking in the second quarter of 2012. To a lesser extent1 sales also benefited from the effect of a price increase taken since the second quarter of 2012.
Litigation proceedings regarding Shire’s LIALDA patents are ongoing. Further information about this litigation can be found in PART I: ITEM 1 of this Form 10-Q.
REPLAGAL – Fabry disease
REPLAGAL sales were down 7% (down 5% on a CER basis) as compared to the second quarter of 2012, primarily due to the return of competition to the Fabry market in Europe and the timing of shipments which have distorted quarter on quarter growth rates in both 2013 and 2012. However, recent positive trends in the patient dynamics indicate that the impact of switches to the competitor product is diminishing and Shire continues to see strong growth in the number of new naïve patients starting on REPLAGAL globally. Sales of $114.1 million in the second quarter of 2013 were flat against the first quarter of 2013 and shire expects similar levels in the third quarter of 2013 with sequential growth in final quarter of the year.
ADDERALL XR – ADHD
ADDERALL XR product sales decreased (down 16%) in the second quarter of 2013 primarily as a result of lower US prescription demand (down 11%) following the introduction of a new generic competitor in June 2012 and the effect of higher sales deductions as a percentage of sales in the second quarter of 2013 compared to the second quarter of 2012.
Litigation proceedings regarding Shire’s ADDERALL XR patents are ongoing. Further information about this litigation can be found in PART I: ITEM 1 of this Form 10-Q.
INTUNIV – ADHD
The strong growth in INTUNIV product sales (up 31%) in the second quarter of 2013 was driven by both growth in US prescription demand (up 10%) and the effect of price increases taken since the second quarter of 2012.
Further information about litigation proceedings regarding Shire’s INTUNIV patents can be found in PART I: ITEM 1 of this Form 10-Q.
VPRIV – Gaucher disease
VPRIV product sales were flat (up 1% on a CER basis) in the second quarter of 2013, reflecting the particularly strong quarterly sales seen in the second quarter of 2012 which benefited from higher US volumes and the timing of orders to Latin America. The number of patients on therapy continues to grow.
PENTASA – Ulcerative Colitis
PENTASA product sales (up 15%) benefited from both price increases taken since the second quarter of 2012 and the impact of moderate stocking in the second quarter of 2013 compared to a small amount of pipeline destocking in the second quarter of 2012.
FIRAZYR – Hereditary Angioedema (“HAE”)
FIRAZYR product sales (up 56%) showed strong growth reflecting the continuing global growth of the product, particularly in the US market.
DERMAGRAFT – Diabetic Foot Ulcers (“DFU”)
DERMAGRAFT product sales grew by 21% compared to the first quarter of 2013 but were down 57% compared to the second quarter of 2012.
1 The actual net effect of price increases on current period net sales compare to the comparative period is difficult to quantify due to the various managed care rebates, Medicaid discounts, other discount programs in which the Company participates and fee for service agreements with wholesalers customers.
Royalties
The following table provides an analysis of Shire’s royalty income:
| | | 3 months to | | | 3 months to | | | | |
| | | June 30, | | | June 30, | | | | |
| | | 2013 | | | 2012 | | | Change | |
| | | $'M | | | $'M | | | % | |
| 3TC and ZEFFIX | | | 11.3 | | | | 10.6 | | | | +7 | |
| FOSRENOL | | | 10.8 | | | | 13.0 | | | | -17 | |
| ADDERALL XR | | | 4.9 | | | | 25.7 | | | | -81 | |
| Others | | | 9.3 | | | | 7.0 | | | | +33 | |
| Total royalties | | | 36.3 | | | | 56.3 | | | | -36 | |
Royalties from ADDERALL XR in the second quarter of 2013 were significantly impacted by both reduced sales volume and a lower royalty rate being payable to Shire by Impax Laboratories, Inc. for its authorised generic product following the launch of a new generic product in June 2012.
Cost of product sales
Cost of product sales increased to $175.7 million for the three months to June 30, 2013 (14% of product sales), from $152.5 million in the corresponding period in 2012 (2012: 13% of product sales). Cost of product sales as a percentage of product sales remained broadly constant in the second quarter of 2013 as compared to the second quarter of 2012. For the three months to June 30, 2013 cost of product sales included depreciation of $10.0 million (2012: $7.0 million) and amortization of $nil (2012: $0.5 million).
R&D
R&D expenditure increased by 9% to $260.1 million for the three months to June 30, 2013 (21% of product sales), compared to $238.6 million in the corresponding period in 2012 (21% of product sales). The second quarter of 2012 included higher impairment charges relating to certain IPR&D intangible assets compared to the second quarter of 2013. Excluding impairment charges, R&D increased by 14% due to the Company’s continued investment in R&D pipeline, primarily on non-ADHD programs for LDX, on SPD602 for iron overload and the impact of development programs acquired through business development in 2013.
R&D in the three months to June 30, 2013 included depreciation of $4.3 million (2012: $6.4 million).
SG&A
SG&A expenditure decreased by 10% to $457.6 million (37% of product sales) for the three months to June 30, 2013 from $511.0 million (45% of product sales) in the corresponding period in 2012, primarily due to higher legal and litigation costs incurred in the second quarter of 2012, as compared to the second quarter of 2013. Excluding legal and litigation costs SG&A decreased by 5% due to the Company’s continuing focus on simplifying its business and delivering efficient growth.
For the three months to June 30, 2013 SG&A included depreciation of $16.1 million (2012: $14.5 million) and amortization of $45.8 million (2012: $51.0 million).
Gain on sale of product rights
For the three months to June 30, 2013 Shire recorded a gain on sale of product rights of $4.5 million (2012: $3.6 million) following re-measurement of the contingent consideration receivable from the divestment of DAYTRANA®.
Reorganization costs
For the three months to June 30, 2013 Shire recorded reorganization costs of $26.4 million (2012: $nil) primarily relating to the “One Shire” reorganization as Shire transitions to a new operating structure. The charges in the second quarter of 2013 primarily related to property costs arising from the decisions not to relocate to a new site in Pennsylvania and to limit the site expansion in San Diego to manufacturing facilities only.
Integration and acquisition costs
For the three months to June 30, 2013 Shire recorded integration and acquisition costs of $17.4 million primarily associated with the acquisitions of SARcode and Lotus in addition to charges related to the change in fair value of contingent consideration. In the second quarter of 2012 integration and acquisition costs ($7.1 million) primarily related to the acquisition of FerroKin and integration of ABH.
Interest expense
For the three months to June 30, 2013 Shire incurred interest expense of $8.9 million (2012: $9.6 million). Interest expense in the second quarter of 2013 principally relates to the coupon on Shire’s $1,100 million 2.75% convertible bonds due 2014.
Taxation
The effective rate of tax in the second quarter of 2013 was 22% (2012: 18%). The effective rate of tax in the second quarter of 2013 is higher than the same period in 2012 due primarily to adverse changes in profit mix, changes in estimates of the amount of certain tax liabilities following the finalization of various tax returns and the impact of higher integration & acquisition costs which are not deductible for tax purposes.
Results of operations for the six months to June 30, 2013 and 2012
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, | | | | |
| | | 2013 | | | 2012 | | | change | |
| | | $'M | | | $'M | | | % | |
| Product sales | | | 2,346.9 | | | | 2,254.6 | | | | +4 | |
| Royalties | | | 74.8 | | | | 112.6 | | | | -34 | |
| Other revenues | | | 14.7 | | | | 12.4 | | | | +19 | |
| Total | | | 2,436.4 | | | | 2,379.6 | | | | +2 | |
Product sales
The following table provides an analysis of the Company’s key product sales:
| | | 6 months to | | | 6 months to | | | | | | | | | | | | | |
| | | June 30, | | | June 30, | | | Product sales | | | Non-GAAP CER | | | US prescription | | | Exit market | |
| | | 2013 | | | 2012 | | | growth | | | growth | | | growth1 | | | share1 | |
| | | $'M | | | $'M | | | % | | | % | | | % | | | % | |
| Net product sales: | | | | | | | | | | | | | | | | | | |
| VYVANSE | | | 598.7 | | | | 526.2 | | | | 14 | % | | | +14 | | | | +7 | | | | 16 | |
| ELAPRASE | | | 263.5 | | | | 247.8 | | | | 6 | % | | | +9 | | | | n/a | 2 | | | n/a | 2 |
| LIALDA/MEZAVANT | | | 238.0 | | | | 184.1 | | | | 29 | % | | | +29 | | | | +13 | | | | 26 | |
| REPLAGAL | | | 228.1 | | | | 257.6 | | | | -11 | % | | | -10 | | | | n/a | 3 | | | n/a | 3 |
| ADDERALL XR | | | 212.1 | | | | 245.3 | | | | -14 | % | | | -14 | | | | -15 | | | | 5 | |
| INTUNIV | | | 168.1 | | | | 137.6 | | | | 22 | % | | | +22 | | | | +11 | | | | 5 | |
| VPRIV | | | 164.1 | | | | 154.4 | | | | 6 | % | | | +7 | | | | n/a | 2 | | | n/a | 2 |
| PENTASA | | | 144.6 | | | | 129.7 | | | | 11 | % | | | +12 | | | | -2 | | | | 14 | |
| FIRAZYR | | | 91.2 | | | | 51.4 | | | | 77 | % | | | +77 | | | | n/a | 2 | | | n/a | 2 |
| FOSRENOL | | | 84.4 | | | | 88.7 | | | | -5 | % | | | -5 | | | | -18 | | | | 4 | |
| XAGRID | | | 49.9 | | | | 48.7 | | | | 2 | % | | | +2 | | | | n/a | | | | n/a | 2 |
| DERMAGRAFT | | | 40.8 | | | | 101.2 | | | | -60 | % | | | -60 | | | | n/a | 2 | | | n/a | 2 |
| Other product sales | | | 63.4 | | | | 81.9 | | | | -23 | % | | | -22 | | | | n/a | | | | n/a | |
| Total product sales | | | 2,346.9 | | | | 2,254.6 | | | | 4 | % | | | | | | | | | | | | |
| (1) | Data provided by IMS Health National Prescription Audit (“IMS NPA”) relates solely to US-based prescriptions. Exit market share represents the average monthly US market share in the month ended June 30, 2013. |
| (2) | IMS NPA Data not available. |
| (3) | Not sold in the US in the six months to June 30, 2013. |
VYVANSE – ADHD
VYVANSE product sales showed strong growth in the first half of 2013, up 14% compared to the first half of 2012, primarily as a result of higher prescription demand (up 7%) and to a lesser extent1 the effect of a price increase taken since the first half of 2012, the benefit of which was partially offset by higher sales deductions and higher destocking in the first half of 2013 compared to the first half of 2012.
Litigation proceedings regarding Shire’s VYVANSE patents are ongoing. Further information about this litigation can be found in PART I: ITEM 1 of this Form 10-Q.
ELAPRASE – Hunter syndrome
Product sales from ELAPRASE in the first half of 2013 were up 6% compared to the first half of 2012, primarily due to growth in underlying patient numbers.
LIALDA/MEZAVANT – Ulcerative Colitis
Product sales for LIALDA/MEZAVANT showed strong growth in the first half of 2013, up 29%. Increased presciption demand (up13% inthe US) benefited from new Managed Care contracts in the US. First half of 2013 sales also benefited from lower de-stocking compared to the first half of 2012. To a lesser extent1 sales also benefited from the effect of a price increase taken since the first half of 2012, offset by the effect of higher US sales deductions.
Litigation proceedings regarding Shire’s LIALDA patents are ongoing. Further information about this litigation can be found in PART I: ITEM 1 of this Form 10-Q.
REPLAGAL – Fabry disease
REPLAGAL revenues were down 11% compared to the first half of 2012, primarily due to the return of competition to the Fabry market in Europe and the timing of certain shipments which have distorted quarter on quarter growth rates in both 2013 and 2012. However, recent positive trends in the patient dynamics indicate that the impact of switches to the competitor product is diminishing and Shire continues to see strong growth in the number of new naïve patients starting on REPLAGAL globally.
ADDERALL XR – ADHD
ADDERALL XR product sales decreased in the first half of 2013 (down 14%) compared to the first half of 2012, primarily as a result of lower US prescription demand (down 15%) following the introduction of a new generic competitor in June 2012 and the effect of higher sales deductions.
Litigation proceedings regarding Shire’s ADDERALL XR patents are ongoing. Further information about this litigation can be found in PART I: ITEM 1 of this Form 10-Q.
INTUNIV – ADHD
The strong growth in INTUNIV product sales (up 22%) in the first half of 2013 was driven by both growth in US prescription demand and the effect1 of price increases taken since the first half of 2012, the benefit of which was partially offset by higher sales deductions and higher destocking in the first half of 2013 compared to the first half of 2012.
Further information about litigation proceedings regarding Shire’s INTUNIV patents can be found in PART I: ITEM 1 of this Form 10-Q.
VPRIV – Gaucher disease
VPRIV product sales increased by 6% in the first half of 2013, primarily due to the continued growth in the number of patients on therapy.
PENTASA – Ulcerative Colitis
PENTASA product sales (up 11%) benefited from both price increases1 taken since the first half of 2012 and the impact of moderate stocking in the first half of 2013 compared to a small amount of pipeline destocking in the first half of 2012.
FIRAZYR – Hereditary Angioedema (“HAE”)
FIRAZYR product sales (up 77%) showed strong growth reflecting the continuing global growth of the product, particularly in the US market.
DERMAGRAFT – DFU
DERMAGRAFT product sales in the first half of 2013 were down by 60% compared to the first half of 2012, reflecting the impact of restructuring of the sales and marketing organization and the implementation of a new commercial model which has recently been completed.
1 The actual net effect of price increases on current period net sales compare to the comparative period is difficult to quantify due to the various managed care rebates, Medicaid discounts, other discount programs in which the Company participates and fee for service agreements with wholesalers customers.
Royalties
The following table provides an analysis of Shire’s royalty income:
| | | 6 months to | | | 6 months to | | | | |
| | | June 30, | | | June 30, | | | | |
| | | 2013 | | | 2012 | | | Change | |
| | | $'M | | | $'M | | | % | |
| 3TC and ZEFFIX | | | 23.8 | | | | 24.2 | | | | -2 | |
| FOSRENOL | | | 19.8 | | | | 23.0 | | | | -14 | |
| ADDERALL XR | | | 13.0 | | | | 51.0 | | | | -75 | |
| Other | | | 18.2 | | | | 14.4 | | | | +26 | |
| Total royalties | | | 74.8 | | | | 112.6 | | | | -34 | |
Royalties from ADDERALL XR in the first half of 2013 were significantly impacted by both reduced sales volume and a lower royalty rate being payable to Shire by Impax Laboratories, Inc. for its authorised generic product following the launch of a new generic product in June 2012.
Cost of product sales
Cost of product sales increased to $331.6 million for the six months to June 30, 2013 (14% of product sales), up from $310.9 million in the corresponding period in 2012 (2012: 14% of product sales). Cost of product sales as a percentage of product sales remained constant.
For the six months to June 30, 2013 cost of product sales included depreciation of $17.8 million (2012: $14.2 million) and amortization of $nil (2012: $0.7 million).
R&D
R&D expenditure increased to $484.3 million for the six months to June 30, 2013 (21% of product sales), compared to $458.9 million in the corresponding period in 2012 (20% of product sales). In the six months to June 30, 2012 R&D included payments of $23.0 million in respect of in-licensed and acquired products and intangible asset impairment charges of $27.0 million compared to impairment charges of $19.9 million in 2013. Excluding these costs R&D increased by $56 million or 14% due to the Company’s continued investment in its R&D pipeline, primarily on non-ADHD programs for LDX, SPD-602 for iron overload and development programs acquired through business development in 2013.
R&D in the six months to June 30, 2013 included depreciation of $8.9 million (2012: $12.8 million), and impairment charges in respect of the Company’s RESOLOR IPR&D intangible assets of $19.9 million (2012: $27.0 million).
SG&A
SG&A expenditure decreased to $896.3 million (38% of product sales) for the six months to June 30, 2013 from $1,011.0 million (45% of product sales) in the corresponding period in 2012, primarily due to the Company’s continuing focus on simplifying its business and delivering efficient growth. In the six months to June 30, 2012 SG&A also included higher legal and litigation costs and higher intangible amortization expense which were not incurred in the same period in 2013.
For the six months to June 30, 2013 SG&A included depreciation of $32.8 million (2012: $28.1 million) and amortization of $91.7 million (2012: $96.6 million).
Goodwill impairment charges
For the six months to June 30, 2013 Shire recorded an impairment charge for goodwill of $198.9 million (2012: $nil) relating to Shire’s RM business. Following a review of future forecasts for the RM business unit, management determined in the first quarter of 2013 that future sales were expected to be lower than anticipated at the time of acquisition and consequently in accordance with US GAAP, it was determined that the goodwill attributable to the RM business unit was impaired. Whilst future expectations for long term growth of DERMAGRAFT have been revised downwards, the Company still expects the product to return to growth over coming quarters.
Gain on sale of product rights
For the six months to June 30, 2013 Shire recorded a gain on sale of product rights of $11.0 million (2012: $10.8 million) following re-measurement of the contingent consideration receivable from the divestment of DAYTRANA.
Reorganization costs
For the six months to June 30, 2013 Shire recorded reorganization costs of $43.9 million (2012: $nil), relating to the collective dismissal and business closure at Turnhout, Belgium and the “One Shire” reorganization as the Company transitions to a new operating structure.
Integration and acquisition costs
For the six months to June 30, 2013 Shire recorded integration and acquisition costs of $21.5 million primarily associated with the acquisitions of SARcode and Lotus and the integration of FerroKin in addition to charges related to the change in fair value of contingent consideration. In 2012 integration and acquisition costs ($12.4 million) primarily related to the acquisition of FerroKin and integration of ABH.
Interest expense
For the six months to June 30, 2013 Shire incurred interest expense of $18.0 million (2012: $19.8 million), principally relates to the coupon on Shire’s $1,100 million 2.75% convertible bonds due 2014.
Taxation
For interim reporting purposes, the Company calculates its tax expense by estimating its global annual effective tax rate and applies that rate in providing for income taxes on a year-to-date basis. The Company has calculated an expected annual effective tax rate, excluding significant, unusual or extraordinary items, and the tax effect of jurisdictions with losses for which a tax benefit cannot be recognized. In the six months to June 30, 2013 the effective tax rate was 29% (2012: 18%). The effective rate of tax in the six months to June 30, 2013 was higher than the six months to June 30, 2012 primarily due to the impact of the RM goodwill impairment charge (which is not deductible for tax purposes), an increase in unrecognized tax losses, adverse changes in profit mix and changes in estimates of the amount of certain tax liabilities following the finalization of various tax returns. These factors were partially offset by the recognition of the 2012 US R&D credit in the first quarter of 2013. The US R&D credit was recognized following the enactment of legislation on January 2, 2013, approving the extension of the regular R&D credit retrospectively.
Financial condition at June 30, 2013 and December 31, 2012
Accounts receivable, net
Accounts receivable, net increased by $91.0 million to $915.2 million (December 31, 2012: $824.2 million), primarily due to the increase in revenue in the second quarter of 2013. Days sales outstanding remained constant at 50 days (December 31, 2012: 50 days).
Other intangible assets, net
Other intangible assets increased by $610.0 million to $2,998.1 million (December 31, 2012: $2,388.1 million), due to the IPR&D assets acquired with SARcode, Premacure and Lotus, offset by intangible asset amortization, IPR&D impairment and foreign exchange movements.
Convertible bonds
Current liabilities have increased by $1,100 million due to the reclassification of the Company’s $1,100 million 2.75% convertible bonds due 2014 from non-current to current liabilities in 2013 as the Company is required to redeem the Bonds within twelve months of the balance sheet date.
Non-current deferred tax liabilities
Non-current deferred tax liabilities increased by $210.6 million to $731.4 million (December 31, 2012: $520.8 million), primarily due to deferred tax liabilities arising on the IPR&D assets acquired with SARcode, Premacure and Lotus.
Other non-current liabilities
Other non-current liabilities increased by $382.9 million to $624.5 million (December 31, 2012: $241.6 million) primarily due to the recognition of non-current contingent consideration payable related to the SARcode, Premacure and Lotus business combinations.
Liquidity and capital resources
General
The Company’s funding requirements depend on a number of factors, including the timing and extent of its development programs; corporate, business and product acquisitions; the level of resources required for the expansion of certain manufacturing and marketing capabilities as the product base expands; increases in accounts receivable and inventory which may arise with any increase in product sales; competitive and technological developments; the timing and cost of obtaining required regulatory approvals for new products; the timing and quantum of milestone payments on collaborative projects; the timing and quantum of tax and dividend payments; the timing and quantum of purchases by the EBT of Shire shares in the market to satisfy awards granted under Shire’s employee share plans; the timing and quantum of purchases of Shire shares under the share buy-back program; and the amount of cash generated from sales of Shire’s products and royalty receipts.
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 the cost of litigation.
The Company finances its activities through cash generated from operating activities; credit facilities; private and public offerings of equity and debt securities; and the proceeds of asset or investment disposals.
Shire’s balance sheet includes $1,301.9 million of cash and cash equivalents at June 30, 2013. Substantially all of Shire’s debt relates to its $1,100 million 2.75% convertible bonds due 2014 (the “Bonds”). In addition, Shire has a revolving credit facility of $1,200 million which matures in 2015 (the “RCF”), which is currently undrawn.
Financing
Shire anticipates that its operating cash flow together with available cash, cash equivalents and the RCF will be sufficient to meet its anticipated future operating expenses, share buy-back program, capital expenditures, tax and interest payments, lease obligations and milestone payments as they become due over the next twelve months.
If the Company decides to acquire other businesses, it expects to fund these acquisitions from existing cash resources, the RCF and possibly through new borrowings and the issue of new equity if necessary.
Share buy-back program
Shire has a strong balance sheet and continued robust cash generation, and considers efficient use of capital on behalf of shareholders an important objective. Therefore, during the year to December 31, 2012 the Company commenced a share buy-back program, for the purpose of returning funds to shareholders, of up to $500 million through both direct purchases of ordinary shares and through the purchase of ordinary shares underlying American Depository Receipts (“ADRs”).
At June 30, 2013 the Company had made on-market repurchases totaling 9,432,043 Ordinary shares at a cost of $285.5 million (excluding transaction costs). This represents 1.68% of the issued share capital of the Company as at the end of the quarter. Ordinary Shares purchased may be cancelled or be held as treasury shares, in accordance with the authority renewed by shareholders at the Company’s Annual General Meeting (“AGM”). At its AGM on April 24, 2012 the Company was authorized to make market purchases of up to 56,253,208 of its own Ordinary Shares. That authority expired at the AGM held on April 30, 2013 and was renewed. Under the new authority, which expires at the 2014 AGM, the Company was authorized to make market purchases of up to 55,741,587 of its own Ordinary Shares.
The following table provides information about purchases by the Company in the six months to June 30, 2013 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.
| Period | | Total Number of ordinary shares Purchased | | Average Price Paid Per ordinary share (£) | | Total Number of ordinary shares underlying ADRs Purchased | | Average Price Paid Per ordinary share underlying ADRs ($) | | Approximate Dollar Value of ordinary shares that May Yet Be Purchased Under the Share Buy- back Program |
| January 2013 | | 715,203 | | 19.934 | | 336,300 | | 32.360 | | $360 million |
| February 2013 | | 448,896 | | 20.748 | | 164,100 | | 31.954 | | $340 million |
| March 2013 | | 466,918 | | 20.110 | | 244,200 | | 30.518 | | $318 million |
| April 2013 | | 866,594 | | 19.731 | | 500,400 | | 30.263 | | $277 million |
| May 2013 | | 1,136,618 | | 19.383 | | 418,698 | | 30.081 | | $231 million |
| June 2013 | | 320,688 | | 20.716 | | 181,857 | | 32.247 | | $215 million |
Sources and uses of cash
The following table provides an analysis of the Company’s gross and net cash/ debt position (excluding restricted cash), as at June 30, 2013 and December 31, 2012:
| | | June 30, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | $’M | | | | $’M | |
Cash and cash equivalents1 | | | 1,301.9 | | | | 1,482.2 | |
| Convertible bonds | | | 1,100.0 | | | | 1,100.0 | |
| Other | | | 8.9 | | | | 9.3 | |
| Total debt | | | 1,108.9 | | | | 1,109.3 | |
| Net cash | | | 193.0 | | | | 372.9 | |
| (1) | Substantially all of the Company’s cash and cash equivalents are held by foreign subsidiaries (i.e. those subsidiaries incorporated outside of Jersey, Channel Islands, the jurisdiction of incorporation of Shire plc, Shire’s holding company). The amount of cash and cash equivalents held by foreign subsidiaries has not had, and is not expected to have, a material impact on the Company’s liquidity and capital resources. |
Cash flow activity
Net cash provided by operating activities for the six months to June 30, 2013 decreased by 42% or $303.8 million to $419.0 million (2012: $722.8 million), as higher cash receipts from gross product sales were more than offset by higher cash tax payments, lower royalty receipts, the payment to settle the litigation with Impax ($48 million) (see note 13 for details), the timing of receipts from large distributors in the US and the timing of operating expenses payments. The second quarter of 2012 also included strong cash receipts from government-supported healthcare providers in Spain.
Net cash used in investing activities was $279.3 million in the six months to June 30, 2013, principally relating to the cash paid (net of cash acquired) for the acquisitions of SARcode, Premacure and Lotus and for purchases of PP&E.
Net cash used in investing activities was $179.9 million in the six months to June 30, 2012, relating to the payment of $97.0 million to acquire Ferrokin and certain assets and liabilities from Pervasis, $43.5 million for the purchase of intangible assets, and $64.4 million on the purchase of PP&E.
Net cash used in financing activities was $317.1 million for the six months to June 30, 2013, principally due to the purchase of shares under the share buy-back program, purchase of shares by the EBT and the dividend payment.
Net cash used in financing activities was $48.6 million for the six months to June 30, 2012, principally due to the dividend payment and the purchase of shares by the EBT, which more than offset the excess tax benefit associated with the exercise of stock options.
Obligations and commitments
During the six months to June 30, 2013 there have been no material changes outside the ordinary course of the Company’s business to the contractual obligations previously disclosed in PART II: ITEM 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Note 15 to the unaudited consolidated financial statements included in PART I: ITEM 1 of this Form 10-Q and PART II: ITEM 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 contains a discussion of the Company’s exposure to market and other risks.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that the Company files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
As at June 30, 2013 the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures, including those with respect to the Income Access Share (“IAS”) Trust. 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, including those with respect to the IAS Trust, are effective at the reasonable level of assurance to ensure that information required to be disclosed in reports that the Company files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
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 INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is incorporated herein by reference to Note 13 to the unaudited consolidated financial statements included in PART I: ITEM 1 of this Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBITS
| 2.01 | 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) |
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| 2.02 | Agreement of Merger dated as of February 20, 2007 among Shire plc, Shuttle Corporation and New River Pharmaceuticals, Inc.(2) |
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| 2.03 | Business Combination Agreement dated as of July 3, 2008 between Maia Elfte Vermögensverwaltungs GmbH and Jerini AG. (3) |
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| 2.04 | Heads of Agreement by and among Shire plc and Movetis NV relating to a friendly tender offer, dated August 3, 2010. (4) |
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| 2.05 | Agreement and Plan of Merger, dated as of May 17, 2011, by and among Shire Pharmaceuticals Inc., ABH Merger Sub Inc., Advanced Biohealing, Inc., and solely for the limited purposes set forth therein, Canaan VII L.P. and Shire plc. (5) |
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| 2.06 | Agreement and Plan of Merger, dated as of March 14, 2012, by and among Shire Pharmaceuticals LLC, Pelegrina Corporation, FerroKin BioSciences, Inc. and Shareholder Representative Services LLC, solely for the limited purposes set forth therein. (6) |
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| 3.01 | Form of Memorandum of Association of Shire plc as adopted by a special resolution passed on April 10, 2008 and amended by a special resolution passed on September 24, 2008. (7) |
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| 3.02 | Form of Article of Association of Shire plc as amended by a special resolution passed on April 26, 2011 and adopted by a special resolution passed on April 26, 2011. (8) |
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| 4.01 | Form of Assignment and Novation Agreement between Shire Limited, Shire plc, JPMorgan Chase Bank, N.A. dated April 16, 2008 relating to the Deposit Agreement among Shire plc, JPMorgan Chase Bank, N.A. as depositary and all holders from time to time of ADRs issued thereunder dated November 21, 2005.(9) |
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| 4.02 | Form of Deposit Agreement among Shire plc, JPMorgan Chase Bank, N.A. as depositary and all holders from time to time of ADRs issued thereunder dated November 21, 2005. (10) |
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| 4.03 | Form of Ordinary Share Certificate of Shire Limited. (11) |
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| 4.04 | Form of American Depositary Receipt Certificate of Shire Limited. (12) |
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| 4.05 | Trust Deed for the New Shire Income Access Trust, dated August 29, 2008. (13) |
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| 4.06 | Form of Amended and Restated Deposit Agreement among Shire plc, Citibank, N.A. as successor depositary, and all holders from time to time of ADRs thereunder dated May 23, 2011 (14) |
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| 10.01 | Tender and Support Agreement dated as of February 20, 2007 among Shire plc, Mr. Randal J. Kirk and the other parties named therein. (15) |
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| 10.02 | Multicurrency Term and Revolving Facilities Agreement as of February 20, 2007 by and among Shire plc, ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited, The Royal Bank of Scotland plc, and Barclays Bank plc. (16) |
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| 10.03 | Accession and Amendment Deed dated April 15, 2008 between Shire Limited, Shire plc, certain subsidiaries of Shire plc and Barclays Bank PLC as Facility Agent relating to a US $1,200,000,000 facility agreement dated February 20, 2007 (as amended by a syndication and amendment agreement dated July 19, 2007). (17) |
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| 10.04 | Subscription Agreement dated May 2, 2007 relating to the 2.75% Convertible Bonds due 2014 between Shire plc and ABN AMRO Bank N.V. and NM Rothschild & Sons Limited (trading together as ABN AMRO Rothschild, an unincorporated equity capital markets joint venture) and Barclays Bank PLC and Citigroup Global Markets Limited and Goldman Sachs International and Morgan Stanley & Co. International plc and others. (18) |
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| 10.05 | Amending Subscription Agreement dated May 8, 2007 relating to the 2.75% Convertible Bonds due 2014 between Shire plc and ABN AMRO Bank N.V. and NM Rothschild & Sons Limited (trading together as ABN AMRO Rothschild, an unincorporated equity capital markets joint venture) and Barclays Bank PLC and Citigroup |
| | Global Markets Limited and Goldman Sachs International and Morgan Stanley & Co. International plc and others. (19) |
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| 10.06 | Trust Deed dated May 9, 2007 relating to the 2.75% Convertible Bonds due 2014 between Shire plc and BNY Corporate Trustee Services Limited. (20) |
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| 10.07 | Supplemental Trust Deed dated April 15, 2008 between Shire Limited, Shire plc and BNY Corporate Trustee Services Limited relating to a trust deed dated May 9, 2007 relating to US $1,100,000,000 2.75% Convertible Bonds due 2014. (21) |
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| 10.08 | Accession and Amendment Agreement dated April 15, 2008 between Shire Limited, Shire plc, BNY Corporate Trustee Services Limited and The Bank of New York relating to a paying and conversion agency agreement dated May 9, 2007 relating to US $1,100,000,000 2.75% Convertible Bonds due 2014. (22) |
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| 10.09* | Revised and Restated Master License Agreement dated November 20, 1995 among Shire BioChem Inc (f/k/a BioChem Pharma Inc.), Glaxo Group Limited, Glaxo Wellcome Inc. (formerly Glaxo Canada Inc.), Glaxo Wellcome Inc. (formerly Glaxo Inc.), Tanaud Holdings (Barbados) Limited, Tanaud International B.V. and Tanaud LLC. (23) |
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| 10.10* | Settlement Agreement, dated August 14, 2006 by and between Shire Laboratories Inc. and Barr. (24) |
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| 10.11* | Product Development and License Agreement, dated August 14, 2006 by and between Shire LLC and Duramed Pharmaceuticals, Inc. (25) |
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| 10.12* | Product Acquisition and License Agreement, dated August 14, 2006 by and among Shire LLC, Shire plc and Duramed Pharmaceuticals, Inc. (26) |
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| 10.13 | Novation Agreement dated November 21, 2005 relating to the Employment Agreement of Angus Russell dated March 10, 2004. (27) |
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| 10.14 | Novation Agreement dated April 11, 2008 relating to the Employment Agreement of Angus Russell dated March 10, 2004, as previously novated on November 21, 2005. (28) |
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| 10.15 | Form of Amended and Restated Employment Agreement between Shire plc and Mr Matthew Emmens, dated March 12, 2004. (29) |
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| 10.16 | Amendment Agreement dated November 21, 2005 relating to the Amended and Restated Employment Agreement of Matthew Emmens dated March 12, 2004. (30) |
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| 10.17 | Ratification and Guaranty dated November 21, 2005 relating to the Amended and Restated Employment Agreement of Matthew Emmens dated March 12, 2004. (31) |
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| 10.18 | Amendment Agreement dated May 20, 2008 relating to the Amended and Restated Employment Agreement of Matthew Emmens dated March 12, 2004, as amended on November 21, 2005. (32) |
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| 10.19 | Ratification and Guaranty dated May 20, 2008 relating to the Amended and Restated Employment Agreement of Matthew Emmens dated March 12, 2004. (33) |
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| 10.20 | Form of Indemnity Agreement for Directors of Shire Limited. (34) |
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| 10.21 | Service Agreement between Shire Limited and Mr Graham Hetherington, dated July 2, 2008. (35) |
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| 10.22 | Form of Settlement Agreement and Mutual Release in re: Transkaryotic Therapies, Inc., by and between Shire Human Genetic Therapies, Inc., Shire plc and the parties set forth therein. (36) |
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| 10.23 | Amended Agreement dated February 24, 2009 relating to the Product Development and License Agreement dated August 14, 2006. (37) |
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| 10.24 | Amendment to the Shire Portfolio Share Plan as approved by the Annual General meeting held on April 27, 2010. (38) |
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| 10.25 | Multicurrency revolving and swingline facilities agreement as at November 23, 2010 by and among Shire plc & with a number of financial institutions, for which Abbey National Treasury Services Plc (trading as Santander Global Banking and Markets), Bank of America Securities Limited, Barclays Capital, Citigroup Global Markets Limited, Lloyds TSB Bank plc and The Royal Bank of Scotland plc acted as mandated lead arrangers and bookrunners and Credit Suisse AG, London Branch, Deutsche Bank AG, London Branch, Goldman Sachs International, Morgan Stanley Bank, N.A. and Sumitomo Mitsui Banking Corporation, Brussels Branch acted as arrangers. (39) |
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| 10.26 | Service Agreement between Shire plc and Mr. Flemming Ornskov, dated October 24, 2012. |
| 31.1 | Certification of Flemming Ornskov pursuant to Rule 13a - 14 under The Exchange Act. |
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| 31.2 | Certification of Graham Hetherington pursuant to Rule 13a - 14 under The Exchange Act. |
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| 32.1 | Certification of Flemming Ornskov and Graham Hetherington pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. |
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| 101.INS XBRL Instance Document |
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| 101.SCH XBRL Taxonomy Extension Schema Document |
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| 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF XBRL Taxonomy Definition Linkbase Document |
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| 101.LAB XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document |
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| * | Certain portions of this exhibit have been omitted intentionally, subject to a confidential treatment request. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. |
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| (1) | Incorporated by reference to Exhibit 99.02 to Shire's Form 8-K filed on April 25, 2005. |
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| (2) | Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on February 23, 2007. |
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| (3) | Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on July 10, 2008. |
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| (4) | Incorporated by reference to Exhibit 2.04 to Shire's Form 10-Q filed on November 5, 2010. |
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| (5) | Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on June 30, 2011. |
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| (6) | Incorporated by reference to Exhibit 2.06 to Shire's Form 10-Q filed on May 23, 2012. |
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| (7) | Incorporated by reference to Exhibit 99.02 to Shire's Form 8-K filed on October 1, 2008. |
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| (8) | Incorporated by reference to Exhibit 3.1 to Shire's Form 8-K filed on April 29, 2011. |
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| (9) | Incorporated by reference to Exhibit 4.01 to Shire's Form 8-K filed on May 23, 2008. |
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| (10) | Incorporated by reference to Exhibit 4.02 to Shire's Form 8-K filed on May 23, 2008. |
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| (11) | Incorporated by reference to Exhibit 4.03 to Shire's Form 8-K filed on May 23, 2008. |
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| (12) | Incorporated by reference to Exhibit 4.04 to Shire's Form 8-K filed on May 23, 2008. |
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| (13) | Incorporated by reference to Exhibit 4.05 to Shire's Form 10-K filed on February 27, 2009. |
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| (14) | Incorporated by reference to Exhibit (a) to Shire's Form F-6 filed on April 27, 2011. |
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| (15) | Incorporated by reference to Exhibit 99.1 to Shire's Form 8-K filed on February 23, 2007. |
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| (16) | Incorporated by reference to Exhibit 10.2 to Shire's Form 10-Q filed on May 1, 2007. |
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| (17) | Incorporated by reference to Exhibit 10.01 to Shire's Form 8-K filed on May 23, 2008. |
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| (18) | Incorporated by reference to Exhibit 10.1 to Shire's Form 10-Q filed on August 2, 2007. |
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| (19) | Incorporated by reference to Exhibit 10.2 to Shire's Form 10-Q filed on August 2, 2007. |
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| (20) | Incorporated by reference to Exhibit 10.3 to Shire's Form 10-Q filed on August 2, 2007. |
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| (21) | Incorporated by reference to Exhibit 10.02 to Shire's Form 8-K filed on May 23, 2008. |
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| (22) | Incorporated by reference to Exhibit 10.03 to Shire's Form 8-K filed on May 23, 2008. |
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| (23) | Incorporated by reference to Exhibit 10.09 to Shire's Form 10-K/A filed on May 30, 2008. |
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| (24) | Incorporated by reference to Exhibit 10.1 to Shire's Form 10-Q filed on November 7, 2006. |
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| (25) | Incorporated by reference to Exhibit 10.2 to Shire's Form 10-Q filed on November 7, 2006. |
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| (26) | Incorporated by reference to Exhibit 10.3 to Shire's Form 10-Q filed on November 7, 2006. |
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| (27) | Incorporated by reference to Exhibit 10.03 to Shire's Form 8-K filed on November 25, 2005. |
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| (28) | Incorporated by reference to Exhibit 10.06 to Shire's Form 8-K filed on May 23, 2008. |
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| (29) | Incorporated by reference to Exhibit 10.13 to Shire's Form 10-K filed on March 12, 2004. |
| (30) | Incorporated by reference to Exhibit 10.01 to Shire's Form 8-K filed on November 25, 2005. |
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| (31) | Incorporated by reference to Exhibit 10.02 to Shire's Form 8-K filed on November 25, 2005. |
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| (32) | Incorporated by reference to Exhibit 10.04 to Shire's Form 8-K filed on May 23, 2008. |
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| (33) | Incorporated by reference to Exhibit 10.05 to Shire's Form 8-K filed on May 23, 2008. |
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| (34) | Incorporated by reference to Exhibit 10.07 to Shire's Form 8-K filed on May 23, 2008. |
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| (35) | Incorporated by reference to Exhibit 10.23 to Shire's Form 10-Q filed on November 10, 2008. |
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| (36) | Incorporated by reference to Exhibit 10.24 to Shire's Form 10-Q filed on November 10, 2008. |
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| (37) | Incorporated by reference to Exhibit 10.25 to Shire's Form 10-Q filed on May 7, 2009. |
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| (38) | Incorporated by reference to Exhibit 10.27 to Shire's Form 10-Q filed on May 6, 2010. |
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| (39) | Incorporated by reference to Exhibit 10.28 to Shire's Form 10-K filed on February 23, 2011. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: August 1, 2013 | /s/ Flemming Ornskov Flemming Ornskov Chief Executive Officer |
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Date: August 1, 2013 | /s/ Graham Hetherington Graham Hetherington Chief Financial Officer |
