Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-29630
SHIRE PHARMACEUTICALS GROUP PLC
(Exact name of registrant as specified in its charter)
England and Wales 98-0359573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Hampshire International Business Park, Chineham, Basingstoke, RG24 8EP
- -------------------------------------------------------------- --------
Hampshire, England (Zip Code)
-------------------
(Address of principal executive offices)
44 1256 894 000
---------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
American Depository Shares,
each representing 3 Ordinary
Shares 5 pence par value per share Nasdaq National Market
- ---------------------------------- ----------------------
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
1
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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 26, 2002, the aggregate market value of the ordinary shares,
(pound)0.05 par value per share of the Registrant held by non-affiliates was
approximately $3,542 million.
As of March 26, 2002, the number of outstanding ordinary shares of the
Registrant was 482,605,799.
2
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. The 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, our results could be materially affected. The risks
and uncertainties include, but are not limited to, risks associated with the
inherent uncertainty of pharmaceutical research, product development and
commercialization, the impact of competitive products, government regulation and
approval, and other risks and uncertainties detailed from time to time in our
filings with the Securities and Exchange Commission including this annual report
on Form 10-K for the year ended December 31, 2001.
3
ITEM 1: Business
(A) General Development of Business
We are an international specialty pharmaceutical company with a strategic focus
on three therapeutic areas: central nervous system disorders, oncology and
anti-infectives. Our strategy is further supported by two technology platforms,
drug delivery and biologics.
We have sales and marketing subsidiaries with a portfolio of products targeting
the U.S., Canada, the U.K., the Republic of Ireland, France, Germany, Italy and
Spain. We also cover other significant pharmaceutical markets indirectly through
distributors. We operate and manage our business within three individual
operating segments: U.S., International and global research and development.
Within these segments, revenues are derived primarily from three sources: sales
of products by our own sales and marketing operations, royalties and licensing
and development fees.
We have expanded our business both organically and through acquisitions, the
most recent of which was our merger with BioChem Pharma, Inc. (BioChem) in May
2001.
We were incorporated under the laws of England and Wales on January 1, 1994. As
part of a recapitalization, we acquired the entire share capital of Shire
Holdings Ltd on December 19, 1994, including the operations of Rybar
Laboratories Ltd, a U.K. based sales and marketing company acquired by our
predecessor in July 1992. In September 1995, we acquired Imperial Pharmaceutical
Services Ltd (subsequently renamed Shire Pharmaceutical Contracts Ltd). We
acquired Pharmavene, Inc. (subsequently renamed Shire Laboratories, Inc.) in
March 1997 and Richwood Pharmaceutical Company, Inc. (subsequently renamed Shire
Richwood, Inc. and then Shire US Inc.) in August 1997.
In October 1999, we acquired the German, French and Italian sales and marketing
subsidiaries of Fuisz Technologies Ltd (the subsidiaries were subsequently
renamed Shire Deutschland, Shire France and Shire Italia respectively). We
merged with Roberts Pharmaceutical Corporation (Roberts) in December 1999.
Following our merger, the U.S. sales and marketing operations of Roberts were
merged into those of Shire Richwood, Inc., now Shire US Inc. In May 2000, we
established a Representative Office in Singapore to effectively manage our
activities in the Pacific Rim markets. In June 2000, we established a sales and
marketing subsidiary in Spain, Shire Pharma Iberica.
We are a public limited company organized under the laws of England and Wales.
Our principal executive offices are located at Hampshire International Business
Park, Chineham, Basingstoke, Hampshire, RG24 8EP, England and our telephone
number is + 44 1256 894000.
In this report, the term the "Company" or the "Group" refers to Shire
Pharmaceuticals Group plc and its subsidiaries unless the context indicates
otherwise.
(B) Financial Information about Industry Segments
Substantially all of our revenues, operating profits or losses and assets are
attributable to one line of business, the acquisition, development and sale of
pharmaceutical products within three individual operating segments: U.S.,
International and global research and development.
4
(C) Description of Business
Strategy and Approach
Our business model has five levels of focus: specialist doctors, business,
functional, geographic, and therapeutic areas and platform technologies.
Specialist doctors
We have a particular interest in innovative therapies. The term "specialty"
refers to products prescribed by specialist doctors as opposed to those
prescribed by primary care or general practitioners. We target specialists
because they usually lead innovations in prescribing. Therefore, we target
or shall target the main specialist doctors who prescribe within the
following therapeutic areas: central nervous system disorders, oncology and
anti-infectives.
Business
As a specialty pharmaceutical company, our strategy is to target a limited
but specific audience and to maximize sales through a comparatively small
sales force.
The concept of marketing to specialists allows us to clearly define our
financial goals, which include high gross profit and operating margin
targets, with the aim to reach both annual sales growth and investment in
research and development that is above the industry average.
Functional
We focus on specific functional areas of the business that are identified
as being key drivers for success, such as Research, Development and
Marketing.
On May 11, 2001 we completed our merger with BioChem, which added seven
pre-Phase II projects to our portfolio. The merger strengthened our
in-house early phase development capabilities and added two valuable
sources of new projects, our Biologics business and our Lead Optimization
capability located both in Canada and the U.S.
In order to reduce financial and business risk, we maintain a careful and
objective discipline in our approach to R&D risk management by weighting
our portfolio of projects towards those projects viewed as low to medium
risk. Part of this strategy is the acquisition of projects at a given stage
of development as such in-licensing opportunities typically reduce our
exposure to the high risks associated with the early stages of research and
development. We believe, as a consequence, the average risk profile of
projects in our R&D portfolio is targeted to be lower than the industry
average.
Our strategy also includes the identification of off-patent products that
could be enhanced using the technology of our oral drug delivery company,
Shire Laboratories Inc., based in Maryland, U.S. Examples of such projects
are ADDERALL XR(TM) and CARBATROL XR(TM). We seek to obtain patent
protection through our drug delivery expertise wherever possible.
Another very important source of growth is our "search" function. This
function has played a key role in enabling the identification of new
projects, products and merger and acquisition (M&A) opportunities. We have
grown both organically and through six mergers and acquisitions during the
past seven years.
5
Our Sales and Marketing function is another essential source of our
success. We take pride in our well-trained and highly-motivated sales force
that has, through the success of our main marketed products and the recent
launch of ADDERALL XR, demonstrated outstanding professionalism and
performance.
Geographic
Our aim is to market our products using our own sales forces in eight major
pharmaceutical markets of the world. We have sales and marketing
subsidiaries with a portfolio of products targeting the U.S., Canada, the
U.K., the Republic of Ireland (R.O.I.), France, Germany, Italy and Spain
with plans to add Japan by 2004. We intend to cover other significant
pharmaceutical markets indirectly through distributors. We have already
appointed such distributors in territories including Australia, Denmark,
Finland, Hong Kong, Israel, Malaysia, Norway, Phillipines, Singapore, South
Africa, South Korea and Thailand.
Therapeutic areas and platform technologies
We focus on three therapeutic areas: central nervous system disorders,
oncology and anti-infectives, with two platform technologies: drug delivery
and biologics. However, we continue to market two of our major products in
the metabolic diseases and gastroenterology specialist field.
Sales and Marketing
Our sales and marketing operations in the U.S., the U.K., the Republic of
Ireland, continental Europe and Canada presently consist of 654 sales
representatives. We believe that our sales and marketing infrastructure can be
expanded rapidly to meet product opportunities.
(a) Currently marketed products
The table below lists our key currently marketed products by therapeutic area,
indicating the owner or licensor of the product, the marketer of the product and
the territory in which the product is being marketed.
Products Principal Indication(s) Owner/Licensor Marketed By/Relevant
Territory
Treatments for central nervous system disorders
Adderall XR(TM) ADHD Shire Shire - U.S.
Adderall(TM) ADHD Shire Shire - U.S.
Carbatrol(TM) Epilepsy Shire Shire - U.S.
REMINYL(TM) Alzheimer's disease Shire Shire and Janssen - U.K. and
R.O.I.
Janssen - RoW
6
Treatments for infections
3TC*/EPIVIR* HIV/AIDS Shire** Shire and GSK -Canada
GSK - RoW
COMBIVIR* HIV/AIDS Shire** Shire and GSK -Canada
GSK - RoW
TRIZIVIR* HIV/AIDS Shire** Shire and GSK -Canada
GSK - RoW
ZEFFIX* / EPIVIR-HBV* Hepatitis B infection Shire** Shire and GSK -Canada
/HEPTOVIR*(1) GSK - RoW
Oncology treatments
Agrylin(TM) Elevated blood platelets Shire Shire - U.S. and Canada
Treatments for other diseases
ProAmatine(TM) Orthostatic hypotension Nycomed Shire - U.S. and Canada
Amatine(TM)
Pentasa(TM) Ulcerative colitis Ferring Shire - U.S.
CALCICHEW(TM) range Adjunct in osteoporosis Nycomed Shire - U.K. and R.O.I.(2)
1 This is not a comprehensive list of trademarks for this product as various
others are used in smaller markets.
2 Also distributed in various export markets on our behalf.
TM Our trademarks or those of our subsidiaries.
* Trademarks of GlaxoSmithKline (GSK)
** GSK is the owner / licensor of some rights in these products.
Treatments for central nervous system disorders
Adderall XR and Adderall. Attention Deficit Hyperactivity Disorder (ADHD) is a
central nervous system disorder, characterized by varying degrees of
inattention, impulsivity and hyperactivity. It was thought to be a childhood
disorder, although there is increasing evidence to show that it also affects
adults. According to IMS America, the U.S. market for ADHD treatments was
approximately $1,019 million for the year ended December 31, 2001. It is
estimated that between 3% and 7% of children in the U.S. suffer from the
condition.
U.S. Drug Enforcement Agency (DEA) Schedule II products, specifically
methylphenidate and amphetamines, are currently the only approved first line
treatments for ADHD available. Our products, ADDERALL XR and ADDERALL, contain a
combination of four amphetamine salts. ADDERALL was launched in 1996 and was the
ADHD brand leader at the end of 2001. Adderall XR is a patented formulation of
Adderall that uses Shire Laboratories' Microtrol(TM) delivery technology and is
designed to provide an all day treatment with one morning dose. It can be
administered as a capsule or sprinkled on food. In the ADHD market, a once a day
formulation is accepted to be an important benefit as it:
o provides all day control symptoms;
o avoids the need for medication to be taken at school;
o reduces the risk of diversion;
o allows parental control of medication;
o offers potential for improved compliance;
o decreases social stigma; and
o eases the burden on school nurses.
7
A New Drug Application (NDA) for ADDERALL XR was submitted to the U.S. Food and
Drug Administration (FDA) on October 3, 2000. An approvable letter was received
on August 3, 2001 followed by the approval letter on October 12, 2001. In
November 2001 a formulation and pharmaceutical composition patent relating to
ADDERALL XR was issued by the U.S. Patent and Trademark Office, expiring in
2018. The product was launched by promotion to doctors on November 5, 2001, and
according to NDC Health had already achieved 14.5% share of the U.S.
prescription ADHD market for the week ending March 15, 2002.
Sales of ADDERALL XR and ADDERALL during 2001 were $350.3 million, representing
approximately 40% of our total revenues. As a result, factors adversely
affecting the sale or production of ADDERALL XR and ADDERALL would have a
material adverse effect on our financial condition and results of operation.
Factors which could adversely affect sales of Adderall XR and ADDERALL include:
o issues impacting the production of ADDERALL XR and ADDERALL or our
supply of amphetamine salts;
o development and marketing of competitive pharmaceuticals (including
generic versions of AdderalL - see below);
o technological advances (including the introduction of competing
non-scheduled ADHD treatments);
o changes in reimbursement policies of third-party payers;
o government action / intervention;
o marketing or pricing actions by our competitors;
o the occurrence of adverse reactions to AdderalL XR or ADDERALL;
o public opinion towards ADHD treatments;
o product liability claims; or
o changes in prescription writing practices.
On February 11, 2002 Barr Laboratories Inc. announced FDA approval to market a
generic version of ADDERALL. We are also aware that a number of other
pharmaceutical companies may have filed abbreviated New Drug Applications
(ANDA's) with the FDA and are seeking approval for a generic version of ADDERALL
which no longer has marketing exclusivity in the U.S.
Carbatrol. Approximately 2.5 million people in the U.S. suffer from epilepsy, a
disorder that is characterized by an episodic disturbance of consciousness
during which seizure activity occurs in the brain. Carbatrol is an extended
release formulation of carbamazepine that can be administered as a capsule or
sprinkled on food, and delivers steady blood levels of drug over 24 hours when
taken twice daily. When administered in an immediate release formulation,
carbamazepine requires dosing three to four times a day. CARBATROL therefore
provides advantages for patients, aiding compliance. Carbamazepine is one of the
most widely prescribed antiepileptic drugs, accounting for approximately 12% of
total U.S. anti-epileptic prescriptions written in 2001. Prescription numbers
for Carbatrol increased from 658,000 in 2000 to 853,000 in 2001.
The FDA approved CARBATROL on September 30, 1997 for marketing in the U.S. The
product was originally out-licensed to Athena, a subsidiary of Elan Corporation
plc. In December 1997, we reacquired the worldwide rights to Carbatrol, together
with inventory and certain plant and equipment for $25.0 million. We launched
Carbatrol in the U.S. in June 1998. On March 31, 1999, we terminated our
promotion agreement with Athena. In 1994, we obtained a patent in the U.S.
covering the formulation of Carbatrol with an expiration date of 2011. Patent
applications covering this technology are pending in other countries.
8
We outsource the manufacture and packaging of CARBATROL. In 2001, the
third-party manufacturer that encapsulates and packages CARBATROL has been
unable to produce sufficient quantities to maintain adequate stock of product in
the distribution pipeline to support the current growth. We believe this supply
issue is temporary and will be resolved through additional production capacity
in 2002.
In the year ended December 31, 2001, sales of CARBATROL were $36.8 million
representing approximately 4% of our total revenues.
REMINYL. Alzheimer's disease is characterized by loss of memory, particularly of
recent events, confusion and disorientation, followed by severe intellectual
disturbances, personality changes and emotional disintegration. It is
progressive, with death usually occurring within five to nine years following
the onset of symptoms. It is estimated that approximately 8 million people in
the U.S. and Western Europe suffer from Alzheimer's disease.
REMINYL, a new treatment for mild to moderate Alzheimer's disease, was developed
with Janssen Research Foundation under a co-development and licensing agreement.
The first regulatory approval within the European Union (EU) for REMINYL was
received from Sweden on March 3, 2000. In July 2000, REMINYL successfully
completed the EU Mutual Recognition Procedure and was launched in the U.K. in
September 2000. This was followed by launches in a number of other countries
during late 2000 and 2001. In the U.S., Janssen submitted an NDA on September
29, 1999. An approvable letter was issued by the FDA in August 2000, followed by
an approval letter on February 28, 2001. REMINYL was launched in the U.S. in May
2001 by Janssen Pharmaceutical and Ortho-McNeil Pharmaceutical.
The European Summary of Product Characteristics indicates that REMINYL has a
novel dual mechanism of action. Decreased levels of acetylcholine, caused by the
death of acetylcholine neurons, are known to be related to the symptoms of
Alzheimer's disease. In addition to preserving levels of acetylcholine in the
brain by blocking the action of the enzyme acetylcholinesterase, which
inactivates acetylcholine, laboratory research suggests that REMINYL may also
act on the brain's nicotinic receptors. The modulation of these receptors may
lead to the release of more acetylcholine. Janssen Research Foundation is
investigating the clinical significance of this characteristic.
REMINYL was launched using natural galantamine extracted from daffodil bulbs.
Regulatory approval for the synthetic manufacture of galantamine was gained in
2001 in Europe and the U.S. We will be relying on Janssen and Waldheim
Pharmaceutica for the supply of synthetic galantamine of suitable quality and
quantity and there can be no assurance that adequate supplies will be available.
Janssen are also developing REMINYL for additional indications including
vascular and mixed dementias.
Treatments for infections
Following our merger with BioChem, the anti-infective area has become of
strategic importance to us, and we now have a strong portfolio of marketed
antiviral medications.
3TC/EPIVIR, COMBIVIR, TRIZIVIR. The human immunodeficiency virus (HIV) is a
retrovirus that has been isolated and recognized as the causative agent of
acquired immunodeficiency syndrome (AIDS). There are many strains of HIV
throughout the world, although they all use the same mechanism of action. The
virus' RNA is converted to DNA using the reverse transcriptase enzyme and the
DNA is integrated into the host organisms' genome, where it is able to
replicate.
According to UNAIDS, in December 2001 there were more than 40 million adults and
children living with the HIV infection worldwide. Estimates suggest that there
are 16,000 new infections each day.
9
Lamivudine, which was originally discovered by BioChem and licensed to Glaxo
Wellcome in 1990, is the key to the success of this HIV/AIDS treatment
franchise. We receive royalties on sales of lamivudine (now marketed in various
single and combination formulations, including 3TC/EPIVIR, COMBIVIR and
TRIZIVIR), except in Canada, where we have a commercialization partnership with
GlaxoSmithKline (GSK). These products are now launched widely.
ZEFFIX. Hepatitis B (HBV) virus is the causative agent of both acute and chronic
forms of hepatitis B, a liver disease which is a major cause of death and
disease throughout the world. Over 2 billion people worldwide have been at some
point infected with the HBV virus. Of these 2 billion, there are over 350
million people chronically infected, 75% of whom are found in the Asia-Pacific
region (World Health Organization (WHO) 1996). There are some 25 million chronic
carriers of HBV in industrialized countries. These chronic carriers are at risk
of developing chronic active hepatitis, which kills up to 2 million persons per
annum. Vaccines to prevent hepatitis B are currently available, however, they
have not been shown to be effective in those already infected with the virus.
Despite the availability of these vaccines for more than a decade, the incidence
of HBV infection in the U.S. has increased.
Lamivudine has also been shown to be effective against the HBV virus and is
marketed as ZEFFIX and various other trademarks around the world. In an
agreement similar to that for lamivudine in HIV/AIDS, we receive royalties on
sales of lamivudine by GSK for HBV except in Canada, where we have a
commercialization partnership with GSK. Please refer to Note 19b (iv) to the
consolidated financial statements for further details in relation to lamivudine.
Oncology treatments
Agrylin. Thrombocythemia is a chronic disorder associated with increased or
abnormal production of blood platelets. Since platelets are involved in blood
clotting, their abnormal production can result in the inappropriate formation of
blood clots or in bleeding, with the consequence of an increased risk of
gastrointestinal bleeding, heart attack and stroke.
In January 1999, we purchased the intellectual property rights to Agrylin from
Bristol-Myers Squibb for $35.0 million.
In 1991, we obtained an exclusive worldwide license from Bristol-Myers Squibb to
develop, market and sell Agrylin (anagrelide) as an oral treatment for
thrombocythemia. In March 1997, the NDA for Agrylin was approved. We also market
AGRYLIN in Canada and through distributors in South Korea, Switzerland, Israel,
South Africa and Australia. There is no other U.S. or Canadian approved
treatment available for thrombocythemia. Other current therapies used to reduce
excessive platelet production may have disadvantages, such as possible links to
leukemogenesis and leukopenia.
In December 1998, we received approval for an expanded indication for AGRYLIN
for thrombocytosis secondary to all myeloproliferative diseases, including
polycythemia vera and chronic myelogenous leukemia.
In the year ended December 31, 2001, our worldwide sales of Agrylin were $85.5
million, representing approximately 10% of our total revenues.
Treatments for other diseases
CALCICHEW range. Osteoporosis is characterized by a progressive loss of bone
mass that renders bone fragile and liable to fracture. More than 3 million
people in the U.K. are estimated to suffer from this condition. Osteoporosis
affects both sexes but is more rapid and profound in women, largely as a result
of the decline in estrogen production following menopause.
10
Our principal products for the adjunctive treatment of osteoporosis and for the
treatment of hyper phosphatemia are the CALCICHEW range of calcium and
calcium/vitamin D supplements which are sold mainly in the U.K. and the Republic
of Ireland. Our CALCICHEW range includes, among others, CALCICHEW(TM), CALCICHEW
D3(TM) and CALCICHEW D3 FORTE(TM), used as adjuncts to other therapies and which
we believe are more palatable than alternative products. We hold a leading
position in the (pound)20 million (approximately $29 million) U.K. prescription
calcium market.
ProAmatine. In 1996, PROAMATINE was given accelerated approval by the FDA as a
new drug for life-threatening illnesses and is currently the only FDA approved
treatment for postural hypotension. This is a condition involving low blood
pressure upon assuming an upright posture, resulting in dizziness, weakness or
unconsciousness. ProAmatine has been designated as an orphan drug by the FDA,
giving it a seven year period of market exclusivity in the U.S., which will
expire at the end of 2003. Sales of ProAmatine in 2001 were $38.0 million,
representing approximately 4% of our total revenues.
Pentasa. Ulcerative colitis is a chronic, relapsing disease in which part or all
of the large intestine becomes inflamed and often ulcerated.
In April 1998, exclusive U.S. marketing rights to Pentasa were acquired from
Hoechst Marion Roussel for $136.0 million. This drug addresses a large market of
over 2 million patients in the U.S. Sales of Pentasa in 2001 were $75.5 million,
representing approximately 9% of our total revenues.
(b) Products under development
We seek to maintain a broad and balanced approach to our development of new
products by, among other things, leveraging third-party research and development
expertise, exploiting investment in research collaborations and licensing
compounds from third parties and developing them through the pre-clinical and
clinical phases with a view to marketing them by our own sales and marketing
organization. Recognizing the risks in drug development, our policy is to manage
this by maintaining a broad range of products in different development phases
and with varying inherent levels of risk, from low risk reformulations of off
patent approved compounds, through to higher risk new chemical entities. We aim
to optimize the level of fixed overhead by using contract research organizations
to manage multi-center and / or international clinical trials on a day-to-day
basis. In the year ended December 31, 2001, we spent $171.0 million on research
and development, representing approximately 19% of our total revenues.
The table below lists our key products under development by therapeutic area,
indicating their most advanced development status for any market and their
territorial rights.
Product(s) Principal indication(s) Most advanced development Shire's
status territorial rights
Treatments for central nervous system disorders
DIRAME(TM) Analgesia Phase III Global
SPD 417 Bipolar disorder Phase III Global
SPD 420 ADHD Phase II Global (option)
SPD 421 Epilepsy Phase II Global
SPD 451 Parkinson's disease Preclinical Global
SPD 452 Epilepsy Preclinical Global
SPD 453 Epilepsy Preclinical Global
SPD 473 Parkinson's disease Phase IIa Global
11
SPD 474 Parkinson's disease Preclinical Global
SPD 503 ADHD Phase II Global
Treatments for infections
SPD 701 Influenza vaccine Phase I Global
SPD 703 Streptococcus Preclinical Global
pneumoniae vaccine
SPD 704 Neisseria meningitidis Phase I Global
vaccine
SPD 705 Pseudomonas aeruginosa Preclinical Global
vaccine
SPD 707 Influenza vaccine Phase II complete(1) Global
SPD 754 HIV/AIDS Phase I Global
SPD 756 HIV/AIDS Phase I Global
Oncology treatments
AGRYLIN(TM)/XAGRID(TM) Essential Phase III complete(2) Global
Thrombocythemia
TROXATYL(TM) Leukemia Phase II Global
TROXATYL Pancreatic cancer Phase I Global
SPD 427 Oncology Phase I Global
Treatments for other diseases
FOZNOL(TM)/ FOZRENOL(TM)(5) Hyperphosphataemia In registration in EU(3) Global
PENTASA (500mg) Ulcerative colitis Phase II complete U.S.
Balsalazide Ulcerative colitis Phase II complete(4) Certain countries within Europe
1 This project is marketed in Canada under the trademark FLUVIRAL S/F(TM) and
is under development for markets outside of Canada.
2 This project is marketed in the U.S. and Canada under the trademark AGRYLIN
and is currently under development for Europe.
3 The U.S. NDA for FOZNOL is being prepared and is planned to be submitted to
the FDA in Q2 2002.
4 This project is marketed in the U.K. by us and in various European
countries by our distributors and is currently under development for
various other European markets.
5 This project is referred to as FOZNOL throughout this document.
Treatments for central nervous system disorders
12
DIRAME(TM) for analgesia
The analgesic market is worth approximately $3.5 billion in the U.S.
DIRAME is our orally administered centrally-acting analgesic for treating
moderate to moderately severe pain. Exclusive worldwide rights for this product
were acquired from Bayer. We believe that DIRAME could have a favorable
side-effect profile especially in terms of low addiction potential, although
this needs to be demonstrated in clinical studies. Phase III trials in
osteoarthritis were completed during 2001 and further studies are ongoing.
SPD 417 for bipolar disorder
SPD 417 is a project that capitalizes on the success of CARBATROL, which we
currently market in the U.S. for the treatment of epilepsy. There is anecdotal
evidence that carbamazepine, the active ingredient in CARBATROL, may work as a
treatment for bipolar disorder. The aim of this project is to investigate the
efficacy of CARBATROL in clinical trials for bipolar disorder with a view to
gaining FDA approval for this indication. The project is currently in Phase III.
ADHD products
Development of ADDERALL XR was successfully completed in 2001 and culminated in
the U.S. launch on November 5, 2001.
We have two further projects in development for ADHD; SPD 420 and SPD 503.
SPD 420
In April 2000, we announced the signing of an option agreement with Cortex
Pharmaceuticals, Inc. (Cortex). Under the terms of the agreement, we are
conducting a double-blind, placebo-controlled evaluation of the AMPAKINE* SPD
420, in ADHD patients. This study was initiated in Q3 2001 and, if successful,
will give us the option to acquire the global rights for the product. If we
elect to execute this agreement, we will bear all future developmental costs and
Cortex will receive an upfront fee, milestone payments based on successful
clinical and commercial development, research support for additional AMPAKINES
and royalties on sales.
SPD 420 is likely to lead to a non scheduled compound that will assist in
treating certain subsets of symptoms in both children and adult ADHD patients.
* Trademark of Cortex
SPD 503
SPD 503, another potentially non scheduled compound is in Phase II clinical
trials. Development will target both adult and pediatric ADHD patients and, as
with SPD 420, the product is likely to assist in treating certain subsets of
symptoms.
Epilepsy
Epilepsy is a condition currently affecting a large market of approximately 2.5
million people in the U.S. We have three projects under development for the
treatment of this condition, with the aim of building a franchise based on our
existing U.S. marketed product, CARBATROL.
13
SPD 421, a unique phospholipid derivative of valproic acid, was in-licensed from
D-Pharm on March 14, 2000. Despite the excellent efficacy profile of valproic
acid, a variety of adverse effects limit its usage. The first Phase II trial of
SPD 421, for which preparation was initiated during Q3 2001, will be a
multicenter, multinational study as add-on therapy in the treatment of complex
partial seizures. Preclinical data and Phase I results demonstrate favorable
safety and pharmacokinetic profiles of the drug.
SPD 452 and SPD 453, new projects described as novel formulations of established
anti-epileptic drugs, were introduced during Q2 2001 and replaced the project
SPD 418 which was discontinued in Q2 2001 as a result of unsatisfactory Phase I
results.
SPD 502 for stroke
On February 5, 1998, we in-licensed from NeuroSearch A/S an AMPA antagonist, SPD
502, for central nervous system disorders including the acute treatment of
stroke. The project is currently at Phase I. As the development of treatments
for stroke is of a particularly high risk nature, further development of this
project is on hold while a third party is sought to share the risk.
Parkinson's disease
Parkinson's disease is a relatively common disease that causes a progressive
loss of movement, rigidity, postural abnormalities and tremor. As the number of
elderly in the population increases it is likely that the number of patients
with Parkinson's disease will also rise.
We have been developing a dopamine D1 agonist project, SPD 451, since December
2000, when it was in-licensed from CeNeS Pharmaceuticals plc. This project is
currently in the preclinical stage of development. In November 2001, we extended
our research into Parkinson's disease by acquiring the rights to a second
development project, SPD 473, which had originally been granted to DevCo
Pharmaceuticals Limited. SPD 473 is a mixed and potent dopamine, 5HT and
noradrenaline re-uptake inhibitor. A proof of concept study (Phase IIa) is
currently being conducted.
SPD 474 is a project to identify an additional compound for Parkinson's disease
which is being conducted in collaboration with an un-named third party.
Treatments for infections
Following our merger with BioChem, the anti-infective area has become of
strategic importance to us, and we now have a strong portfolio of antiviral
medications and anti-infective vaccines.
Influenza vaccines
SPD 707, a split virion influenza vaccine was introduced as a project during Q3
2001. It is already manufactured and marketed by us in Canada as FLUVIRAL S/F.
We are now capitalizing on our global rights to FLUVIRAL S/F by investigating
its potential for other markets, primarily the U.S. and Europe. This project is
considered to be at the end of Phase II since Phase III data will be needed to
support marketing approval applications in the major markets.
On October 29, 2001, we announced that Shire Biologics Inc. had signed a
ten-year contract with the Government of Canada to assure a state of readiness
in the case of an influenza pandemic (worldwide epidemic) and to provide
influenza vaccine for all Canadian citizens in such an event. Under the
contract, Shire Biologics will also supply the Government of Canada with a
substantial proportion of its annual influenza vaccine requirements over the
ten-year period. It has been estimated that the value of the agreement may
exceed CAN$300 million (approximately $190 million).
14
SPD 701
SPD 701 is a cell based influenza vaccine. Prior to our merger, BioChem
announced in its Q1 2001 financial results that the agreement with GSK to
develop SPD 701 had been terminated. In our Q3 2001 financial results we
announced that we were negotiating a termination of the research agreement with
BioVector and confirmed that development of both the nasal and injectable
formulations of SPD 701 will not continue until a new partner has been found.
HIV/AIDS
Our expertise in HIV/AIDS, has lead to the discovery of two further
antiretroviral compounds; SPD 756 (formerly BCH 13520) and SPD 754 (formerly BCH
10618).
SPD 756
SPD 756 is a potent nucleoside (guanosine) analogue. It is a nucleoside reverse
transcriptase inhibitor. It has been shown in vitro to retain efficacy against
resistant clinical isolates including multiple and highly resistant strains of
HIV. In preclinical studies viruses resistant to SPD 756 emerged slowly. This
project entered Phase I clinical studies during Q3 2001.
SPD 754
SPD 754 is a nucleoside (cytidine) analogue that also reduces the rate of
replication of HIV.
Preclinical data indicates that SPD 754 is active against HIV strains which have
developed resistance to other nucleoside analogues such as AZT and 3TC, as well
as against clinical isolates of HIV-1 that are highly resistant to a range of
nucleoside analogues. As with SPD 756, preclinical studies indicate that viral
resistance to SPD 754 appears to develop very slowly. In addition, SPD 754 is
able to penetrate the cerebrospinal fluid, considered an HIV sanctuary. SPD 754
is currently in Phase I development.
Antibacterial vaccines
There is a great need for new antibacterial vaccines, especially given the
increasing resistance of many bacteria to current antibiotics. As existing
vaccines often do not provide effective immunisation against many deadly
bacteria, we are developing a new generation of antibacterial vaccines based on
innovative recombinant protein technology.
In April 2000, the Government of Canada provided substantial financial support
for our work in the field of antibacterial vaccines within the scope of the
Technology Partnerships Canada (TPC) program.
We have three vaccines in development against the following bacteria: Neisseria
meningitidis, Streptococcus pneumoniae and Pseudomonas aeruginosa.
SPD 704 - Neisseria meningitidis vaccine
Our meningococcal vaccine candidate, SPD 704, is designed to protect against
infection by Neisseria meningitidis. Two of the most common outcomes of
infection by Neisseria meningitidis are meningococcal meningitis and
septicaemia. During the 1990s this bacteria emerged as one of the two most
common bacterial causes of meningitis. Apart from epidemics, at least 1.2
million cases of bacterial meningitis are estimated to occur every year, 135,000
of which are fatal, according to WHO statistics. Some 500,000 of these cases and
50,000 of the deaths are attributable to Neisseria meningitidis. It strikes at
otherwise
15
healthy children under the age of five, with the highest incidence among
children aged six to 12 months, and can kill within 48 hours.
Existing polysaccharide vaccines against Neisseria meningitidis only protect
against four of the 12 serogroups of Neisseria meningitides and none protect
against serogroup B, one of the most common strains of the bacteria in
industrialised countries such as Canada, the U.S. and the U.K. SPD 704 appears
to have the potential to protect against all known serogroups of the bacteria,
including type B. Also, currently available polysaccharide (carbohydrate based)
vaccines are generally poorly immunogenic in children and in immunocompromised
patients. In contrast SPD 704 has the potential to induce a potent and long
lasting immunity in these patients. If these properties are confirmed in
clinical trials, our recombinant protein vaccine against Neisseria meningitidis
will be a very significant medical advance. This vaccine is currently in Phase I
clinical trials.
SPD 703 - Streptococcus pneumoniae vaccine
Streptococcus pneumoniae can cause a variety of infections including meningitis,
pneumonia and acute otitis media (ear infection). The U.S. Centers for Disease
Control and Protection estimates that each year in the U.S. Streptococcus.
pneumoniae causes at least 3,000 cases of meningitis, nearly half a million
cases of severe pneumonia and at least 40,000 deaths together with 7 to 10
million cases of acute otitis media (ear infection) in children.
Until now efforts to combat the disease caused by this bacteria have been
hampered by the fact that existing polysaccharide vaccines fail to elicit much
of a response in the elderly or in healthy children under the age of two years,
the age where 80% of childhood pneumococcal disease occurs. We believe that our
protein based vaccine, SPD 703, should stimulate the immune system better and
has the potential to provide improved protection for children and older people
alike. This project is at the preclinical phase of development.
SPD 705 - Pseudomonas aeruginosa vaccine
Pseudomonas aeruginosa is one of the leading causes of life threatening
nosocomial (hospital acquired) infections. It causes chronic degenerative
pulmonary disease in cystic fibrosis patients and can cause death in 30 - 60 %
of immunocompromised patients. There is a high and increasing level of
antibiotic resistance to this bacteria.
We are collaborating with Cytovax Biotechnologies Inc. (Cytovax) in the
development of a vaccine against Pseudomonas aeruginosa, known as SPD 705.
Scientists at the University of Alberta had been conducting research on the pili
of Pseudomonas aeruginosa, which are appendages responsible for bacterial
attachment to cells. Cytovax's proprietary "Anti-Adhesion Platform Technology"
could prevent infection by blocking the adhesion of pathogens onto human mucosal
cells. Based on the pili tip sequences, Cytovax has developed a consensus
sequence peptide vaccine that has the potential to elicit protective immunity
against experimental infection. This project is currently in preclinical
development.
Treatments for oncology
AGRYLIN for Essential Thrombocythemia
We market AGRYLIN in the U.S. and Canada for the treatment of Essential
Thrombocythemia, where it is the only medicine approved for this condition. We
are continuing to develop AGRYLIN for other countries with the preparation of
the Marketing Authorization Application for the EU and Phase I clinical trials
in Japan. It is anticipated that the European filing will be made during Q2
2002.
16
In January 2001, the European Commission granted orphan drug designation to
anagrelide for the treatment of essential thrombocythemia. This designation
covers the EU plus Norway and Iceland, and confers up to ten years market
exclusivity for the product following marketing authorization approval. Orphan
drug status already applies to anagrelide in the U.S., where market exclusivity
is available until 2004, and in Japan where it will run for ten years following
marketing approval.
SPD 427, an oncology product
SPD 427, a novel formulation of an existing oncology product will be developed
using our drug delivery expertise at Shire Laboratories Inc. This project is
undergoing Phase II clinical trials.
TROXATYL for leukemia and pancreatic cancer
TROXATYL is being clinically evaluated for two types of cancer; leukemias, such
as acute myeloid leukemia, together with solid tumors such as pancreatic cancer.
In children, cancer is the leading cause of death between the ages of 3 and 13
years; about half of these deaths are due to leukemia. It has been estimated
that in 2002 there will be approximately 96,550 new cases of pancreatic cancer
across North America, the EU and Japan.
We discovered TROXATYL (SPD 758, troxacitabine), the first dioxolane nucleoside
analogue.
Studies to date have shown that TROXATYL is a complete DNA chain terminator and
DNA polymerase inhibitor. As such, it appears to incorporate itself into the
growing DNA chain of cancer cells, interfering with their ability to replicate
further. Unlike other cytidine analogues currently used in cancer therapy,
TROXATYL is not degraded by cytidine deaminase.
Development in leukemia has reached Phase II, while a Phase I study in
pancreatic cancer commenced in early 2002. Treatments for other diseases
FOZNOL for hyperphosphatemia
FOZNOL (lanthanum carbonate) is being developed for the prevention and treatment
of high levels of phosphate in the blood in patients with chronic kidney
failure. Hyperphosphatemia arises from damaged kidneys being unable to eliminate
from the body the excess dietary phosphate that is widespread in food. Renal
dialysis and a restricted diet are generally unable to reduce these phosphate
levels sufficiently. If left untreated, hyperphosphatemia can result in renal
osteodystrophy, a painful condition with similarities to osteoporosis, in which
there are abnormalities in the formation and structure of bone. Taking lanthanum
carbonate with food results in the formation of the relatively water insoluble
compound, lanthanum phosphate, which cannot pass easily through the gut lining
into the blood stream. As a consequence, phosphate absorption from the diet is
decreased. As FOZNOL does not contain calcium it enables the physician to
separate the control of calcium from phosphate.
It is estimated that there are 650,000 patients worldwide with end-stage renal
disease. We believe that current therapies are not ideal: aluminum salts can
cause neural toxicity and are no longer widely used; calcium salts are
inefficient binders requiring large doses and often causing hypercalcemia, which
among other things, can result in calcification of blood vessels.
The first regulatory submission for FOZNOL was made on March 13, 2001 to a
Reference Member State in Europe, the initial step in the process that leads to
the Mutual Recognition Procedure. The U.S. NDA is being prepared and is planned
to be submitted to the FDA in Q2 2002.
17
PENTASA for ulcerative colitis
PENTASA 250mg, which is currently marketed in the U.S., is used to treat
ulcerative colitis. As part of the acquisition of PENTASA from Hoechst Marion
Roussel, we received U.S. rights to a 500mg capsule, which has completed Phase
II development. An optimum formulation is required before we can proceed to
Phase III. The new 500mg capsule formulation or a higher dose formulation would
aid the compliance of patients who often need to take large doses of this
medication.
COLAZIDE for ulcerative colitis
In May 2000, we in-licensed COLAZIDE, a second treatment for ulcerative colitis,
from Salix Pharmaceuticals Inc., for a number of European countries. The first
launch was in the U.K. in September 2000. Once the necessary regulatory
approvals have been gained, we intend to market COLAZIDE in France and Germany;
the other countries covered by the agreement will be handled by distributors.
Following discussions with various regulatory authorities in Europe, it appears
that further data will be required before we could submit a Marketing
Authorization Application.
Emitasol for diabetic gastroparesis
Emitasol is an intranasal formulation of metoclopramide, an existing anti-nausea
drug currently available in oral and injectable forms for which Phase II studies
have been completed. In the Q3 2001 financial results we announced that we had
discontinued development of Emitasol and had ended the agreement with Questcor.
This decision was taken as part of the portfolio review undertaken as part of
the merger process with BioChem. The potential market for this project did not
warrant our continued support.
(c) Drug delivery technologies
We have several platforms of drug delivery technologies that can be applied to
drugs in order to enhance their effectiveness or their convenience to patients.
Generally, this involves reformulating the drug into a new delivery system
designed either to enhance the absorption of the drug into the blood stream or,
alternatively, to delay absorption of the drug into the bloodstream, thereby
requiring the patient to take fewer daily doses.
Our portfolio of drug delivery technologies includes technologies to predict and
enhance bioavailability of drugs as well as technologies to develop oral
controlled release profiles. These technologies are available to third parties
in return for development fees, licensing fees, milestone payments and
royalties. We have employed these technologies selectively to develop our own
unique products such as CARBATROL and ADDERALL XR and intend to continue doing
so in the future.
Manufacturing and Distribution
ADDERALL XR is manufactured by DSM Pharmaceuticals Inc. (DSM). Prior to
commercial approval of ADDERALL XR, DSM's manufacturing facility was the subject
of multiple FDA inspections. The findings from these inspections identified
compliance issues at the facility that we believe have been satisfactorily
resolved by DSM. Factors adversely impacting the future production of ADDERALL
XR at this facility would have a material adverse effect on our financial
condition and results of operation.
We manufacture and package ADDERALL and DEXTROSTAT(TM) at our facility in Valley
Stream, New York. Our other products marketed in the U.S. are manufactured and
packaged by third party contract manufacturers.
In June 2001, we sold our pharmaceutical manufacturing facility located in
Oakville, Ontario, Canada.
18
Our U.S. distribution center, which includes a large vault to house DEA
regulated Schedule II products, is located in Florence, Kentucky. From there, we
distribute our ADHD products to nearly all the wholesale distribution centers
and the three major warehousing pharmacy chains that stock Schedule II drugs in
the U.S., providing access to nearly all pharmacies in the U.S. We distribute
other products from a facility located in a suburb of Chicago.
In Canada all products are manufactured by a third party manufacturer, with the
exception of our vaccines which are manufactured in house.
All products marketed by the U.K. based sales and marketing operation are either
manufactured and supplied by the originator of the product under supply
arrangements or are manufactured for us by third parties under contract.
Distribution in the U.K. and the Republic of Ireland and to export territories
is also contracted out to third parties. We have access to all principal drug
wholesale chains in the U.K. and the Republic of Ireland and their respective
distribution centers.
In both the U.S. and the U.K., a small number of large wholesale distributors
control a significant share of each market. In recent years the number of
independent drug stores and small chains has decreased as a result of
consolidation. Consolidation or financial difficulties could cause customers to
reduce their inventory levels, or otherwise reduce purchases of our products.
In the U.S., our significant customers include McKesson Corp., Bergen Brunswig
Corp. and Cardinal Health Inc. In the U.K., our customers include The Boots
Company PLC, AAH Pharmaceuticals Ltd and Unichem Plc. For the fiscal year ended
December 31, 2001, our three largest customers accounted for approximately 20%,
14% and 9% of total revenues, respectively. The loss of any one of these
customer accounts could have a material adverse effect on our financial
condition and results of operations.
Intellectual Property
An important part of our business strategy is to protect our products and
technologies through the use of patents, proprietary technologies and
trademarks, to the extent available. Our success will depend, in part, upon our
ability to obtain and enforce strong patents, to maintain trade secret
protection and to operate without infringing the proprietary rights of others.
Our policy is to seek patent protection for our proprietary technology whenever
possible in the U.S., Canada, major European countries and Japan. Where
practicable, we seek patent protection in other countries on a selective basis.
In all cases, we endeavor to either obtain patent protection ourselves or
support applications by our licensors.
ADDERALL is not protected by patent. On February 11, 2002 Barr Laboratories Inc.
announced FDA approval to market a generic version of this twice / three times
daily product. We are also aware that a number of other pharmaceutical companies
may have filed ANDA's with the FDA for authorization to market a generic version
of this twice / three times daily product. However, we received product approval
from the FDA on October 12, 2001 for our extended release "once daily" version
of ADDERALL, ADDERALL XR, which was recently launched and was granted patent
protection in November 2001 in the U.S.
We have issued patents and pending applications in the U.S., Canada, most
European countries, Japan and selected countries worldwide in the areas of
therapeutics and biologics, including patents and applications relating to our
products, our process technologies and, where appropriate, in respect of the
formulation of products made by those processes or incorporating those
technologies.
We cannot however assure you that our patents or patent applications or those of
our third party manufacturers will provide valid patent protection sufficiently
broad to protect our products and technology and will not be challenged,
revoked, invalidated, infringed or circumvented by third parties. In the regular
course of business, we are a party to litigation or other proceedings relating
to intellectual property rights.
19
We also rely on trade secrets, unpatented know-how and technological
innovations, trademarks and contractual arrangements with third parties to
maintain and enhance our competitive position where we are unable to obtain
patent protection or our marketed products are not covered by specific patents.
Our commercial success will depend in part on our not infringing patents or
proprietary rights of others and not breaching licenses granted to us. The
degree of patent protection afforded to pharmaceutical or biological inventions
around the world is uncertain. We are aware of certain issued patents and patent
applications of third parties, and there may be other patents and patent
applications containing subject matter which we, or our licensees, may require
in order to research, develop or commercialize certain of our products and
technologies. If patents are granted to other parties that contain claims having
a scope that is interpreted by the relevant authorities to cover any of our
products or technologies, there can be no guarantee that we will be able to
obtain licenses to such patents or make other arrangements at reasonable cost,
if at all. Failure to obtain a license to any technology or patents that we may
require to commercialize our products or technology may result in material
adverse effects on the sale or development of the product or technology in
question and lead to the abandonment or delay in development, manufacture or
sale of that product or technology and lead to additional expenses.
Our licensors hold issued patents in the U.S., Europe and Japan relating to the
use of galantamine for the treatment of Alzheimer's disease and related
dementias.
Our licensors hold an issued patent in the U.S., a granted patent in Europe and
pending applications in selected other countries relating to the phosphate
binder which we are developing for use in the treatment of hyperphosphatemia.
We have been granted orphan drug exclusivity until 2004 in the U.S. for the
product AGRYLIN. We hold patents and patent applications in the U.S. and other
selected countries including Europe relating to processes for producing the
active ingredient anagrelide.
We have numerous issued patents in the U.S. claiming nucleoside analogues,
methods of treatment using nucleoside analogues and processes for producing
these nucleoside analogues. These patents include claims covering the chemical
composition of lamivudine and related nucleoside analogues and methods of
treating viral infections, including HIV and hepatitis B with lamivudine and
related nucleoside analogs. We also have issued patents and pending applications
covering lamivudine, TROXATYL, SPD 756, SPD 754 and related nucleoside
analogues, processes for their preparation and methods of using same in over 100
countries, including the U.S., Europe and Japan.
Competition
The manufacture and sale of pharmaceuticals is highly competitive. Many of our
present and potential competitors have research and development capabilities
that may allow such competitors to develop new or improved products that compete
with our products. The pharmaceutical industry is characterized by rapid product
development and technological change. Our pharmaceutical products may be
rendered obsolete or uneconomical by the development of new pharmaceuticals to
treat the conditions addressed by our products or as the result of either
technological advances affecting the cost of production or marketing or pricing
action by competitors.
We believe that competition in our markets is based on, among other things,
product safety, efficacy, convenience of dosing, reliability, availability and
price. Companies with more resources and larger research and development
expenditures have a greater ability to fund research and clinical trials
necessary for regulatory applications, and may have an improved likelihood of
obtaining approval of drugs that would compete with our drugs. Prior regulatory
approvals for competing products would force our development products to compete
with an established drug. Other products now in use or under development by
others may be more effective or have fewer side effects than our current or
future products. For example, we are
20
aware of a number of products that compete with REMINYL, including Aricept by
Pfizer and Exelon by Novartis. FOZNOL's principal competitor is likely to be
RenaGel, which was launched in 1998. The product was developed by GelTex
Pharmaceutical, Inc. and is marketed by Genzyme General.
In addition, we are aware of efforts by competitors to develop both improved
formulations of existing Schedule II drugs and new, non-Schedule II drugs, for
the treatment of ADHD. For example, Alza Corporation, Novartis (in collaboration
with Elan), Celltech plc (in collaboration with Eurand) and Noven are believed
to be developing extended release, once-a-day formulations of methylphenidate
while Celgene and Celltech Chiroscience plc are both working to develop a single
isomer version of methylphenidate. GSK, Eli Lilly, Bristol-Myers Squibb (in
collaboration with Sano Corporation) and Abbott are believed to be developing
non Schedule II products for ADHD. Initial products of this type could become
available as early as the fourth quarter of 2002. On February 11, 2002 Barr
Laboratories Inc. announced FDA approval to market a generic version of this
twice / three times daily product. We are also aware that a number of other
pharmaceutical companies may have filed ANDA's with the FDA and are seeking
approval for a generic version of ADDERALL which no longer has marketing
exclusivity in the U.S. Any products approved by the FDA, could have a material
adverse effect on the sales of ADDERALL, which represented approximately 36% of
our total revenues for the year ended December 31, 2001. On October 12, 2001 we
received FDA approval for our new once a day formulation of ADDERALL, ADDERALL
XR. We hold a patent covering the drug product for ADDERALL XR in the U.S. We
believe that ADDERALL XR, a once a day formulation has certain benefits to the
patient over and above other twice / three times daily drugs (including ADDERALL
and its generic versions).
Principal Licensing and Collaborative Agreements
Various Galantamine Agreements
Pursuant to an agreement with Synaptech Inc., the owner of the patents on
galantamine for use in the treatment of Alzheimer's disease, we have undertaken
technical, pre-clinical and clinical work on the use of REMINYL in Alzheimer's
disease and related dementias. We initially paid Synaptech an up front payment
of (pound)1 million (approximately $1.4 million) which was accounted for as a
development cost, and have agreed to pay royalties on sales of REMINYL. We have
also entered into a co-development agreement with Janssen under which we
licensed to Janssen all of our clinical data and know-how relating to the use of
galantamine in Alzheimer's disease and related dementias worldwide, except for
the U.K. and the Republic of Ireland. The agreement provides for a one-time
upfront payment, a milestone payment and the reimbursement of development costs.
The upfront and milestone payments were recognized as licensing and development
income when they became due. Under these arrangements, Janssen undertook to
finance substantially all the future research and development costs of REMINYL
as a treatment for Alzheimer's disease and related dementias and to conduct
clinical trials, obtain regulatory approvals and manufacture and market REMINYL.
As a result we are dependent on Janssen for any revenues derived from REMINYL.
Moreover, there can be no assurance that our interests will continue to coincide
with those of Janssen.
Our rights to develop, manufacture and sell REMINYL for use in the treatment of
Alzheimer's disease and related dementias under the patents of Synaptech extend
throughout the world but exclude North America, Japan, Korea, Taiwan, Thailand
and Singapore. We have, in turn, entered into a sub-license with Janssen under
which we granted Janssen exclusive rights to develop, manufacture and sell
REMINYL for use in Alzheimer's disease in all territories licensed to us except
the U.K. and the Republic of Ireland. We also have the right to reacquire the
rights to sell REMINYL in one of a specified group of major European countries
five or 10 years after commercial launch. Janssen has entered into a separate
license agreement with Synaptech covering North America, Japan, Korea, Taiwan,
Thailand and Singapore. Synaptech authorized us to enter into the above
co-development agreement and the above sub-license agreement
21
with Janssen, under which, among other things, we will receive royalties on
sales of REMINYL by Janssen in the U.S.
The co-development agreement and sub-license granted to Janssen may be
terminated by Janssen on 90 days' notice. If Janssen exercises its right to
terminate the license and co-development agreement under this provision, the
licenses granted to Janssen terminate and Janssen is also obligated to transfer
to us data and other information and responsibility for the management of
continuing development and registrations of the product. The costs of ongoing
studies will be shared by us and Janssen in the relevant proportions in the
agreement for three months after the date of termination except for the costs
payable for clinical trials, which will be shared until they can be properly
terminated. Under the agreement we have the right to complete the registration
of the products and seek alternative partners.
Lamivudine
By agreement between Shire BioChem and GSK dated January 31, 1990 and amended as
of November 20, 1995, Shire BioChem licensed to GSK the worldwide rights, with
the exception of Canada, to develop, manufacture and sell the nucleoside
analogue lamivudine marketed as 3TC, ZEFFIX Heptodin, HEPTOVIR, EPIVIR,
EPIVIR-HBV, COMBIVIR and TRIZIVIR (together referred to in this section as
"lamivudine"). A partnership exists between GSK's Canadian subsidiary, GSK Inc.,
and Shire BioChem to supply, market and sell lamivudine in Canada. GSK has
agreed to manufacture all the required lamivudine to be supplied in Canada by
the partnership.
In consideration for the grant of such rights, GSK agreed to undertake and fund
the development of lamivudine and to pay Shire BioChem a royalty on sales of
lamivudine. In addition, it was agreed that milestone payments would be made to
Shire BioChem in installments as GSK progressed in the development and approval
process. The amount of relevant patent prosecution costs and 50% of milestone
payments are deductible from any royalties payable to Shire BioChem by GSK. The
milestone payments and its related deductions from royalties have been
completed. Certain contractual and litigation costs may be deducted from
royalties payable to Shire BioChem by GSK. If GSK terminates the license
agreements upon certain events of default by Shire BioChem, GSK will retain a
non-exclusive, paid-up license from Shire BioChem to make, have made, use and
sell lamivudine worldwide.
Please refer to Note 19b (iv) to the consolidated financial statements for
further details in relation to lamivudine.
PROAMATINE
By agreement dated November 23, 2000 we re-negotiated the terms and duration of
our distribution agreement with Nycomed Austria GmbH for the supply of
PROAMATINE in the U.S., Canada, the U.K. and the Republic of Ireland. We now
have exclusive rights to supply PROAMATINE in these countries until 2010 and we
no longer pay a royalty on sales to Nycomed having "bought back" the royalty as
part of the re-negotiation.
FLUVIRAL
The Company has signed a ten-year contract with the Government of Canada to
assure a state of readiness in the case of an influenza pandemic (worldwide
epidemic) and to provide influenza vaccine for all Canadian citizens in such an
event. Under the contract, Shire Biologics will also supply the Government of
Canada with a substantial proportion of its annual influenza vaccine
requirements over the ten-year period. The value of the agreement may exceed
C$300 million (approximately $190 million) over the ten-year term, with an
option for the Government of Canada to extend the contract.
22
The concept of a state of readiness against an influenza pandemic requires the
development of sufficient infrastructure and capacity in Canada to provide 100%
of domestic vaccine needs in the event of an influenza pandemic. Canada would
require 32 million doses of single-strain (monovalent) flu vaccine within a
production period of 16 weeks. Shire Biologics will therefore begin expanding
its current production capacity in order to meet this objective within a
five-year period.
Shire Biologics is committed to CAN$4.5 million (approximately $2.8 million) of
capital expenditure on immoveables for the purpose of achieving the level of
Pandemic Readiness required. In addition, a performance bond equal to 10% of the
minimum estimated contract value in any year, which for 2001/2002 is CAN$17.5
million (approximately $11 million), would become payable to the Government of
Canada if contracted penalty clauses were triggered.
Johnson Matthey--FOZNOL
Johnson Matthey plc has granted patents in the U.S. and Europe and pending
applications elsewhere for pharmaceutical compositions containing lanthanum
carbonate and to use of these compositions for the treatment or prevention of
hyperphosphatemia. In February 1996, we entered into an agreement with Johnson
Matthey under which Johnson Matthey granted to us an exclusive license agreement
to develop, manufacture, use and sell FOZNOL worldwide. Under the license
agreement, in return for an exclusive license we paid an upfront payment and are
committed to a royalty on sales of FOZNOL. We have consented to the assignment
by Johnson Matthey of its patents to AnorMed Inc., a Canadian company, which is
partially owned by Johnson Matthey. As part of these arrangements we amended the
agreement and received an exclusive worldwide license to use Johnson Matthey's
manufacturing know-how in return for up front payments and future royalties.
Government Regulation
The clinical development, manufacturing and marketing of our products are
subject to regulation by various authorities in the U.S. and the EU, including,
in the U.S., the FDA, the DEA and the Occupational Safety and Health
Administration, and in the U.K., principally the Medicines Control Agency (MCA).
The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act in the
U.S. and numerous directives and guidelines in the EU govern the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising and promotion of our products. Product development and approval
within these regulatory frameworks takes a number of years and involves the
expenditure of substantial resources.
Regulatory approval will be required in the major markets in which we or our
licensees seek to test or market products. At a minimum, such approval requires
the evaluation of data relating to the quality, safety and efficacy of a product
for its proposed use. The specific types of data required and the regulations
relating to this data will differ depending on the territory, the drug involved
and the stage of development.
In general, for a new chemical entity, the product needs to undergo rigorous
preclinical testing before it can be used in humans, both in the laboratory and,
until suitable alternative tests are found, in animals. Clinical trials for new
products are typically conducted in three sequential phases that may overlap. In
Phase I, the initial introduction of the pharmaceutical into healthy human
volunteers, the emphasis is on testing for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to determine the initial
efficacy of the pharmaceutical for specific targeted indications, to determine
dosage tolerance and optimal dosage and to identify possible adverse side
effects and safety risks. Once a compound is found to be effective and to have
an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to more fully evaluate clinical outcomes.
In the U.S., data, as described above, needs to be submitted to the FDA as part
of an Investigational New Drug (IND) application which, unless the FDA objects,
will become effective 30 days following receipt by the
23
FDA. Phase I studies in human volunteers may commence only after the application
becomes effective. Prior regulatory approval for human volunteer studies is not
required in the U.K., although the same level of testing will need to have been
completed before we decide it is safe to proceed. In the U.K. following
successful completion of Phase I studies, data is then submitted in summarized
format to the MCA as a clinical trial exemption application in support of a
specific Phase II clinical study or program, and provided no objection has been
received within a maximum of 63 days after receipt, the Phase II studies may
commence. For any additional studies, Phase II and/or Phase III, further
submissions to regulatory authorities are necessary, detailing results of
previous trials, updating ongoing preclinical studies and describing full
details of the proposed studies. Authorities may require additional data before
allowing the studies to commence and could demand the studies be discontinued at
any time if there are significant safety issues. In addition to the regulatory
review, a study often has to be approved by an independent body. The exact
composition and responsibilities of this body will differ from territory to
territory. In the U.S., for example, each study will be conducted under the
auspices of an independent Institutional Review Board at the institution at
which the study is conducted. This board considers among other things, the
design of the study, ethical factors, the safety of the human subjects and the
possible liability risk for the institution. The U.K. equivalent of this body,
the Ethics Committee, has a very similar approach. Other authorities around
Europe and the rest of the world have slightly differing requirements involving
both the execution of clinical trials and the import/ export of pharmaceutical
products. It is our responsibility to ensure we conduct our business in
accordance with the regulations of each relevant territory.
Information generated in this process is susceptible to varying interpretations
that could delay, limit or prevent regulatory approval at any stage of the
approval process. The failure to demonstrate adequately the quality, safety and
efficacy of a therapeutic drug under development would delay or prevent
regulatory approval of the product. There can be no assurance that if clinical
trials are completed, either we or our collaborative partners will submit
applications for required authorizations to manufacture and/or market potential
products (including a marketing authorization, NDA or abbreviated NDA) or that
any such application will be reviewed and approved by the appropriate regulatory
authorities in a timely manner, if at all.
In order to gain marketing approval we must submit a dossier to the relevant
authority for review. The format is usually specific and laid out by each
authority, although in general it will include information on the chemistry and
pharmaceutical aspects of the product as well as the pre-clinical and clinical
data. The FDA undertakes the review for the U.S.; in Europe the review may be
undertaken by the European Medicines Evaluation Agency or an individual
country's agency, followed by "mutual recognition" of this review by a number of
other countries' agencies, depending on the process applicable to the drug in
question. Approval can take several months to several years, or be denied. The
approval process can be affected by a number of factors; additional animal
studies or clinical trials may be requested during the review and may delay
marketing approval and involve unbudgeted costs. The agency may conduct an
inspection of the facility, review manufacturing procedures, operating systems
and personnel qualifications. In addition to obtaining approval for each
product, in many cases each drug manufacturing facility must be approved.
Further inspections may occur over the life of the product. As a condition of
approval, the regulatory agency may require post-marketing surveillance to
monitor for adverse effects. After approval for the initial indication, further
clinical studies are necessary to gain approval for any additional indications.
The terms of any approval, including labeling content, may be more restrictive
than expected and could affect the marketability of a product.
In the U.S., the Drug Price Competition and Patent Restoration Term Act of 1984,
known as the Waxman-Hatch Act, established abbreviated application procedures
for obtaining FDA approval for many brand name drugs that are off-patent and
whose marketing exclusivity has expired. Approval to manufacture these drugs is
obtained by filing an abbreviated new drug application. As a substitute for
conducting full-scale pre-clinical and clinical studies of the brand name drug,
the FDA requires data establishing that the drug formulation, which is the
subject of an abbreviated application, is either bio-equivalent or has the same
24
therapeutic effect as the previously approved drug, among other requirements.
The European guidelines also allow for the submission of abridged applications
using similar criteria to the U.S. system.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. Renewals in Europe may require additional
data, which may result in a license being withdrawn. In the U.S., the FDA has
the authority to revoke or suspend approvals of previously approved products, to
prevent companies and individuals from participating in the drug-approval
process, to request recalls, to seize violative products and to obtain
injunctions to close manufacturing plants not operating in conformity with
regulatory requirements and to stop shipments of violative products. The FDA
also may impose pre-clearance requirements on products currently being marketed
without FDA approval. In addition, changes in regulation could have a material
adverse effect on our financial condition and results of operation.
The DEA also controls the national production and distribution of Schedule II
drugs in the U.S. by allocating production quotas based, in part, upon the DEA's
view of national demand. As Schedule II drugs, the production and sale of our
ADHD products are strictly controlled. It cannot be guaranteed that a company
will always receive the quotas for which it applies, and this may have a
material effect on revenues and earnings.
Third Party Reimbursement
Our ability to market products depends in part on the extent to which healthcare
providers pay at appropriate reimbursement levels for the cost of the products
and related treatment. Third-party payers are increasingly challenging the
pricing of pharmaceutical products and/or seeking pharmacoeconomic data to
justify reimbursement practices. In the U.S., several factors outside of our
control could significantly influence the purchase of pharmaceutical products
including the ongoing trend toward managed health care, and the renewed focus to
reduce costs in state Medicaid and other government insurance programs. These
factors could result in lower prices or a reduction in demand for our products.
However, the prices of our products are fixed and determinable at the outset of
each transaction we undertake with our customers, and therefore these factors
would not impact the recording of our revenues in accordance with generally
accepted accounting principles.
Similar developments may take place in the EU markets, where the emphasis will
likely be on price controls and non-reimbursement for new and highly priced
medicines for which the economic as well as the therapeutic rationales are not
established. Significant uncertainty exists about the reimbursement status of
newly approved pharmaceutical products. There can be no assurance that
reimbursement will be available for any of our products. Limits on reimbursement
available from third-party payers may reduce the demand for our products. Price
applications in Europe have delayed product launches in some countries for up to
two years and as a consequence dates for product launches cannot be predicted
with accuracy.
Employees
On December 31, 2001, we employed 1,677 individuals, 759 of whom were in sales
and marketing, 407 of whom were in research and development, 212 of whom were in
manufacturing and distribution, and 299 of whom were in general and
administrative. In addition to our employees, we engage professional personnel
on a consultancy basis and, from time to time, consultants and others on a per
day or hourly basis. We believe that relations with our employees are
satisfactory. Our success is dependent on our ability to attract and retain
highly qualified management and scientific personnel. We face intense
competition for personnel from other companies, academic institutions,
government entities and other organizations. We may not be able to successfully
attract and retain such personnel. In general, we have agreements with our key
scientific and management personnel for periods of one year or less. The loss of
such personnel, or the
25
inability to attract and retain the additional highly skilled employees required
for our activities, could have an adverse effect on our business.
Financial Information about Foreign and Domestic Operations
Financial information about Foreign and Domestic Operations is presented in Note
22 to the consolidated financial statements.
Risk Factors
We have adopted a positive risk management strategy that enables us to identify
and manage significant risks that we face. While we aim to identify and manage
every significant risk that we face, it is important to recognize that no risk
management strategy can provide absolute assurance against loss.
Set out below are the key risk factors associated with our business that have
been identified through our approach to risk management.
The introduction of new products by competitors may impact future revenue.
The manufacture and sale of specialty pharmaceuticals is highly competitive.
Many of our competitors are large, well-known pharmaceutical, chemical and
health care companies with considerable resources. Companies with more resources
and larger research and development expenditures have a greater ability to fund
research and clinical trials necessary for regulatory applications. They may
also have an improved likelihood of obtaining approval of drugs that may compete
with those marketed or under development by us. If any product, that competes
with one of our principal drugs, is approved, sales of our drugs could fall.
The pharmaceutical industry is also characterized by rapid product development
and technological change. Our products could therefore be rendered obsolete or
uneconomical through the development of new products or technological advances
in the cost of production or marketing by our competitors.
The failure to secure new products for development may reduce the strength of
the future pipeline.
Our future results will depend, to a significant extent, upon our ability to
in-license or acquire new products for development. The failure to in-license,
acquire or to develop, on a commercially viable basis, new products could have a
material adverse effect on our financial position.
The actions of governments, regulators and customers can affect the ability to
sell or market products profitably.
Our ability to market our products profitably will depend on the impact on the
environments in which we operate, from governments, regulators and customers. In
particular, we depend in part on reimbursement levels for the cost of the
products and related treatment established by health care providers, including
government authorities, private health insurers and other organizations, such as
health maintenance organizations and managed care organizations. Third party
payers are increasingly challenging the pricing of pharmaceutical products and
reviewing their reimbursement practices.
In addition, the purchase of pharmaceutical products could be significantly
influenced by the following, which would result in lower prices and a reduced
demand for our products:
the ongoing trend toward managed health care in the U.S.;
legislative proposals to reform health care and government insurance
programs; or
26
price controls and non-reimbursement of new and highly priced medicines for
which the economic and therapeutic rationales are not established.
In both the U.S. and the U.K., a small number of large wholesale distributors
control a significant share of each market. In addition, the number of
independent drug stores and small chains has decreased as retail pharmacy
consolidation has occurred. Consolidation or financial difficulties could cause
customers to reduce their inventory levels, or otherwise reduce purchases of our
products.
We enter into strategic partnerships for the development and commercialization
of our products. The failure of a strategic partner to deliver the required
results could result in delays in approval or loss of revenue.
We enter into strategic partnerships with other companies in areas such as
product development or sales and marketing. In these partnerships, we are
dependent on our partner to deliver results. While these partnerships are
supported by contracts, we do not exercise direct control. If a partner fails to
perform, we may suffer a reduction in sales or royalties or may experience
delays in approval of products.
The outsourcing of services can create a significant dependency on third
parties, the failure of whom can affect the ability to operate our business and
to develop and market products.
We have entered into many agreements with third parties for the provision of
services to enable us to operate our business. In particular, we have entered
into agreements with third party contract manufacturers for the supply of our
development and marketed products. Many of the components of these products are
available only from one supplier. We may not be able to establish or maintain
good relationships with the suppliers. Additionally, there is no assurance that
the suppliers will continue to exist on commercially viable terms or be able to
supply components that meet regulatory requirements. We are also subject to the
risk that suppliers will not be able to meet the quantities needed to meet
market requirements.
The development and approval of our products depends on the ability to procure
active ingredients and special packaging materials from sources approved by
regulatory authorities. Because the marketing approval process requires
manufacturers to specify their own proposed suppliers of active ingredients and
special packaging materials in their applications, regulatory approval of a new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The need to qualify a new
supplier could delay our development and marketing efforts.
We have entered into licensing and co-development agreements with a number of
parties. There is a risk that, upon expiration or termination of a third party
agreement, we may not be able to renew or extend the agreement with the third
party, as interests may no longer coincide. In such circumstances, we may be
unable to continue to develop or market our products as planned and could be
required to abandon or divest a product line.
We intend to explore acquisitions and our future growth will partly depend on
the completion of such transactions. If we do complete acquisitions but fail to
integrate these successfully, we may have products or operations that do not
yield any benefit.
We intend to pursue business and product acquisitions that could complement or
expand our operations. However, we may not be able to identify appropriate
product acquisition candidates. If an acquisition candidate is identified, we do
not know if we will be able to negotiate successfully the terms of the
acquisition, finance the acquisition or integrate an acquired business or
product into our existing operations. The negotiation and completion of
potential acquisitions could cause diversion of management's time and resources.
27
If we complete one or more significant acquisitions through the issuance of
ordinary shares or ADS's, holders of ordinary shares and ADS's could suffer
significant dilution of their ownership interests.
If we are unable to meet the requirements of regulators in relation to a
particular product, we may be unable to develop and market the product.
Drug companies that manufacture or market drugs are required to obtain
regulatory approval before marketing most drug products. Regulatory approval is
generally based on the results of:
o preclinical testing;
o clinical data;
o manufacturing, chemistry and control data; and
o bioavailability.
The clinical development, manufacture, marketing and sale of pharmaceutical
products are subject to extensive regulation, including separate regulation by
each country in the EU, the EU itself, and federal, state and local regulation
in the U.S. Unanticipated legislative and other regulatory actions and
developments concerning various aspects of our operations and products may
restrict our ability to sell one or more of our products or to sell those
products at a profit. The primary regulatory authorities which regulate our
ability to manufacture and sell pharmaceutical products include the MCA in the
U.K., the FDA and the DEA in the U.S. and the Health Protection Branch of the
Ministry of Health in Canada.
The generation of data is regulated and any generated data are susceptible to
varying interpretations that could delay, limit or prevent regulatory approval.
Required regulatory approvals may not be obtained in a timely manner, if at all.
In addition, other regulatory requirements for any such proposed products may be
met. Even if we obtain regulatory approvals, the terms of any product approval,
including labeling, may be more restrictive than desired and could affect the
marketability of our products. Regulatory authorities have the power to:
o revoke or suspend approvals of previously approved products;
o require the recall of products that fail to meet regulatory requirements;
and
o close manufacturing plants that do not operate in conformity with current
Good Manufacturing Practices and/or other regulatory requirements or
approvals.
Such delays or actions could affect our ability to manufacture and sell our
products.
If we are unable to complete successfully projects or clinical trials for the
development of products, our products will not receive authorization for
manufacture and sale.
Due to the complexity of the formulation and development of pharmaceuticals, we
cannot be certain that we will successfully complete the development of new
products, or, if successful, that such products will be commercially viable.
Before obtaining regulatory approvals for the commercial sale of each product
under development, we must demonstrate through clinical trials that the product
is of appropriate quality and is safe and effective for the claimed use.
Clinical trials of any product under development may not demonstrate the
quality, safety and efficacy required to result in an approvable or a marketable
product. Failure to demonstrate adequately the quality, safety and efficacy of a
therapeutic drug under development would delay or prevent regulatory approval of
the product. In addition, regulatory authorities in Europe or the U.S.
(including the U.K. MCA and the U.S. FDA) may require additional clinical
trials, which could result in (a) increased costs and significant development
delays, or (b) termination of a project as it would no longer be economically
viable.
28
The completion rate of clinical trials is dependent upon, among other factors,
obtaining adequate clinical supplies and recruiting patients. Delays in patient
enrollment in clinical trials may also result in increased costs and program
delays. Additional delays can occur in instances in which we share control over
the planning and execution of product development with collaborative partners.
We intend to continue to out-license a number of products and the clinical
development of such out-licensed products would then be the responsibility of
the licensee. We cannot be certain that if clinical trials are completed, either
we or our collaborative partners will file for or receive required
authorizations to manufacture and/or market potential products in a timely
manner.
If a marketed product fails to work effectively or causes adverse side effects,
this could result in damage to our reputation, the withdrawal of the product and
legal action against us.
Our ability to sell any pharmaceutical products after the receipt of regulatory
approval will depend in part on the acceptance of those products by physicians
and patients. Unanticipated side effects or unfavorable publicity concerning any
of our products generally or those of our competitors could have an adverse
effect on our ability to maintain and/or obtain regulatory approvals or
successfully market our products. Our future results of operations will also
depend on continued market acceptance of our current products and the lack of
substitutes that are cheaper or more effective.
The testing, manufacturing, marketing and selling of pharmaceutical products
entails a risk of litigation and product liability. If, in the absence of
insurance, we do not have sufficient financial resources to satisfy a liability
resulting from such a claim or to fund the legal defense of such a claim, we
could become insolvent. Product liability insurance coverage is expensive,
difficult to obtain and may not be available in the future on acceptable terms.
Although we carry product liability insurance, this coverage may not be
adequate. In addition, we cannot be certain that insurance coverage for present
or future products will continue to be available.
If we cannot obtain the financing necessary to fund our expansion, we will not
be able to respond to changes in demand from our customers.
We anticipate that our existing capital resources, together with cash expected
from operations and available from bank borrowings, should be sufficient to
finance current and anticipated operations and working capital requirements for
the next twelve months. However, the acquisition and licensing of products, the
expansion of our sales force, and any expansion or relocation of our facilities
would require substantial capital resources. If adequate funds are not
available, we may be unable to pursue acquisitions, or be forced to curtail
in-licensing or research and development programs.
To satisfy our capital requirements, we may need to raise additional funds
through public and private financings, including equity financings. We may also
seek additional funding through corporate collaborations and other financing
arrangements. We do not know whether adequate funds will be available when
needed or on terms acceptable to us. Alternatively, we may need to obtain funds
through arrangements with future collaborative partners or others that may
require us to relinquish rights to some or all of our technologies or product
candidates. If we are successful in obtaining additional financing, the terms of
the financing may have the effect of diluting the value of ordinary shares and
ADS's.
A change in the value of the U.S. dollar could adversely affect our results.
Changes in exchange rates, particularly those between the U.S. dollar, British
pound and Canadian dollar will affect our results of operations. For the year
ended December 31, 2001, approximately 30% of our revenue was earned in
currencies other than U.S. dollars and approximately 50% of our expenses were in
currencies other than U.S. dollars.
29
Any decrease in the sales of ADDERALL XR or ADDERALL could significantly reduce
our revenues.
In 2001, sales of ADDERALL XR and ADDERALL were $350.3 million, representing
approximately 40% of our revenues. Any factors that decrease sales or reduce
production of ADDERALL XR or ADDERALL would significantly reduce our revenues
and earnings. These include:
o issues impacting the production of ADDERALL XR and ADDERALL or our
supply of amphetamine salts;
o development and marketing of competitive pharmaceuticals (including
generic versions of AdderalL - see details above under "Treatments for
central nervous system disorders");
o technological advances (including the introduction of competing
non-scheduled ADHD treatments);
o changes in reimbursement policies of third-party payers; government
action/intervention;
o marketing or pricing actions by our competitors;
o the occurrence of adverse reactions to AdderalL XR or ADDERALL;
o public opinion towards ADHD treatments;
o product liability claims; or
o changes in prescription writing practices.
Contracts, intellectual property patents and other agreements are used in all
areas of operation of the business. These may contain conditions that do not
protect our position or that we cannot comply with.
Contracts form the basis of agreement in many key activities such as mergers and
acquisitions, arrangements with suppliers and outsourcing, or product licensing
and marketing. These contracts may contain conditions that impose duties on the
parties involved or may fail to contain adequate conditions to protect our
position. We may be unable to meet these conditions or may be unable to enforce
other parties to comply. We may therefore suffer financial loss or penalty.
An important part of our business strategy is to protect our products and
technologies through the use of patents, proprietary technology and trademarks,
to the extent available. In addition, our success depends upon the ability of
our collaborators and licensors to protect their own intellectual property
rights. Patents and patent applications covering a number of the technologies
and processes owned or licensed to us have been granted or are pending in
various countries, including the U.S. We intend to enforce vigorously our patent
rights and believe that our collaborators intend to vigorously enforce patent
rights they have licensed to us. However, patent rights may not prevent other
entities from developing, using or commercializing products that are similar or
functionally equivalent to our products or technologies or processes for
formulating or manufacturing similar or functionally equivalent products. Our
patent rights may be successfully challenged in the future. We cannot assure you
that our patents and patent applications or those of our third party
manufacturers will provide valid patent protection sufficiently broad to protect
our products and technology and will not be challenged, revoked, invalidated,
infringed or circumvented by third parties. In the regular course of business,
we are party to litigation or other proceedings relating to intellectual
property rights.
Additionally, our products or the technologies or processes used to formulate or
manufacture those products may now or in the future infringe the patent rights
of third parties. It is also possible that third parties will obtain patent or
other proprietary rights that might be necessary or useful for the development,
manufacture or sale of our products. If third parties are the first to invent a
particular product or technology, it is possible that those parties will obtain
patent rights that will be sufficiently broad to prevent us or our strategic
collaborators from developing, manufacturing or selling our products. We may
need to obtain licenses for intellectual property rights from others to develop,
manufacture and market commercially viable products. We may not be able to
obtain these licenses on commercially reasonable terms, if at all. In addition,
any licensed patents or proprietary rights may not be valid and enforceable.
30
We also rely on trade secrets and other un-patented proprietary information,
which we generally seek to protect by confidentiality and nondisclosure
agreements with our employees, consultants, advisors and collaborators. These
agreements may not effectively prevent disclosure of confidential information
and may not provide us with an adequate remedy in the event of unauthorized
disclosure of such information. If our employees, scientific consultants or
collaborators develop inventions or processes that may be applicable to our
products under development, such inventions and processes will not necessarily
become our property, but may remain the property of those persons or their
employers. Protracted and costly litigation could be necessary to enforce and
determine the scope of our proprietary rights. Our failure to obtain or maintain
patent and trade secret protection, for any reason, could allow other companies
to make competing products and reduce the sales of our products.
We have filed applications to register various trademarks for use in connection
with pharmaceuticals and related laboratory services in the U.S. and intend to
trademark new product names as new pharmaceuticals and services are developed.
In addition, with respect to certain products, we rely on the trademarks of
third parties. These trademarks may not afford adequate protection, or we and
the third parties may not have the financial resources to enforce any rights
under any of these trademarks. Our inability or the inability of these third
parties to protect their trademarks because of successful third party claims to
those trademarks could allow others to use our trademarks and dilute their
value.
Throughout our business and particularly through the sale of our products, we
may become involved in litigation as a defendant. This may result in distraction
of senior management, significant defense costs and payment of compensation.
Item 3 provides a summary of significant legal proceedings in which we are
currently involved.
There has been substantial litigation in the pharmaceutical industry with
respect to the manufacture, use and sale of new products that are the subject of
conflicting patent rights. These lawsuits relate to the validity and
infringement of patents. The expense of defending lawsuits brought against us
could cause us not to defend these suits and abandon the products. In the past,
innovators of products which we are in the process of developing have filed
patent infringement lawsuits challenging notices of non-infringement submitted
as part of regulatory filings. These lawsuits may be brought by innovators
against us or our collaborative partners while we or our collaborative partners
pursue regulatory approvals for our products. The ultimate outcome of this type
of litigation, if brought, may not be favorable. Our own patents may be subject
to infringement by others. While we may pursue litigation in order to protect
these rights, we may not be successful in these lawsuits. We are also required
to certify to regulatory authorities, such as the FDA, when seeking approval of
some of our products that the product does not infringe upon third party rights.
A patent holder may challenge a notice of non-infringement or invalidity by
filing suit for patent infringement within 45 days of receiving notice. This
challenge, if made, would prevent regulatory approval in the U.S. until the suit
was resolved or until at least 30 months had elapsed.
Any loss of key personnel could cause us subsequent financial loss.
Our success is dependent on our ability to attract and retain highly qualified
management and scientific personnel. We face intense competition for personnel
from other companies, academic institutions, government entities and other
organizations. We may not be able to successfully attract and retain such
personnel. In general, we have agreements with some of our key scientific and
management personnel for periods of one year or less. The loss of such
personnel, or the inability to attract and retain the additional, highly skilled
employees required for our activities, could have an adverse effect on our
business.
31
ITEM 2: Properties
We occupied the following principal premises as at December 31, 2001:
Location Use Approximate Owned or Leased
Square Footage
Chineham, Hampshire, U.K. Office accommodation (Global 35,000 Owned
Headquarters)
Rockville, Maryland, USA Office accommodation, 44,500 Leased
laboratories and GCMP suite
(Shire Laboratories Inc.)
Rockville, Maryland, USA Office accommodation (Shire 16,500 Leased
Pharmaceuticals Development
Inc.)
Florence, Kentucky, USA Office accommodation and 32,000 Leased
warehousing (Shire US Inc.)
Valley Stream, New York, USA Schedule II manufacturing 9,700 Leased
facility and laboratories
Northborough, Massachusetts, Office accommodation, 61,500 Owned
USA laboratories and GCMP suite
(Shire Biologics Inc.)
Buffalo Grove, Illinois, USA US distribution facility 70,000 Owned
Laval, Quebec, Canada Office accommodation and 193,500 Owned
laboratories (Shire BioChem
Inc.)
Sainte Foy, Quebec, Canada Office accommodation, 118,000 Owned
manufacturing facility and
laboratories (Shire Biologics
Inc.)
Paris, France Office accommodation 1,500 Leased
Cologne, Germany Office accommodation 3,000 Leased
Madrid, Spain Office accommodation 2000 Leased
Florence, Italy Office accommodation 2000 Leased
32
We also have Representative Offices in Singapore and the Republic of Ireland and
have other smaller locations both in some of the countries listed above and in
several other countries around the world.
ITEM 3: Legal Proceedings
As of December 31, 2001 we had been named as a defendant in approximately 3,784
lawsuits, in both U.S. federal and state courts, which seek damages for, among
other things, personal injury arising from certain products supplied for the
treatment of obesity by us and several other pharmaceutical companies. As of
December 31, 2001, we had been dismissed from 3,619 cases and approximately 111
cases were pending dismissal. We are involved in other legal proceedings. See
Note 19b to the consolidated financial statements.
Throughout our business and particularly through the sale of our products, we
may become involved in litigation as a defendant. This may result in distraction
of senior management, significant defense costs and payment of compensation.
In addition, we are from time to time party to litigation or other legal
proceedings. Other than as discussed above, we are not a party to any litigation
or other legal proceedings that we believe could reasonably be expected to have
a material adverse effect on our financial condition or results of operations.
ITEM 4: Submission of matters to a vote of security holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
33
ITEM 4A: Executive Officers of the Registrant
Our directors and executive officers as of February 27, 2001 were as follows:
Name Age Position
Dr James Cavanaugh 64 Non-executive Chairman
Rolf Stahel 57 Chief Executive
Angus Russell 45 Group Finance Director
Dr Wilson Totten 46 Group Research and Development Director
Dr Barry Price 58 Senior Non-executive Director
Dr Bernard Canavan 66 Non-executive Director
Ronald Nordmann 60 Non-executive Director
Dr Francesco Bellini 54 Non-executive Director
The Hon. James Andrews Grant 64 Non-executive Director
Gerard Veilleux 59 Non-executive Director
The brief biographical details of the Directors are as follows:
Dr James Cavanaugh joined the Board on March 24, 1997 and was appointed as
Non-executive Chairman with effect from May 11, 1999. Dr Cavanaugh is the
President of HealthCare Ventures LLC and is also on the Board of 3-Dimensional
Pharmaceuticals Inc.. Formerly he was President of SmithKline & French
Laboratories, the U.S. pharmaceutical division of SmithKline Beecham
Corporation. Prior to that, he was President of SmithKline Beecham Corporation's
clinical laboratory business and, before that, President of Allergan
International. Prior to his industry experience, Dr Cavanaugh served as Deputy
Assistant to the President of the U.S. for Health Affairs on the White House
Staff in Washington, DC. He is a Non-executive Director of MedImmune Inc.,
Diversa Corporation and Versicor Inc.
Rolf Stahel joined Shire in March 1994 as Chief Executive from Wellcome plc
where he worked for 27 years in Switzerland, Italy, Thailand, Singapore and the
U.K. As Regional Director based in Singapore, Mr Stahel was responsible for 18
Pacific Rim countries. From April 1990 until February 1994, he served as
Director of Group Marketing reporting to the Chief Executive. A business studies
graduate of KSL Lucerne, Switzerland, he attended the 97th Advanced Managers
Program at Harvard Business School.
On March 15, 2001 Mr Stahel received the Chief Executive Officer of the Year
Award 2001 for the global pharmaceutical industry.
Angus Russell joined Shire on December 13, 1999 as Group Finance Director. Mr
Russell worked for ICI, Zeneca and AstraZeneca for a total of 19 years. His last
position was Vice President - Corporate Finance at AstraZeneca PLC, where he was
responsible for financial input into mergers and acquisitions activities,
management of tax, legal and finance structure, investor relations activities
and the management of various financial risks. Prior to this, he held a number
of positions within Zeneca Group PLC from 1993 until 1999, including Group
Treasurer, and before that in ICI from 1980 until 1992. Mr Russell is a
chartered
34
accountant, having qualified with Coopers & Lybrand and is a fellow of the
Association of Corporate Treasurers.
Dr Wilson Totten joined Shire in January 1998 as Group Research and Development
Director. Dr Totten is a medical doctor and has wide experience in the
pharmaceutical industry covering all phases of drug development. He has
substantial experience in the field of central nervous system disorders. His
last position was Vice President of Clinical Research and Development with Astra
Charnwood where he served from 1995 to 1997, having previously worked for Fisons
Pharmaceuticals from 1989 to 1995, and prior to that with 3M Health Care and Eli
Lilly. He is a Non-executive Director of Keryx Biopharmaceuticals Inc.
Dr Barry Price joined the Board on January 24, 1996 having spent 28 years with
Glaxo holding a succession of key executive positions with Glaxo Group Research.
He is Chairman of Antisoma plc and also Biowisdom Ltd. He is also on the board
of directors of Pharmgene plc. Dr Price is Chairman of the Remuneration
Committee.
Dr Bernard Canavan joined the Board as a Non-executive Director on March 11,
1999. Dr Canavan is a medical doctor. He was employed by American Home Products
for over 25 years until he retired in January 1994. He was president of that
corporation from 1990 to 1994, and prior to that was Chairman and Chief
Executive Officer of American Home Products, Pharmaceutical Division,
Wyeth-Ayerst Laboratories. Dr Canavan is a Director of Genaera Corporation. Dr
Canavan is Chairman of the Audit Committee.
Ronald Nordmann joined the Board on December 23, 1999 having previously served
as a Non-executive Director of Roberts Pharmaceutical Corporation since May 1999
and has been a financial analyst in healthcare securities since 1971. From
September 1994 to January 2000 he was an analyst and partner at Deerfield
Management. He has held senior positions with PaineWebber, Oppenheimer & Co., F.
Eberstadt & Co., and Warner-Chilcott Laboratories, a division of Warner-Lambert.
Mr Nordmann received his undergraduate degree from The Johns Hopkins University
and an M.B.A. from Fairleigh Dickinson University. Mr Nordmann is also a
Director of Guilford Pharmaceuticals Inc., Boron, LePore & Associates Inc. and
Pharmaceutical Resources, Inc.
Dr Francesco Bellini joined the Board on May 14, 2001 as a Non-executive
Director. Dr Bellini is Chairman of Picchio International Inc. and is also on
the board of several companies and organizations such as Molson Inc. and
Industrial-Alliance Life Insurance Co. Formerly, he was Chairman and Chief
Executive Officer of BioChem which he co-founded in 1986.
The Hon. James Andrews Grant joined the Board on May 14, 2001 as a Non-executive
Director. He was formerly a Director of BioChem since 1986, and is a partner
with the law firm of Stikeman Elliot in Montreal. Mr Grant sits on the boards of
two other Canadian corporations in addition to other foundations and councils
that are not for profit organizations. He attended McGill University receiving a
B.A. in arts in 1958 and a B.C.L in Law in 1961.
Gerard Veilleux joined the Board on May 14, 2001 as a Non-executive Director. He
was formerly a Director of BioChem since 1999. He is president of Power
Communications Inc. and Vice President of Power Corporation, a diversified
management and holding company. Mr Veilleux is a director of several public and
private companies as well as a member of the Board of Governors of McGill
University. He has a Masters degree in public administration from Carleton
University and a Batchelor of Commerce from Laval University.
35
PART II
ITEM 5: Market for the Registrant's Common Equity and Related Stockholder
Matters
Ordinary Shares
Our ordinary shares are traded on the London Stock Exchange ("LSE"). The
following table presents the per share closing mid-market quotation for our
ordinary shares as quoted in the Daily Official List of the LSE for the periods
indicated.
High Low
---- ---
(pound) per Ordinary Share (pound) per Ordinary Share
-------------------------- --------------------------
Year ended December 31, 2001
1st Quarter 13.39 8.65
2nd Quarter 12.94 10.01
3rd Quarter 13.19 8.50
4th Quarter 11.12 8.15
Year ended December 31, 2000
1st Quarter 14.28 5.98
2nd Quarter 12.40 7.37
3rd Quarter 13.69 11.35
4th Quarter 14.92 9.53
The total number of record holders of ordinary shares as of March 26, 2002 was
13,142 of which 91 were registered as U.S. holders.
American Depository Shares
American Depository Shares (each representing three ordinary shares) evidenced
by American Depository Receipts issued by Morgan Guaranty Trust Company of New
York, as depository, are quoted on the Nasdaq National Market. As of March 26,
2002, the proportion of ordinary shares represented by American Depository
Receipts was 23% of the ordinary shares outstanding.
The following table presents, for the quarters indicated, the high and low
market quotations for the ADSs quoted on the Nasdaq National Market.
High Low
$ per ADS $ per ADS
--------- ---------
Year ended December 31, 2001
1st Quarter 59.12 35.75
2nd Quarter 56.10 41.69
3rd Quarter 57.40 34.39
4th Quarter 48.78 34.37
Year ended December 31, 2000
1st Quarter 67.19 28.31
2nd Quarter 59.75 33.19
3rd Quarter 60.63 51.38
4th Quarter 65.00 42.06
36
The number of record holders of American Depository Shares in the U.S. as of
March 26, 2002 was 423. Since certain of the ADRs are held by broker nominees,
the number of record holders may not be representative of the number of
beneficial owners.
Dividend Policy
Historically, we have not paid any dividends. We do not anticipate paying any
dividends on ordinary shares, or indirectly on ADSs, in the foreseeable future.
As a matter of English law, we may pay dividends only out of our distributable
profits, which are accumulated realized profits under U.K. GAAP, so far as not
previously utilized by distribution or capitalization, less accumulated realized
losses, so far as not previously written off in a reduction or reorganization of
capital duly made. As of December 31, 2001, we had an accumulated deficit of
(pound)2.7 million (approximately $4.0 million). Future dividend policy will be
dependant upon our distributable profits, our financial condition, the terms of
any then existing debt facilities and other relevant factors existing at that
time.
37
ITEM 6: Selected Financial Data
We have restated our results for all periods presented below to combine the
results of BioChem, the merger with whom was accounted for as a pooling of
interests. The selected consolidated financial data should be read in
conjunction with "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with our consolidated financial
statements and related notes appearing elsewhere in this report.
Years ended December 31,
2001 2000 1999 1998 1997
$'000 $'000 $'000 $'000 $'000
------------- ------------- ------------- ------------- -------------
Income Statement Data:
Revenues 877,569 671,110 537,253 435,905 298,656
Operating expenses (779,498) (519,752) (573,907) (358,275) (334,317)
------------- ------------- ------------- ------------- -------------
Operating income/(loss) 98,071 151,358 (36,654) 77,630 (35,661)
Interest and other, net 16,152 108,033 23,064 14,092 10,704
------------- ------------- ------------- ------------- -------------
Income/(loss) before income taxes
and extraordinary items 114,223 259,391 (13,590) 91,722 (24,957)
Income taxes (72,860) (47,664) (21,663) (7,665) (3,080)
------------- ------------- ------------- ------------- -------------
Income/(loss) from continuing
operations and before extraordinary
items 41,363 211,727 (35,253) 84,057 (28,037)
Extraordinary items (2,604) - - - -
Loss from discontinued operations,
net of tax - - (12,179) (2,017) (366)
------------- ------------- ------------- ------------- -------------
Net income/(loss) 38,759 211,727 (47,432) 82,040 (28,403)
------------- ------------- ------------- ------------- -------------
Income/(loss) from continuing
operations per share - basic 8.4c 43.8c (7.3)c 17.5c (6.5)c
Income/(loss) from continuing
operations per share - diluted 8.2c 42.8c (7.3)c 17.0c (6.5)c
Net income/(loss) per share - basic 7.9c 43.8c (9.8)c 17.1c (6.6)c
Net income/(loss) per share -
diluted 7.7c 42.8c (9.8)c 16.6c (6.6)c
Weighted average number of shares
outstanding - basic 492,594,226 482,890,070 484,358,876 480,827,784 431,276,428
Weighted average number of shares
outstanding - diluted 504,875,587 494,691,805 484,358,876 494,149,715 431,276,428
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
Current assets 1,140,555 695,853 520,023 445,972 495,360
38
Non-current assets 770,176 852,642 831,768 764,181 626,413
Current liabilities 231,616 227,850 233,818 99,770 141,196
Non-current liabilities 416,126 146,259 238,087 137,151 59,834
Minority interests - - - - 9,011
Shareholders' equity 1,262,989 1,174,386 879,886 973,232 911,732
------------- ------------- ------------- ------------- -------------
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
We have restated our results for all periods discussed below to combine the
results of BioChem, the merger with whom was accounted for as a pooling of
interests.
The following discussion should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report.
Results of Operations
Years Ended December 31, 2001 and 2000
Overview
For the year ended December 31, 2001, total revenue increased by 31% to $877.6
million, compared to $671.1 million in fiscal 2000. This increase was primarily
the result of an increase in product sales. Product sales in the U.S.
represented a significant percentage of our worldwide sales, increasing to 85%
in 2001 from 80% in 2000. Net income for the year ended December 31, 2001 was
$38.8 million as compared to $211.7 million in 2000.
Following our merger with BioChem, the current year results include $177.0
million of other charges comprising asset impairment and restructuring costs
($85.4 million), merger related transaction expenses ($83.5 million) and a loss
from the sale of our manufacturing facility in Toronto, Canada ($8.1 million).
Net income in the year ended December 31, 2000 included exceptional income of
$104.0 million related primarily to a gain recognized on the disposal of our
non-strategic long-term investment in North American Vaccine, Inc. (NAVA).
Total revenues
The following table provides an analysis of our total revenues:
2001 Change 2000
$m % $m
------------ ------------ ------------
Product sales 724.0 + 39.2% 520.2
Licensing and development 5.5 - 61.1% 14.1
Royalties 145.2 + 7.1% 135.5
Other 2.9 + 133.9% 1.3
------------ ------------ ------------
Total 877.6 + 30.8% 671.1
------------ ------------ ------------
Product sales
39
For the year ended December 31, 2001, our total product sales increased by 39%
to $724.0 million, compared to $520.2 million in the prior year.
The following table presents our net product sales by operating segment:
2001 Change 2000
$m % $m
------------ ------------ ------------
U.S. 612.1 + 47.6% 414.6
International 111.9 + 6.0% 105.6
------------ ------------ ------------
Total product sales 724.0 + 39.2% 520.2
------------ ------------ ------------
We launched a new improved, patent protected, once daily formulation of
ADDERALL, called ADDERALL XR in the U.S. on November 5, 2001, in order to
further strengthen the ADDERALL franchise by responding to market demand.
ADDERALL XR on February 21, just 16 weeks from launch date, had already achieved
a 14% share of the US ADHD prescription market. ADDERALL XR has beaten all
previous records for launching a new product in this therapeutic area. At
February 21, the total ADDERALL franchise achieved 37% market share, an increase
of 5% points since the launch of ADDERALL XR.
For the year ended December 31, 2001, sales of ADDERALL were $317.7 million,
representing 48% growth over the prior year. ADDERALL XR, in the period from
launch date to December 31, 2001, achieved sales of $32.6 million including $11
million of launch stock. On a combined basis, these products achieved a 34.4%
share of the prescription market for ADHD in the US in December 2001 (December
2000: 33.0%).
Sales of AGRYLIN, the only U.S. product licensed for the treatment of
thrombocythemia, grew by 48% to $85.5 million (2000: $57.7 million). We achieved
24.4% of the total U.S. AGRYLIN, Hydrea and generic hydroxyurea prescription
market in December 2001, compared to 18.8% in December 2000.
Sales of PENTASA, for the treatment of ulcerative colitis, were up 39% at $75.5
million (2000: $54.2 million), due in part to price increases and also the
renegotiation of our contracts with Managed Care during the past twelve months.
Underlying prescriptions grew by 9% for the year 2001. PENTASA had a scrip share
of 18.6% of the U.S. oral mesalamine/olsalazine market in December 2001,
compared with 18.0% in December 2000.
Sales of PROAMATINE, for the treatment of postural hypotension, were $38.0
million, 60% higher than 2000 sales of $23.7 million, due in part to price
increases and also the renegotiation of our contracts with Managed Care during
the past twelve months. Underlying prescriptions grew by 18% during the year
ended December 31, 2001. The U.S. prescription market for PROAMATINE and
Florinef presciptions indicates that PROAMATINE had a 23.6% share for the month
of December 2001, an increase from 21.7% in December 2000.
CARBATROL, containing carbamazepine for the treatment of epilepsy, recorded
sales of $36.8 million in 2001, an increase of 44% over prior year sales of
$25.6 million. CARBATROL achieved 35.5% of the U.S. extended release
carbamazepine prescription market in December 2001, compared with 30.9% in
December 2000.
Licensing and development
40
As expected, following the launch by Janssen of REMINYL, our Alzheimer's drug,
re-imbursement of associated research and development costs by Janssen has now
come to an end. Consequently, our licensing and development income decreased by
61% to $5.5 million (2000: $14.1 million).
Royalties
Royalty revenue increased 7% to $145.2 million in 2001 compared to $135.5
million in 2000.
We receive royalties from GSK on the worldwide sales of 3TC and ZEFFIX, with the
exception of Canada, where a partnership has been established with GSK.
In 2001, worldwide sales of 3TC amounted to $902.0 million, an increase of 4%
compared to sales of $863.5 million in 2000. These amounts include the 3TC sales
portion in COMBIVIR, a product that combines in a single tablet two
antiretroviral drugs, AZT and 3TC. 3TC sales also included the 3TC portion in
TRIZIVIR, a product that combines in a single tablet three antiretroviral drugs,
AZT, 3TC and Ziaglen.
Sales of ZEFFIX, our discovery for the treatment of chronic hepatitis B,
contributed to the increase in royalty revenue in 2001. Sales of ZEFFIX totaled
$149.0 million in 2001 compared to $106.9 million in 2000, an increase of 39%.
More than 80% of ZEFFIX sales were in the Asia Pacific region for both periods.
Cost of revenues
For the year ended December 31, 2001 cost of revenues amounted to 16% of product
sales as compared to 19% in 2000. The higher margin products, ADDERALL XR,
ADDERALL, PENTASA and AGRYLIN represented a higher proportion of total sales in
2001 (71%) compared to the prior year (63% of total sales). Improved pricing in
respect of our ADHD franchise has also benefited the gross margin.
Research and development
Research and development expenditure increased to $171.0 million in 2001 from
$155.1 million in 2000, representing an increase of 10%. Included within
research and development in 2001 is a warrant compensation charge of $4.5
million (2000: $nil). Excluding the effect of this warrant compensation charge,
research and development expenditure increased by 7% and as a proportion of
total revenues represented 19% (2000:23%).
Selling, general and administrative
Selling, general and administrative expenses increased from $236.3 million to
$311.1 million, an increase of 32%.
Excluding the effects of stock option compensation charges of $2.3 million
(2000: $21.9 million), selling, general and administrative costs increased by
44% to $308.8 million (2000: $214.4 million). As a percentage of product sales,
selling, general and administrative expenses (excluding stock option
compensation charges) were 43% (2000: 41%). The increase is in part due to the
high level of promotional spend associated with the ADDERALL XR launch.
A significant component of selling, general and administrative expenses are
depreciation and amortization charges, which increased from $38.0 million in
2000 to $45.8 million in 2001 This increase is partly attributable to the
purchase of several new products in Europe during 2001.
Other charges
41
(a) BioChem merger
In May 2001, we completed our merger with BioChem. As a result of the merger, we
recorded pre tax charges in the second quarter of 2001 totalling $177.0 million.
The $177.0 million is included within the Consolidated Statements of Operations
under the following captions:
42
$m
------------
Asset impairments and restructuring charges 85.4
Merger transaction expenses 83.5
Loss on disposition of assets 8.1
------------
Total 177.0
------------
The $8.1 million loss on disposition of assets results from the sale of our
duplicate manufacturing facility in Toronto, Canada.
The restructuring costs included an impairment charge of $20.9 million to adjust
intangible asset values, primarily trademark and patent costs but also an
element of product rights, to their estimated fair value. These charges are
consistent with our accounting policy to review periodically the carrying value
of intangible assets and evaluate whether there has been any impairment in the
carrying value of those intangibles as compared with estimated undiscounted
future cash flows relating to those intangibles. Other asset impairment charges
included the write down of long-term unquoted investments ($24.9 million) and a
write down of $30.8 million to a debenture held by BioChem, which was received
on divestiture of its diagnostics subsidiary. These charges are consistent with
our policy to provide for other than temporary impairments in investments by
reference to the fair value of the investment using established financial
methodologies and assessment of qualitative factors. There was also a total of
$8.8 million recorded in respect of employee related costs.
The employee terminations related to the closure of the Toronto facility and the
elimination of duplicate positions across the combined organization. Our
existing Canadian based sales and marketing operations in Toronto have been
combined with those of BioChem in Laval. We identified a total of 57 employees
to be terminated. As of December 31, 2001 all of the planned terminations were
complete.
(b) Product disposals
During the third quarter of 2001, we disposed of certain non strategic products
for net proceeds of approximately $4.5 million. A loss on disposition of $2.0
million was recorded.
Interest income and expense
In the year ended December 31, 2001, we received interest income of $19.7
million compared with $19.2 million in 2000. Interest expense decreased from
$16.4 million in 2000 to $8.3 million in 2001. This decrease reflects our
improved debt profile. We repaid an $80.0 million promissory note and our $125
million CSFB (previously DLJ Capital Funding Inc.) term loan in full in January
and May of 2001 respectively. The interest expense in respect of the $400
million convertible notes, which we issued in August 2001, accrues at a
comparatively lower fixed rate of 2%.
Other income, net
Other income for the year ended December 31, 2001 was $4.8 million (2000: $105.2
million). Included within other income in 2001 is $2.0 million representing our
50% share of the profits from our commercialization partnership with GSK, which
has been accounted for using the equity method.
43
Also included in other income for the year ended December 31, 2001 is $4.3
million in respect of income we receive from investments we have made in certain
venture capital funds. In March 1997, we agreed to make an investment of
CAN$30.0 million in GeneChem Technologies Venture Fund L.P., a venture capital
fund sponsored by our subsidiary, GeneChem Financial Corporation. This CAN$100.0
million fund invests in advanced academic research projects and early stage
private or public companies in the area of genomics and related technologies for
human application. Our partners in this fund are a select group of financial
investors. As of December 31, 2001, we had invested CAN$22.0 million in GeneChem
Technologies Venture Fund L.P. In September 2000, we entered into an agreement
to invest CAN$15.0 million in GeneChem Therapeutics Venture Fund L.P., which
invests in genomics companies focusing on cancer and infectious diseases. As of
December 31, 2001, we had invested CAN$5.3 million in GeneChem Therapeutics
Venture Fund L.P. The manager and general partners of these funds are fully
owned subsidiaries of our Group.
Included within other income in the prior year is a $104.0 million gain
resulting from the sale of long-term investments, primarily related to NAVA, a
publicly traded biotechnology company listed on the American Stock Exchange.
Income taxes
For the year ended December 31, 2001 income taxes increased $25.2 million to
$72.9 million from $47.7 million for the year ended December 31, 2000. Our
effective tax rate before the stock compensation charge and exceptional items
was 25% for the year ended December 31, 2001 (2000: 23%). We recorded net
deferred tax assets of $32.3 million. Realization is dependent upon generating
sufficient taxable income to utilize such assets. Although realization of these
assets is not assured, we believe it is more likely than not that the deferred
tax assets will be realized. See Note 25 to the consolidated financial
statements for expiry dates of these tax losses.
Years Ended December 31, 2000 and 1999
Overview
For the year ended December 31, 2000, our total revenues increased by 25% to
$671.1 million, compared to $537.3 million in fiscal 1999. This increase was
primarily the result of an increase in product sales. Product sales in the U.S.
represented a significant percentage of our worldwide sales, increasing to 80%
in 2000 from 78% in 1999. Net income for the year ended December 31, 2000 was
$211.7 million as compared to a net loss in 1999 of $47.4 million. Net income in
the year ended December 31, 2000 included exceptional income of $93.0 million
related primarily to a gain recognized on the disposal of our non-strategic
long-term investment in NAVA. The prior year results included $97.1 million in
respect of merger transaction expenses, following our merger with Roberts.
Total revenues
The following table provides an analysis of our total revenues:
2000 Change 1999
$m % $m
------------ ------------ ------------
Product sales 520.2 + 29.7% 401.0
Licensing and development 14.1 - 3.0% 14.6
Royalties 135.5 + 13.2% 119.7
Other 1.3 - 36.7% 2.0
------------ ------------ ------------
44
Total 671.1 + 24.9% 537.3
------------ ------------ ------------
Product sales
For the year ended December 31, 2000, our total product sales increased by 30%
to $520.2 million, compared to $401.0 million in the prior year.
The following table presents our net product sales by operating segment:
2000 Change 1999
$m % $m
------------ ------------ ------------
U.S. 414.6 + 32.2% 313.6
International 105.6 + 20.9% 87.4
------------ ------------ ------------
Total product sales 520.2 + 29.7% 401.0
------------ ------------ ------------
Of our total product sales for the year ended December 31, 2000, 41% related to
ADDERALL (1999: 35%). Sales of ADDERALL were $213.9 million, representing growth
of 51% over 1999 sales of $142.0 million. ADDERALL increased its share of the
total U.S. ADHD prescriptions written from 27.4% in December 1999 to 33.0% in
December 2000.
Sales of AGRYLIN, the only U.S. product licensed for the treatment of essential
thrombocythemia, grew by 77% to $57.7 million (1999: $32.6 million). We achieved
a prescription share of 19.1% of the total U.S. AGRYLIN market, including Hydrea
and generic hydroxyurea compared to 13.2% in December 1999.
Sales of PENTASA, licensed for the treatment of ulcerative colitis, at $54.2
million, were 4% higher than the prior year (1999:$51.8 million). PENTASA had a
18.0% share of the U.S. oral mesalamine/olsalazine market in December 2000,
compared with 17.8% in December 1999.
Sales of CARBATROL, one of the most widely used first line treatments for
epilepsy, recorded sales growth of 60% to 25.6 million (1999: $16.0 million). In
December 2000, CARBATROL gained 31.2% of the extended release carbamazepine
market, compared with 22.9% in December 1999.
Licensing and development
Licensing and development income for the year ended December 31, 2000 was $14.1
million, slightly below the 1999 income of $14.6 million. The main source of
these revenues was our co-development agreement with J&J.
Royalties
Royalty revenue increased 13% to $135.5 million in 2000 compared to $119.7
million in 1999. These increases were due to growing sales of ZEFFIX and a more
favorable geographic sales mix for 3TC, on which we receive royalties from GSK.
In 2000, worldwide sales of 3TC amounted to $863.5 million, a decrease of 1%
compared to sales of $873.1 million in 1999. These amounts include the 3TC sales
portion in COMBIVIR, a product that combines in a single tablet two
antiretroviral drugs, AZT and 3TC. In 2000,
45
3TC sales also included the 3TC portion in TRIZIVIR, a product that combines in
a single tablet three antiretroviral drugs, AZT, 3TC and Ziaglen. The decrease
in 2000 was attributable to exchange losses resulting form the decline of the
British pound and the Euro currencies against the U.S. dollar and to significant
orders placed in Brazil in 1999 that did not recur in 2000. The financial impact
on royalties received as a result of this decline in Brazilian sales is minimal
due to the lower royalty rates paid on these sales.
Sales of ZEFFIX, our discovery for the treatment of chronic hepatitis B, also
contributed to the increase in royalty revenue in 2000. Sales of ZEFFIX totaled
$106.9 million in 2000 compared to $24.2 million in 1999. More than 80% of
ZEFFIX sales were in the Asia Pacific region for both periods. The first sales
of ZEFFIX were made in December 1998 for a total of $2.9 million and were
primarily in the U.S.
Cost of revenues
For the year ended December 31, 2000 cost of revenues amounted to 19% of product
sales as compared to 26% in 1999. Overall, the higher margin products such as
ADDERALL, PENTASA and AGRYLIN have continued to grow at a faster rate than the
lower margin products. These three products contributed $325.9 million of sales
in the year ended December 31, 2000 compared to $226.4 million in 1999,
representing 63% of total product sales in the year ended December 31, 2000
compared to 56% in 1999.
Research and development
Research and development expenditure increased from $141.1 million in 1999 to
$155.1 million in 2000, representing an increase of 10%. This increase reflects
the significant portion of development projects at Phase II or later where
development costs are higher. In 2000, research and development expenditure as a
proportion of total revenues was 23% (1999: 26%).
Selling, general and administrative
Selling, general and administrative expenses increased from $194.5 million to
$236.3 million, an increase of 21%.
Excluding the effects of a stock option compensation charge of $21.9 million
(1999: $11.9 million), selling, general and administrative costs increased by
17% to $214.3 million (1999: $182.6 million).
A significant component of selling, general and administrative expenses are
depreciation and amortization charges, which increased from $34.2 million in
1999 to $38.0 million in 2000.
As a percentage of product sales, selling, general and administrative expenses
(excluding the effects of stock option compensation, depreciation and
amortization charges) fell from 37% in 1999 to 34% in 2000. For the year ended
December 31, 2000, increases in sales and marketing expenses in the U.S.,
including the recruitment of new sales representatives in the fourth quarter,
have been reduced by merger cost savings and a one off settlement of a
development agreement contract dispute.
Other charges
(a) In process research and development
As a result of the acquisition of CliniChem Development Inc., we incurred a
charge of $27.0 million in the year ended December 31, 2000, representing the
acquisition of in process research and development.
(b) Roberts merger
46
In 1999 we recorded charges totaling $135.3 million pre-tax following our merger
with Roberts. The charges comprised asset impairments and restructuring charges
of $97.1 million, $32.3 million in respect of merger transaction expenses and a
loss on product dispositions of $5.9 million. These charges are disclosed
separately within operating expenses in the Consolidated Statements of Income.
The total asset impairments and restructuring charges comprised asset
impairments totaling $48.5 million as detailed below, a restructuring charge of
$43.6 million and other charges of $5.0 million.
We recorded an impairment charge of $34.2 million to adjust intangible asset
values, primarily product rights, to their estimated fair value. These charges
are consistent with our accounting policy to review periodically the carrying
value of the intangibles and evaluate whether there has been any impairment in
the carrying value of those intangibles. The estimated fair value has been
calculated using projected discounted cash flows of the products.
Other asset impairments included the write off of inventory held for research
and development work and duplicate equipment ($3.2 million), adjustments to the
carrying value of the RiboGene investment to market value at the year end ($ 7.6
million), and the write down of receivables to their estimated realizable value
($3.5 million).
The components of the restructuring charge were as follows:
$m
Employee termination costs 37.9
Property 5.7
------------
43.6
------------
In December 1999, we made the decision to close the Roberts' office facility in
Eatontown, New Jersey and to consolidate the sales and marketing operations into
our existing facility in Florence, Kentucky and to transfer the research and
development activities to our facility in Rockville, Washington. Similarly,
Roberts' sales and marketing operations in the U.K. were combined with our
established operation in Andover, Hampshire, which have since been transferred
to our new facility in Basingstoke, Hampshire. The office facility in Eatontown
was closed as of April 28, 2000 while the U.K. duplicate facility was closed on
March 10, 2000. We completed the sale of the Eatontown facility during the third
quarter of 2000.
As a result of the restructuring and elimination of duplicate facilities, we
identified a number of sales and marketing, research and development and
administrative positions to be terminated. These employees were notified of
their termination prior to December 31, 1999. The employee termination costs
consisted of payments for severance, medical and other benefits, outplacement
counseling, acceleration of pension benefits and excise taxes. We completed the
restructuring program during the fourth quarter of 2000, and the restructuring
reserve of $43.6 million was fully utilized by December 31, 2000. Merger cost
savings exceeded the our initial target of $20 million for the year ended
December 31, 2000.
Interest income and expense
In the year ended December 31, 2000, we received interest income of $19.2
million compared with $16.0 million in 1999. This increase reflects the average
cash balances held during the year. Interest expense increased from $11.6
million in 1999 to $16.4 million in 2000, reflecting an increase in underlying
rates of interest of approximately 1% and a full year's interest charge on the
convertible loan notes issued in connection with the Arenol buy back.
47
Other income, net
Other income for the year ended December 31, 2000 was $105.2 million (1999:
$18.8 million). Included within other income in the year ended December 31, 2000
is a $104.0 million gain arising the sale of long-term investments, primarily
related to NAVA.
As discussed above, we also receive income from investments we have made in
certain venture capital funds. As of December 31, 2000, we had invested CAN$21.0
million in GeneChem Technologies Venture Fund L.P. In September 2000, we entered
into an agreement to invest CAN$15.0 million in GeneChem Therapeutics Venture
Fund L.P.
Income taxes
For the year ended December 31, 2000, income taxes increased by $26.0 million
from $21.7 million to $47.7 million. Our effective tax rate in 2000 (before
stock option compensation charge, gains on disposal of assets and loss from
discontinued operations) was 23% (1999: 16% before stock option compensation
charge, gains on disposal of assets and loss from discontinued operations). We
have recorded net deferred tax assets of approximately $33.5 million (1999:
$37.3 million). Realization is dependent upon generating sufficient taxable
income to utilize such assets. Although realization of these tax assets is not
assured, we believe it is more likely than not that the deferred tax assets will
be realized.
Liquidity and Capital Resources
We have financed our operations since inception through private and public
offerings of equity securities, the issuance of loan notes and convertible loan
notes, collaborative licensing and development fees, product sales and
investment income.
Our funding requirements depend on a number of factors, including our product
development programs, business and product acquisitions, the level of resources
required for the expansion of marketing capabilities as the product base
expands, increased investment in accounts receivable and inventory which may
arise as sales levels increase, competitive and technological developments, the
timing and cost of obtaining required regulatory approvals for new products, and
the continuing revenues generated from sales of our key products.
As of December 31, 2001 we had cash, cash equivalents, marketable securities and
other current asset investments of $842.0 million (December 31, 2000: $463.7
million). Marketable securities and other current asset investments consisted of
immediately available money market fund balances and investment grade
securities. See Note 5 to the consolidated financial statements for further
details of these items.
Our critical accounting policies address the recoverability of intangibles and
fixed asset investments. Estimates and assumptions are primarily made in
relation to provisions for product returns, litigation and sales deductions.
More detailed discussion is included in the consolidated financial statements.
Debt
In August 2001, Shire Finance Limited, a wholly owned subsidiary, issued $400
million in guaranteed convertible notes due 2011, which we guaranteed, with an
interest rate of 2%. We incurred issuance costs of approximately $9 million in
respect of these convertible notes.
In 1998, we acquired the product rights to PENTASA. The majority of the purchase
price was financed through a credit agreement between Roberts, CSFB, and various
other lenders. Under this credit agreement, our merger with Roberts constituted
a change of control that triggered the acceleration of the
48
repayment of the principal amounts outstanding. On November 19, 1999, we entered
into an agreement with CSFB to replace the existing credit agreement with a $250
million credit facility consisting of a $125 million five-year revolving credit
facility and a $125 million five-year term loan facility. In connection with the
credit facility, we were subject to certain affirmative and negative covenants
and maintenance tests that required us to maintain a net minimum worth, a
specified leverage ratio and a specific coverage ratio. At December 31, 2000 we
satisfied the aforementioned covenants and maintenance tests. We repaid in full
our $125 million term loan during the year ended December 31, 2001, terminated
the $125 million revolving credit facility, and wrote off the associated
deferred financing costs of $2.6m which has been disclosed as an extraordinary
item on the consolidated statement of operations. All obligations under the
facility, which was jointly and severally guaranteed by the Company and its
subsidiaries and secured by all material property owned by the Company and its
subsidiaries and the capital stock of the subsidiaries, have been released.
Capital expenditure
Capital expenditure on property, plant and equipment in the year ended December
31, 2001 was $13.6 million. This expenditure included $1.7 million of equipment
related to our new head office facility occupied from March 2001.
In the year ended December 31, 2000 capital expenditure on property, plant and
equipment was $44.2 million. This included the purchase of research and
development equipment, and investment in computer equipment across all
operational areas.
Product acquisitions
For the year ended December 31, 2001 expenditure on new products was $36.3
million. During the first quarter of 2001, we purchased two new products,
Monocid and Indurgan, which are marketed by our Italian and Spanish operations
respectively. The purchase price was approximately $18.4 million.
In October 2001, we acquired the exclusive pan-European rights to market Adept
for (pound)5.0 million (approximately $7.3 million), a new therapy containing
icodextrin, which reduces scarring following abdominal and pelvic surgery. Adept
was developed by ML Laboratories plc, which retains all rights to Adept for the
rest of the world.
For the year ended December 31, 2000, capital expenditure on new products was
$38.4 million. This included the acquisition of certain European and Nordic
rights to COLAZIDE, a treatment for ulcerative colitis, from Salix
Pharmaceuticals Ltd. In May 2000, we paid a total of approximately $15.9 million
under the agreement, which included $2.5 million by way of the issue of 160,546
ordinary shares. In November 2000, we acquired extended distribution and other
ancilliary rights for PROAMATINE from Nycomed for approximately $21.0 million,
including the ending of royalty obligations to Nycomed, which enhanced the gross
margins of this product.
Business combinations and divestitures
Our merger with BioChem on May 11, 2001 was achieved through a tax-free exchange
of shares. This transaction was accounted for as a pooling of interests. We
exchanged 0.7586 ADSs for each common share of BioChem. Merger related costs,
which totaled $177.0 million, are discussed above.
Other commitments
49
Information regarding other commitments is disclosed in Note 19 to the
consolidated financial statements.
Foreign currency fluctuations
Our Group's parent company and a number of subsidiary operations are located
outside the U.S. As such, the consolidated financial results are subject to
fluctuations in exchange rates, particularly those between the U.S. dollar,
British pound and Canadian dollar. The accumulated foreign currency translation
differences are reported within accumulated other comprehensive income.
Concentration of credit risk
Financial instruments that potentially expose us to concentrations of credit
risk consist primarily of short-term cash investments and trade accounts
receivable.
As our revenues are mainly derived from agreements with major pharmaceutical
companies and relationships with pharmaceutical wholesale distributors and
retail pharmacy chains, and such clients typically have significant cash
resources, any credit risk associated with these transactions is considered
minimal. We operate credit evaluation procedures.
Excess cash is invested in short-term money market instruments, including bank
and building society term deposits and commercial paper from a variety of
companies with strong credit ratings. These investments typically bear minimal
risk.
Inflation
Although at reduced levels in recent years, inflation continues to apply upward
pressure on the cost of goods and services which we use in our business.
However, we believe that the net effect of inflation on the our operations has
been minimal during the past three years.
Euro Conversion
On January 1, 1999, the European Economic and Monetary Union (EMU) introduced
the Euro as the official currency of the 11 participating member countries. On
that date, the currency exchange rates of the participating countries were fixed
against the Euro. There was a three year transition to the Euro, and at the end
of 2001 the currency came into circulation while national currencies will be
withdrawn by July 2002.
The U.K. did not participate in the EMU at the commencement of the third stage
on January 1, 1999 and it is uncertain whether or on what terms the U.K. would
be permitted to join at a later date. There can be no prediction as to whether
the U.K. will participate in the EMU or as to the rate at which the pound
sterling would be converted into the Euro. Furthermore, there can be no
prediction as to the likely impact on the U.S. dollar/sterling exchange rate of
a decision by the U.K. to participate in the EMU.
It is anticipated that the pricing of goods and services will be more
transparent through the use of a single currency within the participating member
states. Competition is likely to increase with the greater price transparency
and removal of exchange rate risk. In the longer term more general price
convergence is likely, assuming the EMU leads to greater harmonization of
healthcare policies across the participating member states.
We have sales and marketing operations in the Republic of Ireland, France,
Germany, Spain and Italy and therefore there may be some impact on our business
and competitive position as a result of the increased price transparency.
We have reviewed our financial and operating systems and we are satisfied that
the introduction of the Euro has not caused any disruption to our business, and
that we have systems in place to receive and make
50
payments in Euros. We will continue to monitor the U.K.'s stance in relation to
participation in the Euro and assess the impact of any significant changes in
policy.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. Had the BioChem transaction been initiated after this date, it would
have been required to be accounted for under the purchase method rather than the
pooling of interests method. SFAS No. 141 requires intangible assets to be
recognized if they arise from contractual or legal rights or are "separable",
i.e., it is feasible that they may be sold, transferred, licensed, rented,
exchanged or pledged. As a result, it is likely that more intangibles will be
recognized under SFAS No. 141 than its predecessor, APB Opinion No. 16, although
in some instances previously recognized intangibles will be subsumed into
goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
although goodwill on business combinations consummated after July 1, 2001 will
not be amortized. On adoption the Company may need to record a cumulative effect
adjustment to reflect the impairment of previously recognized intangible assets.
In addition, goodwill recognized on prior business combinations will cease to be
amortized. Had the Company adopted SFAS No. 142 at January 1, 2001 the Company
would not have recorded a goodwill amortization charge of $10.8 million for the
year ended December 31, 2001. The Company has not determined the impact that
these Statements will have on intangible assets or whether a cumulative effect
adjustment will be required upon adoption.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability for asset
retirement obligations be recognized in the period in which it is incurred if a
reasonable estimate of the fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the related
long-lived asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company does not believe the
adoption of this Statement would have a material impact on its results of
operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale consistent with the
fundamental provisions of SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". While it
supersedes APB Opinion No. 30 "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" it retains the presentation
of discontinued operations but broadens that presentation to include a component
of an entity (rather than a segment of a business). However, discontinued
operations are no longer recorded at net realizable value and future operating
losses are no longer recognized before they occur. Under SFAS No. 144 there is
no longer a requirement to allocate goodwill to long-lived assets to be tested
for impairment. It also establishes a probability weighted cash flow estimation
approach to deal with situations in which there are a range of cash flows that
may be generated by the asset being tested for impairment. SFAS No. 144 also
establishes criteria for determining when an asset should be treated as held for
sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years, with early application encouraged.
The provisions of the Statement are generally to be applied prospectively. The
Company is currently assessing whether the adoption of SFAS No. 144 will have
any impact on its results of operations or financial position.
51
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
Our principal treasury operations are managed by our treasury function based in
the U.K. in accordance with our treasury policies and procedures which are
approved by our Board. As a matter of policy, we do not undertake speculative
transactions which would increase our currency or interest rate exposure.
We are subject to market risk exposure in the following areas:
o Interest rate market risk
We have cash and cash equivalents on which interest is earned at variable rates.
Since December 31, 2000 we have repaid in full a long-term loan outstanding to
CSFB and amounts due to GSK under a promissory note. Thus, as at December 31,
2001 our exposure to variable interest rate market risk on debts outstanding
compared to the position at December 31, 2000 is much reduced.
On August 15, 2001 Shire Finance Limited (the issuer), a wholly owned
subsidiary, placed an offering of $350 million principal amount of Guaranteed
Convertible Notes due 2011 with international institutional investors at an
issue price of 100%. In connection with the issue, the initial purchasers
exercised in full the option to subscribe or procure subscribers for an
additional $50 million principal amount of notes. The total principal amount of
the issue was therefore $400 million.
These Notes are guaranteed by Shire Pharmaceuticals Group plc and are
convertible into redeemable preference shares of the issuer which upon issuance
will be immediately exchanged for either our (i) ordinary shares or (ii)
American Depository Shares (ADS's), or at the Issuer's option, cash. The Notes
bear interest of 2% per annum, paid semi-annually. This interest rate is fixed
over the period of the debt reducing any risk associated with movements in
interest rates. The effective initial exchange price was $20.154 per ordinary
share and $60.4625 per ADS. This exchange price represented a premium of 25%
over the closing price of our ADS's on August 14, 2001.
The interest rate risk that has been mitigated by obtaining a fixed rate debt is
equivalent to a $4.0 million saving per 1% rise in interest rates per annum.
Conversely a fall in interest rates by 1% will effectively cost the company $4.0
million.
Investors have the right to require the Issuer to redeem the notes at par on
August 21, 2004, 2006 or 2008. Subject to certain conditions, the Notes will be
callable after August 21, 2004.
We have short term and long-term debt liabilities denominated in foreign
currencies. As at December 31, 2001, a total of $5.4 million was outstanding
(December 31, 2000: $6.0 million). The underlying currency was Canadian dollars.
o Foreign exchange market risk
Our Group's parent company and a number of subsidiary operations are located
outside the U.S. As such, the consolidated financial results are subject to
fluctuations in exchange rates, particularly between the British pound and
Canadian dollar against the U.S. dollar. The financial statements of foreign
entities are translated using the accounting policies described in Note 1 to the
consolidated financial statements. The exposure to foreign exchange market risk
is managed and monitored by our treasury function, using forecasts provided by
the operating units.
There have been no significant changes to our exposure to market risks during
the year ended December 31, 2001.
52
General economic market risk
The terrorist attacks of September 11, 2001 resulted in interruption to the
business activities of many entities, business losses and overall disruption of
the U.S. economy at many levels. The magnitude and far reaching global impact of
the events of September 11 are unprecedented in terms of the wide array of
losses incurred and the number of businesses impacted.
We have experienced no quantifiable losses, damage to property or loss of life
as a direct result of September 11. However, consequential increases to
operational costs such as insurance premiums, international air travel and
incremental supplier costs would impact future profitability levels. We do not
believe that any additional market risk specific to our operations has resulted
from the recent acts of terrorism.
53
ITEM 8: Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data called for by this
item are submitted as a separate section of this report.
ITEM 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
54
PART III
ITEM 10: Directors and Executive Officers of the Registrant
Certain information relating to our executive officers is set forth in Item 4A
of Part I of this Form 10-K under the caption "Executive Officers of the
Registrant".
ITEM 11: Executive Compensation
The following table sets forth, for 2001, 2000 and 1999, the compensation of the
Executive Officers of the Company.
Summary Compensation Table
Long term
Compensation Awards
Annual Compensation
-----------------------------------------------------------------------------
Securities
Other Annual Underlying options All Other
Name and Position Year Salary Bonus Compensation Compensation
---------------------- ----------- ------------------ ------------------ -------------
Rolf Stahel (1, 2) 2001 $693,000 $323,000 - - $96,000
Chief Executive 2000 $575,000 $316,000 - - $80,000
1999 $486,000 $195,000 - - $69,000
Angus Russell (3) 2001 $377,000 $162,000 - - $63,000
Group Finance Director 2000 $272,000 $136,000 - - $48,000
1999 $17,000 - - - $2,000
Dr Wilson Totten (4) 2001 $414,000 $158,000 - - $72,000
Group Research and 2000 $303,000 $151,000 - - $33,000
Development Director 1999 $230,000 $92,000 - - $39,000
(1) In addition to the Chief Executive, the Company has only two other
executive officers.
(2) Mr Stahel's other compensation consists of Company pension contributions
and other benefits provided.
(3) Mr Russell's other compensation consists of Company pension contributions
and other benefits provided.
(4) Dr Totten's other compensation consists of Company pension contributions
and other benefits provided.
The following table sets forth information with respect to grants of stock
options to each of the executive officers during the year ended December 31,
2001.
55
Option Grants in 2001
Percentage of
Total Options Potential Realizable Value at
Number of Granted to Assumed Rates of Stock Price
Securities Employees in Appreciation for Option Term(1)
Underlying Fiscal Exercise Price --------------------------------
Options Per
Name Granted 2001 Share $ Expiration Date 5% 10%
----------- ----------- ----------- ------------------ ------------- -------------
Rolf Stahel 126,492 2.9 17.77 (2) 06/04/2011 $1,414,000 $3,582,000
1,151 * 11.97 (3) 05/31/2005 $ 4,000 $8,000
Angus Russell 69,213 1.6 17.77 (2) 06/04/2011 $ 773,000 $1,960,000
Dr Wilson Totten 73,986 1.7 17.77 (2) 06/04/2011 $ 827,000 $2,095,000
* Less than 1%
(1) The potential realizable value uses the hypothetical rates specified by the
SEC and is not intended to forecast future appreciation, if any, of the
Company's stock price. The Company did not use an alternative formula for
this valuation as the Company is not aware of any formula which will
determine with reasonable accuracy a present value based on future unknown
or volatile factors. The Company disavows the ability of this or any other
valuation model to predict or estimate the Company's future stock price or
to place a reasonably accurate present value on the stock options because
all models depend on assumptions about the stock's future price movements,
which is unknown. The value indicated is a net amount, as the aggregate
exercise price, translated at the rate of exchange at December 31, 2001,
has been deducted from the final appreciated value.
(2) Options were granted under the 2000 Executive Scheme. Options granted under
this scheme are subject to performance criteria determined prior to the
date of grant. These options have been granted based on performance
criteria being satisfied before grant namely that the Company's share price
has increased by an annualized compound rate of 20.5% over a minimum
three-year period. The vesting date for these options is June 5, 2004.
The exercise price was (pound)12.57 per share and has been translated at
the rate of exchange at the date of grant of $1.414 : (pound)1.00.
(3) Options were granted under the Sharesave Scheme. The vesting date for these
options is December 1, 2004. The exercise price was (pound)8.41 per share
and has been translated at the rate of exchange at the date of grant of
$1.423 : (pound)1.00.
56
The following table sets forth information with respect to each of the executive
officers concerning the value of all exercised and unexercised stock options of
such individuals at December 31, 2001.
Aggregated Option/ SAR Exercises in Last Fiscal Year and FY-End Option/ SAR
Values
Number of Securities Underlying
Unexercised Options Value of Unexercised In-the-Money
Shares -------------------------------- Options
Acquired on Value --------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ----------- ------------------ ------------- -------------
Rolf Stahel 9,857 $121,000 964,774 216,073 $10,004,000 $318
Angus Russell - - - 127,606 - $103,812
Dr Wilson Totten - - 150,000 180,362 $1,138,422 $141,786
The value of unexercised in-the-money options is a net amount, as the aggregate
exercise price, translated at the rate of exchange at December 31, 2001, has
been deducted from the unexercised value.
Employment Agreements
The Company entered into an employment contract with Mr Stahel on October 21,
1996 which is terminable by either party on the giving of twelve months' notice.
In connection with this agreement Mr Stahel was paid a salary of $693,000 for
the year ended December 31, 2001 and is entitled to a discretionary bonus of up
to 55% of such salary as determined by the Remuneration Committee on a yearly
basis.
The Company entered into an employment contract with Mr Russell on October 29,
2000 which is terminable by either party on the giving of 12 months' notice. In
connection with such agreement Mr Russell was paid a salary of $377,000 for the
year ended December 31, 2001 and is entitled to a discretionary bonus of up to
50% of such salary as determined by the Remuneration Committee on a yearly
basis.
The Company entered into an employment contract with Dr Totten on December 30,
1998 which is terminable by either party on the giving of 12 months' notice. In
connection with such agreement Dr Totten was paid a salary of $414,000 for the
year ended December 31, 2001 and is entitled to a discretionary bonus of up to
50% of such salary as determined by the Remuneration Committee on a yearly
basis.
Non-executive Directors' Fees
Our non-executive Directors receive fees on an annual basis for their services.
We also reimburse non-executive Directors for out-of-pocket travel expenditures
relating to their service on the Board. During the year ended December 31, 2001
our non-executive Directors received fees totaling $544,000.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Set forth in the following table is the beneficial ownership of Ordinary Shares
as of December 31, 2001 for (i) each person (or group of affiliated persons)
known to the Company to be the beneficial owner of more than 5% of Ordinary
Shares, (ii) all current Directors (iii) each of the Company's executive
officers, including the Company's Chief Executive and (iv) all current Directors
and executive officers as a group. Except as
57
indicated by the notes to the following table, the holders listed below have
sole voting power and investment power over the shares beneficially held by
them. The address of each of the Company's Directors and executive officers is
that of the Company.
Number of Ordinary
Shares Beneficially
Owned as of February Percent of
Name 27, 2002 Outstanding Shares
--------------------- ------------------
The Capital Group of Companies, Inc. (including its affiliates) (2) 38,575,042 8.00%
333, South Hope Street, Los Angeles, California 90071, U.S.
Putnam Investment Management, LLC & The Putnam Advisory Company, 20,791,416 4.33%
Inc. 2 City Center, 2nd Floor, Portland, ME 04101-6419, U.S. (3)
Dr James Cavanaugh (4) 8,806,368 1.83%
Rolf Stahel (5) 988,458 *
Angus Russell - -
Dr Wilson Totten (6) 150,000 *
Dr Barry Price 31,350 *
Dr Bernard Canavan 28,032 *
Ronald Nordmann 46,968 *
Dr Francesco Bellini (7) 9,900,258 2.05%
Hon James Grant (8) 190,013 *
Gerard Veilleux (9) 10,003 *
All Directors and Officers as a Group (10 persons) 20,151,450 4.18%
* Less than 1%
(1) For the purposes of this table, a person or a group of persons is deemed to
have "beneficial ownership" as of a given date of any shares which that
person has the right to acquire within 60 days after that date. For
purposes of computing the percentage of outstanding shares held by each
person or a group of persons named above on a given date, any shares which
that person or persons has the right to acquire within 60 days after that
date are deemed to be outstanding, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Based solely on information provided to the Company by The Capital Group of
Companies, Inc. (including its affiliates) on February 11, 2002.
(3) Based solely on information provided to the Company by Putnam Investment
Management, LLC & The Putnam Advisory Company, Inc on January 15, 2002.
(4) Dr Cavanaugh is the President of HealthCare Ventures LLC, which is the
management company for a number of limited partnerships which have
interests in 8,690,090 Ordinary Shares. Dr Cavanaugh is also a general
partner in these partnerships. 8,690,090 of the shares in which Dr
Cavanaugh is expressed to be interested represent shares held by those
partnerships and not Dr Cavanaugh personally. The remaining 116,278 shares
are held by Dr Cavanaugh as beneficial owner.
(5) Includes 964,774 ordinary shares issuable upon exercise of options.
(6) All of Dr Totten's shares are issuable upon exercise of options.
(7) Includes 3,413,550 ordinary shares issuable upon exercise of options.
58
(8) Includes 185,462 ordinary shares issuable upon exercise of options.
(9) All of Mr Veilleux' shares are issuable on exercise of options.
ITEM 13: Certain Relationships and Related Transactions
Mr Spitznagel, a former Director of the Company, who resigned during the year
ended December 31, 2001, entered into a consultancy agreement with the Company
in December 1999, which provided that:
If he had good reason, as defined in his service agreement with Roberts, to
terminate his employment with Roberts under his service agreement, the
Company would cause Roberts to provide him with the payments and benefits
he would be entitled to upon a `good reason' termination;
Mr Spitznagel would provide consulting services to the Company for at least
42 months following the acquisition of Roberts, unless Mr Spitznagel
terminated the consultancy agreement prior to the end of the 42nd month
upon 30 days notice; and
The Company would pay Mr Spitznagel at a rate of $400,000 per annum for his
consulting services, $150,000 per annum as an office holder, $250,000 per
annum to comply with certain restrictive covenants contained therein and
$150,000 per annum for tax, financial and estate planning advice, life
insurance and health insurance.
Prior to the Company's merger with BioChem, Dr Bellini entered into an agreement
with BioChem whereby BioChem granted to Dr Bellini an option to purchase from
BioChem its interest in a company that owned land and buildings located on
Province Island, Quebec for the fair market value of CAN$225,000 (approximately
$141,000). Dr Bellini exercised his option and the transaction was completed in
accordance with the terms of the option agreement on November 29, 2001.
The Company incurred professional fees with law firms, in which the Hon James
Grant is a partner, totaling $1.9 million for the year ended December 31, 2001
($0.4 million for the year ended December 31, 2000 and $0.2 million for the year
ended December 31, 1999).
BioChem Immunosystems Inc (Immunosystems), formerly a wholly owned subsidiary of
BioChem, was sold in February 2000 to a third party. Dr Bellini, the former
chief executive officer of BioChem, continued as a director of Immunosystems. In
December 2001, the Company acquired a 19.9% equity interest in Immunosystems in
consideration for the release of a debt owing to the Company from Immunosystems.
This debt existed prior to the Company's merger with BioChem. As part of the
same transaction, the Company was released from a pre-existing BioChem guarantee
over other Immunosystems' liabilities.
59
PART IV
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Reference is made to the Index of the Financial Statements and
Financial Statement Schedules hereinafter contained (see F-1).
2. Exhibits
Reference is made to the Index of Exhibits herein contained (see E-1).
(b) Reports on Form 8-K
During the fourth quarter ended December 31, 2001, the following
reports on Form 8-K were filed with the Securities and Exchange
Commission:
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
Exhibits), date of earliest event reported October 12, 2001, with
respect to press release announcement of U.S. FDA approval of ADDERALL
XR.
60
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SHIRE PHARMACEUTICALS GROUP PLC
(Registrant)
Date: March 28, 2002
By: /s/ Rolf Stahel
Rolf Stahel, Chief Executive
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ James Henry Cavanaugh Non-executive Chairman March 28, 2002
-------------------------
JAMES HENRY CAVANAUGH
/s/ Rolf Stahel Chief Executive March 28, 2002
---------------
ROLF STAHEL
/s/ Angus Charles Russell Group Finance Director March 28, 2002
-------------------------
ANGUS CHARLES RUSSELL
/s/ Joseph Wilson Totten Group Research and Development Director March 28, 2002
------------------------
JOSEPH WILSON TOTTEN
/s/ Barry John Price Senior Non-executive Director March 28, 2002
--------------------
BARRY JOHN PRICE
/s/ Bernard Canavan Non-executive Director March 28, 2002
-------------------
BERNARD CANAVAN
/s/ Ronald Maurice Nordmann Non-executive Director March 28, 2002
---------------------------
RONALD MAURICE NORDMANN
/s/ Francesco Bellini Non-executive Director March 28, 2002
---------------------
FRANCESCO BELLINI
/s/ James Andrew Grant Non-executive Director March 28, 2002
----------------------
JAMES ANDREW GRANT
/s/ Gerard Veilleux Non-executive Director March 28, 2002
-------------------
GERARD VEILLEUX
61
SHIRE PHARMACEUTICALS GROUP PLC
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Auditors ...................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 .............F-4
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 .........................................F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 2001, 2000 and 1999 ..............F-7
Consolidated Statements of Comprehensive Income /
(Losses) for the years ended December 31, 2001, 2000 and 1999 ............F-9
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 .........................................F-10
Notes to the Consolidated Financial Statements ...........................F-12
F-1
Report of Independent Public Auditors
To the Shareholders of Shire Pharmaceuticals Group plc:
We have audited the accompanying consolidated balance sheets of Shire
Pharmaceuticals Group plc and its subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, comprehensive income,
changes in shareholders equity, and cash flows for the years ended December 31,
2001, 2000 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements for the years ended December 31, 2000
and 1999 of BioChem Pharma, Inc., a company acquired in 2001 in a transaction
accounted for as a pooling of interests. Such statements are included in the
consolidated financial statements of Shire Pharmaceuticals Group plc and reflect
total assets of 35% and 34%, and total revenues of 23% and 25% respectively, of
the related consolidated totals for the years ended December 31, 2000 and 1999,
after restatement to reflect certain adjustments as set forth in Note 3. The
financial statements prior to those adjustments were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
amounts included for BioChem Pharma Inc., for the years ended December 31, 2000
and 1999 is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Shire Pharmaceuticals Group plc and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for the years ended December 31, 2001, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen
Reading, England
February 27, 2002
F-2
Report of Independent Auditors
To the shareholders of BioChem Pharma Inc.
We have audited the consolidated balance sheet of BioChem Pharma Inc. as at
December 31, 2000 and 1999, and the consolidated statements of earnings, changes
in shareholders' equity and comprehensive income and cash flows for the years
ended December 31, 2000,1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada for the years ended December 31, 2000,1999 and 1998 and in accordance
with auditing standards generally accepted in the United States of America for
the year ended December 31, 2000. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as at
December 31, 2000 and 1999 and the consolidated results of its operations and
its cash flows for the years ended December 31, 2000, 1999 and 1998 in
accordance with generally accepted accounting principles in the United States of
America.
On January 25, 2001, we also reported separately to the shareholders of BioChem
Pharma Inc. on consolidated financial statements for the same period, expressed
in Canadian dollars, prepared in accordance with generally accepted accounting
principles in Canada.
Raymond Chabot Grant Thornton
General partnership
Chartered Accountants
Montreal, Quebec
January 25, 2001
F-3
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
December 31, December 31,
2001 2000
$'000 $'000
ASSETS
Current assets:
Cash and cash equivalents 118,040 93,266
Marketable securities and other current asset investments 723,911 370,425
Accounts receivable, net 193,913 144,175
Inventories, net 46,690 49,612
Deferred tax asset 19,430 26,990
Prepaid expenses and other current assets 38,571 11,385
------------ ------------
Total current assets 1,140,555 695,853
Investments 68,743 74,314
Property, plant and equipment, net 113,347 131,224
Intangible assets, net 549,044 578,436
Net assets of business transferred under contractual arrangements - 35,850
Deferred tax asset 12,874 6,543
Other non current assets 26,168 26,275
------------ ------------
Total assets 1,910,731 1,548,495
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt 4,325 81,811
Accounts payable and accrued expenses 167,152 113,446
Unearned income 17,409 -
Other current liabilities 42,730 32,593
------------ ------------
Total current liabilities 231,616 227,850
Long-term debt, excluding current installments 402,481 132,063
Other non-current liabilities 13,645 14,196
------------ ------------
Total liabilities 647,742 374,109
------------ ------------
Shareholders' equity:
Common stock, 5p par value; 800,000,000 shares authorized; and 481,817,487 (2000:
488,015,304) shares issued and outstanding respectively 39,861 40,292
Exchangeable shares: 5,978,902 (2000: nil) shares issued and outstanding respectively 277,386 -
Additional paid-in capital 1,014,796 1,209,448
Accumulated other comprehensive losses (93,009) (60,550)
Accumulated surplus/(deficit) 23,955 (14,804)
------------ ------------
Total shareholders' equity 1,262,989 1,174,386
------------ ------------
Total liabilities and shareholders' equity 1,910,731 1,548,495
------------ ------------
F-4
The balance sheet as at December 31, 2000 has been restated to include BioChem
Pharma Inc., the merger with whom was accounted for as a pooling of interests in
accordance with APB Opinion No. 16 "Accounting for Business Combinations". The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data)
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
------------ ------------ ------------
Revenues:
Product sales 723,964 520,231 400,959
Licensing and development 5,498 14,147 14,585
Royalties 145,155 135,470 119,714
Other revenues 2,952 1,262 1,995
------------ ------------ ------------
Total revenues 877,569 671,110 537,253
Costs and expenses:
Cost of revenues 118,285 101,371 103,047
Research and development 171,029 155,145 141,112
Selling, general and administrative (inclusive of stock option
compensation charge of $2,278, $21,914 and $11,933 for 2001, 2000 and
1999 respectively) 311,103 236,289 194,513
Other charges:
In process research and development - 26,947 -
Asset impairments and restructuring charges 85,447 - 97,132
Merger transaction expenses 83,470 - 32,279
Loss on disposition of assets 10,164 - 5,824
------------ ------------ ------------
Total operating expenses 779,498 519,752 573,907
------------ ------------ ------------
Operating income/(loss) 98,071 151,358 (36,654)
Interest income 19,667 19,232 15,957
Interest expense (8,315) (16,413) (11,644)
Other income, net 4,800 105,214 18,751
------------ ------------ ------------
Total other income, net 16,152 108,033 23,064
------------ ------------ ------------
Income/(loss) before income taxes and extraordinary items 114,223 259,391 (13,590)
Income taxes (72,860) (47,664) (21,663)
------------ ------------ ------------
Net income/(loss) from continuing operations and before extraordinary
items 41,363 211,727 (35,253)
F-5
Extraordinary item (2,604) - -
Discontinued operations (net of tax) - - (12,179)
------------ ------------ ------------
Net income/(loss) 38,759 211,727 (47,432)
------------ ------------ ------------
Net income/(loss) per share:
Basic
- - Continuing operations 8.4c 43.8c (7.3)c
- - Extraordinary items (0.5)c - -
- - Discontinued operations - - (2.5)c
- - Net income 7.9c 43.8c (9.8)c
Diluted
- - Continuing operations 8.2c 42.8c (7.3)c
- - Extraordinary items (0.5)c - -
- - Discontinued operations - - (2.5)c
- - Net income 7.7c 42.8c (9.8)c
Weighted average number of shares:
Basic 492,594,226 482,890,070 484,358,876
Diluted 504,875,587 494,691,805 484,358,876
The results for the years ended December 31, 2000 and 1999 have been restated to
include the results of BioChem Pharma Inc., the merger with whom was accounted
for as a pooling of interests in accordance with APB Opinion No. 16 "Accounting
for Business Combinations". The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars except share data)
Accumu-
Common Common Exchange- Exchange- lated other
Stock Stock able able Additional Accumu- comp- Total
Amount No. shares shares paid-in lated prehensive shareholders'
$'000 shares Amount No. shares capital deficit losses equity
000's $'000 000's $'000 $'000 $'000 $'000
---------- -------- ----------- ------------ ------------ ------------------------- --------------
At December 31, 1998 32,324 388,542 - - 1,096,341 (39,717) (33,311) 1,055,637
Net loss - - - - - (47,432) - (47,432)
Foreign currency
translation - - - - - - 1,048 1,048
Issuance of common
stock for acquisitions 8,123 100,767 - - (8,123) - - -
Issuance of common
stock by pooled entity - - - - 8,615 - - 8,615
Options exercised 266 3,297 - - 5,983 - - 6,249
Repurchase of common
stock (1,472) (18,206) - - (19,146) (139,382) - (160,000)
Stock option
compensation - - - - 11,933 - - 11,933
Tax benefit
associated with
exercise of stock
options - - - - 1,964 - - 1,964
Unrealized holding
gain on available for
sale investments - - - - - - 1,872 1,872
--------- ------------ ----------- ------------ ------------- --------------------------- ---------
At December 31,
1999 39,241 474,400 - - 1,097,567 (226,531) (30,391) 879,886
Net income - - - - - 211,727 - 211,727
Reclassification
adjustment for
realized loss
included in net
earnings - - - - - - 1,356 1,356
Foreign currency
translation - - - - - - (31,467) (31,467)
Issuance of common
stock 137 1,843 - - 11,720 - - 11,857
Issue costs - - - - (3,385) - - (3,385)
F-7
Options exercised 914 11,772 - - 50,850 - - 51,764
Stock option
compensation - - - - 21,914 - - 21,914
Tax benefit
associated with
exercise of stock
options - - - - 30,782 - - 30,782
Unrealized holding
loss on non-current
investments - - - - - - (48) (48)
---------- ------------ ----------- ------------ ------------- --------------------------- ----------
At December 31,
2000 40,292 488,015 - - 1,209,448 (14,804) (60,550) 1,174,386
Net income - - - - - 38,759 - 38,759
Foreign currency
translation - - - - - - (32,507) (32,507)
Issue of shares for
acquisitions (3,662) (51,876) 802,256 17,292 (798,594) - - -
Issuance of common
stock for conversion
of loan note 22 295 - - 1,522 - - 1,544
Issue costs - - - - (18) - - (18)
Exchange of
exchangeable shares 2,414 33,940 (524,870) (11,313) 522,456 - - -
Options exercised 795 11,443 - - 69,397 - - 70,192
Stock option
compensation and - - - - 6,780 - - 6,780
warrants
Tax benefit
associated with
exercise of stock
options - - - - 3,805 - - 3,805
Unrealized holding
loss on non-current
investments - - - - - - 48 48
---------- ------------ ----------- ------------ ------------- --------------------------- ----------
At December 31,
2001 39,861 481,817 277,386 5,979 1,014,796 23,955 (93,009) 1,262,989
---------- ------------ ----------- ------------ ------------- --------------------------- ----------
Each exchangeable share is exchangeable into 3 ordinary shares.
The results for the year ended December 31, 2000 and 1999 have been restated to
include the results of BioChem Pharma, Inc. the merger with whom was accounted
for as a pooling of interests in accordance with APB Opinion No. 16 "Accounting
for Business Combinations".
F-8
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSSES)
(In thousands of U.S. dollars)
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
------------- ------------- -------------
Net income/(loss) 38,759 211,727 (47,432)
Foreign currency translation adjustments (32,507) (31,467) 1,048
Reclassification adjustments for realized loss included
in net earnings - 1,356 -
Unrealized holding gain/(loss) on marketable securities
and non-current investments 48 (48) 1,872
------------- ------------- -------------
Comprehensive income/(loss) 6,300 181,568 (44,512)
------------- ------------- -------------
There are no material tax effects related to the items included above.
The results for the year ended December 31, 2000 and 1999 have been restated to
include the results of BioChem Pharma, Inc. the merger with whom was accounted
for as a pooling of interests in accordance with APB Opinion No. 16 "Accounting
for Business Combinations".
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
---------- ---------- ----------
Cash flows from operating activities:
Net income/(loss) 38,759 211,727 (47,432)
Loss from discontinued operations - - 12,179
Adjustments to reconcile net income/(loss) to net cash provided by operating
activities:
Acquired in-process research and development - 26,947 -
Depreciation and amortization 45,809 37,987 34,172
Stock option compensation 6,780 21,914 11,933
Tax benefit of stock option compensation, credited directly to equity 3,805 30,782 1,967
Decrease in deferred tax asset 1,229 3,782 535
Non cash exchange gains and losses (979) (1,676) (664)
Gain on sale of long-term investments - (98,627) (16,142)
Loss/(gain) on sale of property, plant and equipment 8,112 - (828)
Loss on sale of intangible assets 2,014 1,514 5,825
Write-down of long-term investments 61,596 - 7,546
Write-down of intangible assets 25,393 - -
Share of loss in equity method investees - 3,809 3,670
Other elements - 1,102 1,563
Changes in assets and liabilities, net of acquisitions:
(Increase)/decrease in accounts receivable (52,033) (52,570) 1,898
Decrease/(increase) in inventory 2,922 (7,916) (7,165)
(Increase)/decrease in prepayments and other current assets (26,109) 1,215 (2,491)
Decrease in other assets 823 - -
Increase in accounts and notes payable and other liabilities 61,504 37,727 49,868
Increase in unearned income 17,409 - -
Reserve for restructuring charges 1,788 (83,608) 83,608
---------- ---------- ----------
Net cash provided by operating activities 198,822 134,109 140,042
---------- ---------- ----------
Cash flows from investing activities:
(Investment in)/redemption of marketable securities and other current asset
investments (367,206) (186,019) 43,903
Purchase of subsidiary undertakings - - (32,000)
Expenses of acquisition - (1,461) -
Additional investment in existing subsidiary - (32,302) -
Net cash acquired with subsidiary undertakings - - 1,979
Purchase of long-term investments (22,336) (16,995) (10,960)
Purchase of intangible assets (35,986) (38,379) (57,848)
Purchase of property, plant and equipment (13,604) (44,243) (26,459)
Purchase of other assets - (6,658) (5,077)
F-10
Proceeds from sale of long-term investments - 123,327 21,407
Proceeds from sale of property, plant and equipment 7,081 12,007 2,118
Proceeds from sale of intangible fixed assets 4,556 - 6,575
Collection on notes receivable - 766 7,195
Other - (1,427) (1,400)
---------- ---------- ----------
Net cash used in investing activities (427,495) (191,384) (50,567)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issue of long-term debt 400,000 - -
Payment of debt issuance costs (9,000) - -
Payments on long-term debt, capital leases and notes (207,762) (8,514) (15,449)
Proceeds from issue of common stock, net 1,526 14,589 11,342
Repurchase of common stock - - (81,544)
Proceeds from exercise of options 70,192 45,647 3,523
---------- ---------- ----------
Net cash provided by/(used in) financing activities 254,956 51,722 (82,128)
---------- ---------- ----------
Effect of foreign exchange rate changes on cash and cash equivalents (1,509) (1,975) 934
Cash flows used in discontinued operations - (1,708) (6,945)
---------- ---------- ----------
Net increase/(decrease) in cash and cash equivalents 24,774 (9,236) 1,336
Cash and cash equivalents at beginning of period 93,266 102,502 101,166
---------- ---------- ----------
Cash and cash equivalents at end of period 118,040 93,266 102,502
---------- ---------- ----------
Supplemental cash flow information:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
---------- ---------- ----------
Interest paid 11,122 12,264 11,927
Income taxes paid 65,773 14,095 18,074
Non cash activities:
Notes issued for product acquisitions - - 11,800
Common stock issued for product acquisitions - 3,085 -
Common stock issued on conversion of zero-coupon note 1,544 8,772 -
Debt assumed on acquisition of subsidiaries - - 3,300
The results for the years ended December 31, 2000 and 1999 have been restated to
include the results of BioChem Pharma, Inc. the merger with whom was accounted
for as a pooling of interests in accordance with APB Opinion No. 16 "Accounting
for Business Combinations".
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
a) Description of Operations and Principles of Consolidation
Shire Pharmaceuticals Group plc (the Company) is an international specialty
pharmaceutical company with a strategic focus on three therapeutic areas:
central nervous system disorders, oncology and anti-infectives. The Company's
strategy is further supported by two technology platforms, drug delivery and
biologics.
The Company has sales and marketing subsidiaries with a portfolio of products
targeting the U.S., Canada, the U.K., the Republic of Ireland, France, Germany,
Italy and Spain. Shire also covers other significant pharmaceutical markets
indirectly through distributors. The business is operated and managed within
three individual operating segments: U.S., International and global research and
development. Within these segments, revenues are derived primarily from three
sources: sales of products by the Company's own sales and marketing operations,
royalties and licensing and development fees.
The Company is referred to as "specialty" because its principal products tend to
be prescribed by specialists as opposed to primary care physicians. The
Company's main approach is to start projects in house through research and
advanced drug delivery or to in-license projects, and then to develop and launch
them using it's sales and marketing capability in eight of the key world
markets. The Company seeks to protect the intellectual property upon which it
relies through a range of patents and patent applications (both its own and
those of its licensors).
The Company's principal products include:
in the U.S., ADDERALL XR and ADDERALL for the treatment of ADHD; AGRYLIN
for the treatment of elevated blood platelets; PENTASA for the treatment of
ulcerative colitis; CARBATROL for the treatment of epilepsy; and PROAMATINE
for the treatment of postural hypotension. In addition, the Company
receives royalties on sales of REMINYL for the treatment of Alzheimer's
disease, marketed by Johnson & Johnson, and on EPIVIR, COMBIVIR and
TRIZIVIR for the treatment of HIV/AIDS and EPIVIR-HBV for the treatment of
hepatitis B, each marketed by GSK;
in the U.K., the CALCICHEW range, used primarily as adjuncts in the
treatment of osteoporosis, and REMINYL, which was launched in September
2000 and is co-promoted by Janssen-Cilag;
in Canada, 3TC for the treatment of HIV/AIDS, COMBIVIR and HEPTOVIR
(marketed in partnership with GSK); AMATINE(TM); SECOND LOOK(TM), a breast
cancer diagnostics product for which the Company received FDA approval in
January 2002; and FLUVIRAL S/F, a vaccine for the prevention of influenza;
and
in the rest of the world, the Company receives royalties on the sales of
ZEFFIX for the treatment of hepatitis B, marketed by GSK, and will receive
royalties on sales of REMINYL from Janssen Pharmaceutica.
In addition, the Company has a number of products in late stage development
including DIRAME for the treatment of analgesia, FOZNOL for the treatment of
high blood phosphate levels associated with kidney failure and TROXATYL for the
treatment of leukemia and pancreatic cancer. The Company submitted the first
regulatory submission for FOZNOL under the European Mutual Recognition procedure
on March 13, 2001.
F-12
The accompanying consolidated financial statements include the accounts of Shire
Pharmaceuticals Group plc and all its subsidiary undertakings after elimination
of intercompany accounts and transactions.
b) Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates and assumptions are
primarily made in relation to provisions for product returns, litigation and
sales deductions.
c) Revenue Recognition
The Company recognizes revenue when:
o there is persuasive evidence of an arrangement; o delivery of products has
occurred or services have been rendered; o the seller's price to the buyer is
fixed or determinable; and o collectibility is reasonably assured.
The Company's principal revenue streams and their respective accounting
treatments are discussed below:
(i) Product sales
Revenue for the sales of products is recognized as net revenue upon shipment to
customers. Provisions for certain rebates, product returns and discounts to
customers are provided for as reductions to net revenue in the same period as
the related sales are recorded. Approximately $17.0 million of ADDERALL XR
product launch shipments made in Q4 2001 will not be recognized as product
revenue until 2002 in accordance with Staff Accounting Bulletin 101 as these
sales have not been realized and earned at December 31, 2001.
(ii) Licensing and development fees
Licensing and development fees represent revenues derived from license
agreements and from collaborative research and development arrangements.
Initial license fees are not considered to be separable from the associated
research and development activities, even where such fees are non-refundable and
not creditable against research and development services to be rendered. Initial
license fees are thus deferred and recognized over the period of the license
term or the period of the associated research and development agreement. In
circumstances where initial license fees are not for a defined period, revenues
are deferred and recognized over the period to the expiration of the relevant
patent to which the license relates.
During the term of certain research and development agreements, the Company
receives non-refundable milestones as certain technical targets are achieved.
Revenues are recognized on achievement of milestones.
The Company also receives non-refundable clinical milestones when certain
targets are achieved during the clinical phases of development, such as the
submission of clinical data to a regulatory authority. These clinical milestones
are recognized when received. If milestone payments are creditable against
future royalty payments, the milestones are deferred and released over the
period in which the royalties are anticipated to be paid.
F-13
(iii) Royalty income
Royalty income relating to licensed technology is recognized when receivable.
Where applicable, all revenues are stated net of value added tax and similar
taxes, trade discounts and intercompany transactions.
No revenue is recognized for consideration, the value or receipt of which is
dependent on future events, future performance, or refund obligations.
d) Research and Development
Research and development expenditures include funded and unfunded expenditures
and are charged to operations in the period in which the expense is incurred.
Milestones payable in respect of research and development work are charged to
the income statement on achievement of those milestones.
e) Leased Assets
The costs of operating leases are charged to operations on a straight-line basis
over the lease term, even if rental payments are not made on such a basis.
Assets acquired under capital leases are included in the balance sheet as
tangible fixed assets and are depreciated over the shorter of the period of the
lease or their useful lives. The capital elements of future lease payments are
recorded as liabilities, while the interest elements are charged to the income
statement over the period of the leases to produce a level yield on the balance
of the capital lease obligation.
f) Pensions
The Group contributes to personal defined contribution pension plans of
employees. Contributions are charged to the income statement as they become
payable. These contributions are detailed in Note 24. Details of the
supplemental Executive Retirement Plan operated by the Group are given in Note
24.
g) Finance Costs of Debt
Finance costs of debt are recorded as a deferred asset and then amortized to the
income statement over the term of the debt using the level yield method.
Deferred financing costs relating to debt extinguishments are written off to the
income statement in that period.
h) Income Taxes
The Company provides for income taxes in accordance with SFAS No.109,
"Accounting for Income Taxes". Deferred tax assets and liabilities are provided
for differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred tax assets and liabilities are measured using the enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is computed as the tax payable or refundable
for the period plus or minus the change during the period in deferred tax assets
and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
i) Advertising Expense
The Company expenses the cost of advertising as incurred. Advertising costs
amounted to $21.8 million, $6.6 million and $6.7 million for the years ended
December 31, 2001, 2000 and 1999 respectively.
F-14
j) Foreign Currency
Monetary assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange ruling at the balance sheet date. Transactions
in foreign currencies are translated into U.S. dollars at the rate of exchange
ruling at the date of the transaction. Transaction gains and losses are
recognized in arriving at operating income.
The functional currency of each of the company's subsidiaries is the local
currency.
The results of overseas operations, whose functional currencies are not U.S.
dollars, are translated at the average rates of exchange during the period and
their balance sheets at the rates ruling at the balance sheet date. The
cumulative effect of exchange rate movements is included in a separate component
of other comprehensive income.
The consolidated financial statements are prepared from records maintained in
the country in which the subsidiary is located and are translated into U.S.
dollars according to the above policy.
Foreign currency exchange transaction gains and losses on an after-tax basis
included in consolidated net income in the years ended December 31, 2001, 2000,
and 1999, pursuant to SFAS No. 52, "Foreign Currency Translation", amounted to a
$0.5 million loss, $2.1 million gain and $1.3 million gain, respectively.
k) Employee Stock Plans
The Company accounts for stock options in accordance with the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
l) Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and bank short-term investments
with original maturities of less than ninety days.
m) Marketable Securities and Other Current Asset Investments
Marketable securities classified as available for sale consist primarily of debt
instruments with maturities of more than three months. They are marked to market
at each balance sheet date, with gains and losses recorded in a separate
component of other comprehensive income. Other than temporary impairments in
value are recorded through the income statement.
n) Inventories
Inventories, consisting primarily of finished goods, are stated at the lower of
cost or net realizable value. Cost incurred in bringing each product to its
present location and condition is based on purchase costs calculated on a
first-in, first-out basis, including transport. Net realizable value is based on
estimated normal selling price less further costs expected to be incurred to
completion and disposal. Provision is made for obsolete, slow moving or
defective items where appropriate.
o) Investments
The Company accounts for its investments in 20% to 50% owned companies using the
equity method of accounting. Accordingly, the Company's share of the earnings of
these companies is included in "Other income, net". The related equity
investment is included in "Investments". At December 31, 2001, the
GlaxoSmithKline commercialization partnership was the Company's only equity
investment.
F-15
Investments which are accounted for under the cost method are stated at cost,
less provisions for other than temporary impairment in value. Impairment is
assessed by reference to the fair value of the securities as determined using
established financial methodologies. Investments in equities with readily
determinable market values are marked to market. The fair value of debt
investments in private entities and non-traded securities of public entities are
measured by valuation methodologies including discounted cash flows.
p) Intangible Assets
Intangible assets comprise goodwill and intellectual property rights.
Goodwill arising on the acquisition of subsidiary undertakings and businesses,
representing any excess of the fair value of the consideration given over the
fair value of the identifiable assets and liabilities acquired, is capitalized
and written off on a straight line basis over its useful economic life.
Goodwill recognized in each significant business combination is being amortized
over a period of five to 30 years on a straight line basis depending on the
nature of the goodwill, and is evaluated periodically for realizability based on
expectations of undiscounted cash flows and earnings from operations for each
subsidiary having a material goodwill balance.
The following factors are considered in estimating the useful lives. Where an
intangible asset is a composite of a number of factors, the period of
amortization is determined from considering these factors together:
o regulatory and legal provisions, including the regulatory approval and
review process, patent issues and actions by government agencies
o the effects of obsolescence, changes in demand, competing products and
other economic factors, including the development of competing drugs
that are more effective clinically or economically
o actions of competitors, suppliers, regulatory agencies or others that
may eliminate current competitive advantages
Impairments of goodwill are recognized if expected undiscounted cash flows are
not sufficient to recover the goodwill. If a material impairment is identified,
goodwill is written down to its estimated fair value. Fair value is determined
based on the present value of expected net cash flows to be generated by the
business, discounted using a rate commensurate with the risks involved.
Intellectual property, including trademarks for products with an immediate
defined revenue stream and acquired for valued consideration, is recorded at
cost and amortized in equal annual installments over the estimated useful life
of the related product which range from 5 to 40 years. Intellectual property
with no defined revenue stream where the related product has not yet completed
the necessary approval process is written off on acquisition. Amounts recorded
as intangible assets are reviewed for impairment on a periodic basis using
expected undiscounted cash flows.
Continuing milestone payments on intellectual property with no defined revenue
stream are charged to operations. Royalty payments due on sales of products are
charged to operations when a liability has been incurred.
q) Property, Plant and Equipment
Property, plant and equipment is shown at cost less accumulated depreciation and
any provision for impairment. Depreciation is provided on a straight-line basis
at rates calculated to write off the cost less estimated residual value of each
asset over its estimated useful life as follows:
F-16
Buildings 20 to 50 years
Office furniture, fittings and equipment 4 to 10 years
Warehouse, laboratory and manufacturing equipment 4 to 10 years
The cost of land is not depreciated.
Expenditures for maintenance and repairs are charged to expense as incurred;
costs of major renewals and improvements are capitalized. At the time property,
plant and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are eliminated from the asset and accumulated
depreciation accounts and the profit or loss on such disposition is reflected in
income.
r) Concentration of Credit Risk
Revenues are mainly derived from agreements with major pharmaceutical companies
and relationships with pharmaceutical wholesale distributors and retail pharmacy
chains. Significant customers are disclosed in Note 22. Such clients have
significant cash resources and therefore any credit risk associated with these
transactions is considered minimal.
Excess cash is invested in bank and building society term deposits and
commercial paper from a variety of companies with strong credit ratings. These
investments typically bear minimal credit risk.
s) Related Parties
Management believes that transactions with related parties are conducted on the
same basis as they would have been with unrelated parties.
t) New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141 "Business Combinations" and SFAS No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. Had the BioChem transaction been initiated after this date, it would
have been required to be accounted for under the purchase method rather than the
pooling of interests method. SFAS No. 141 requires intangible assets to be
recognized if they arise from contractual or legal rights or are "separable",
i.e., it is feasible that they may be sold, transferred, licensed, rented,
exchanged or pledged. As a result, it is likely that more intangibles will be
recognized under SFAS No. 141 than its predecessor, APB Opinion No. 16, although
in some instances previously recognized intangibles will be subsumed into
goodwill.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
although goodwill on business combinations consummated after July 1, 2001 will
not be amortized. On adoption the Company may need to record a cumulative effect
adjustment to reflect the impairment of previously recognized intangible assets.
In addition, goodwill recognized on prior business combinations will cease to be
amortized. Had the Company adopted SFAS No. 142 at January 1, 2001 the Company
would not have recorded a goodwill amortization charge of $10.8 million for the
year ended December 31, 2001. The Company has not determined the impact that
these Statements will have on intangible assets or whether a cumulative effect
adjustment will be required upon adoption.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires the fair value of a liability for asset
retirement obligations be recognized in the period in which it is incurred if a
reasonable estimate of the fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the related
long-lived asset. SFAS No. 143 is effective for
F-17
financial statements issued for fiscal years beginning after June 15, 2002. The
Company does not believe the adoption of this Statement would have a material
impact on its results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale consistent with the
fundamental provisions of SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". While it
supersedes APB Opinion No. 30 "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" it retains the presentation
of discontinued operations but broadens that presentation to include a component
of an entity (rather than a segment of a business). However, discontinued
operations are no longer recorded at net realizable value and future operating
losses are no longer recognized before they occur. Under SFAS No. 144 there is
no longer a requirement to allocate goodwill to long-lived assets to be tested
for impairment. It also establishes a probability weighted cash flow estimation
approach to deal with situations in which there are a range of cash flows that
may be generated by the asset being tested for impairment. SFAS No. 144 also
establishes criteria for determining when an asset should be treated as held for
sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years, with early application encouraged.
The provisions of the Statement are generally to be applied prospectively. The
Company is currently assessing whether the adoption of SFAS No. 144 will have
any impact on its results of operations or financial position.
(u) Statutory Accounts
The consolidated financial statements for the years ended December 31, 2001,
2000 and 1999 do not comprise statutory accounts within the meaning of Section
240 of the UK Companies Act 1985.
Statutory accounts for the years ended December 31, 2000 and 1999 have been
delivered to the Registrar of Companies for England and Wales, The auditors'
report on those accounts was unqualified.
(2) Business Combinations and Reorganizations
Year ended December 31, 2001
(a) BioChem merger
On May 11, 2001, the Company acquired 100% of the outstanding stock of BioChem
Pharma, Inc. (BioChem), an international specialty pharmaceutical company based
in Laval, Canada. The merger was achieved through an exchange of shares. The
Company issued 179,447,629 ordinary shares and 17,292,148 exchangeable shares in
order to effect the business combination.
This transaction was accounted for by the pooling of interests method in
accordance with APB Opinion No. 16, "Accounting for Business Combinations".
Consequently, the consolidated financial statements give retroactive effect to
the merger.
Details of the results of operations of BioChem for the period before the merger
was consummated, which is the period from January 1, 2001 to May 11, 2001, that
are included in the combined net income of the Company are as follows:
F-18
$'000
---------------
Revenue 51,592
Net income 23,003
Other changes in stock holders' equity:
Issue of common shares on exercise of stock options 2,170
The revenues and earnings previously reported by the company for the years ended
December 31, 2000 and 1999 can be reconciled to the combined amounts presented
herein as follows:
2000 1999
Revenue Net Income Revenue Net Income
$'000 $'000 $'000 $'000
------------ --------------- ------------ ---------------
As previously reported 517,608 76,171 401,532 (94,998)
BioChem pooled results 198,478 174,346 185,694 93,098
Accounting policy alignment (see Note 3) (44,976) (38,790) (49,973) (45,532)
------------ --------------- ------------ ---------------
As restated 671,110 211,727 537,253 (47,432)
------------ --------------- ------------ ---------------
(b) Dispositions
During 2001, the Company recorded a $8.1 million loss on the sale of its
manufacturing facility in Toronto, Canada. As a result of the merger with
BioChem, the decision was made to close the Toronto facility and to eliminate
duplicate positions across the combined organization. The Company's existing
Canadian based sales and marketing operations in Toronto have been combined with
those of BioChem in Laval.
During the third quarter of 2001, the Company disposed of certain non strategic
products for net proceeds of approximately $4.5 million. A loss on disposition
of $2.0 million was recorded.
Year ended December 31, 2000
(a) Divestiture of a subsidiary
F-19
In March 2000, BioChem concluded the divestiture of its diagnostics operations
to a management-led group of this subsidiary. The diagnostic operations were
previously accounted for as discontinued operations following the adoption of a
formal plan of disposal on January 29, 1999. As consideration, BioChem received
a debenture in the amount of $35.8 million to be paid out of future cash flows.
For accounting purposes, the transaction was not recorded as a sale since
certain significant risks of ownership were not transferred to the buyer.
Accordingly, as at December 31, 2000, the net assets transferred to the buyer
are presented in the non-current asset section of the balance sheet as "Net
assets of business transferred under contractual arrangements". As at December
31, 2000, the Company had guaranteed the reimbursement of a long-term debt of
this company amounting to 37.3 billion Italian lira, ($18.1 million).
Summarized data relating to the discontinued operations of the diagnostics
operations of BioChem for the years ended December 31, 1999 and net asset data
for 1999 are as follows:
1999
$'000
-----------
Loss from operations of diagnostics segment (less applicable income taxes of $948 in
1999) (738)
Loss on disposal of diagnostics segment, including provision of $11,441 for operating
losses during phase-out period (less applicable income taxes of nil) (11,441)
-----------
Net loss (12,179)
-----------
Net assets of discontinued operations
Current assets 62,094
Property, plant and equipment 10,174
Other assets 13,382
Current liabilities (29,487)
Long-term liabilities (24,088)
-----------
32,075
-----------
(b) CliniChem Development Inc.
CliniChem Development Inc. (CliniChem) was formed by BioChem to conduct research
and development of certain of BioChem's human therapeutic and vaccine product
candidates.
On June 8, 1998, BioChem made a $101.3 million cash contribution to CliniChem's
capital. Simultaneously, BioChem concluded a series of agreements with
CliniChem. BioChem granted to CliniChem an exclusive perpetual license to use
BioChem technology to conduct the CliniChem programs and related activities and
to manufacture and commercialize the CliniChem products world-wide. CliniChem
paid a fee to BioChem in exchange for the technology licenses. The technology
fee was payable monthly at a rate of $0.2 million per month over a period of 48
months.
During 1998 BioChem spun-off to its shareholders its investment in CliniChem. In
connection with this spin off, BioChem retained rights in CliniChem including
that BioChem had an option to reacquire all shares in CliniChem at any time. As
a result, CliniChem was fully consolidated into the Company's accounts even
though the investment had been spun off to its shareholders, with the
inter-company transactions eliminated, as BioChem still retained control of this
company.
F-20
On December 15, 2000, BioChem reacquired the shares in CliniChem for $32.5
million. This additional consideration was allocated to the net assets at that
date as follows:
$'000
------------
Other assets 5,560
Acquired in-process research and development
charged to earnings 26,947
------------
32,507
------------
As a result of the transaction, the Company incurred a charge for the year ended
December 31, 2000 representing the acquisition of in-process research and
development in accordance with SFAS No. 2. The acquired in-process research and
development charge of $26.9 million represents the value of CliniChem's products
in development at the date of the additional investment in CliniChem.
Technological feasibility of these products was not established at this date.
These products were considered to have no alternative future use other than the
therapeutic indications for which they were in development. The work remaining
to complete the development involved continuing formulation activity, clinical
studies and the submission of regulatory filings to seek marketing approval. As
pharmaceutical products cannot be marketed without regulatory approvals, the
company will not receive any benefit unless it receives such regulatory
approvals.
See Note 3 for a discussion of the realignment of BioChem's accounting policies
in respect of CliniChem to conform with those of the Company.
(3) Accounting Policy Alignment - Consolidation of CliniChem
In 1998, BioChem spun-off to its shareholders its investments in CliniChem. In
connection with this spin-off, BioChem retained rights in CliniChem, including
the option to reacquire all shares in CliniChem at any time. Under EITF 99-16,
this transaction would result in CliniChem continuing to be consolidated by
BioChem, as BioChem would have significant continuing involvement in the
operation of CliniChem. However, at the time that CliniChem was spun-off, EITF
99-16 had not been issued and BioChem elected to de-consolidate CliniChem, an
acceptable accounting principle at that time. The management of Shire believe
that their accounting policies would have required Shire to continue to
consolidate CliniChem, also an acceptable accounting alternative at the date of
the spin-off and a policy that conforms with the later guidance issued under
EITF 99-16. The effect of this accounting policy alignment is to reduce the net
income from continuing operations previously reported by BioChem now included in
the pooled financial statements for 2000 and 1999 by $38.8 million and $45.5
million respectively.
On December 15, 2000 BioChem reacquired CliniChem. This acquisition has been
reflected in the accompanying financial statements using purchase accounting.
The allocation of the purchase price to the acquired net assets and liabilities
is discussed in Note 2 above.
(4) Cash and Cash Equivalents
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Cash at bank and in hand 118,040 93,266
------------ ------------
F-21
(5) Marketable Securities and Other Current Asset Investments
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Commercial paper 246,174 304,680
Institutional cash funds 477,737 65,745
------------ ------------
723,911 370,425
------------ ------------
(6) Accounts Receivable
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Trade receivables 187,694 95,130
Royalties receivable from shareholder - 35,663
Research and development contracts 3,998 4,466
Other receivables 2,221 8,916
------------ ------------
193,913 144,175
------------ ------------
Trade receivables included above are stated net of a provision for doubtful
debts of $1.1 million (December 31, 2000: $0.8 million).
Included within trade receivables as at December 31, 2001 is approximately $17.0
million of unearned income relating to ADDERALL XR product sales.
Research and development contracts receivable are in respect of an agreement
with the Canadian government (Technology Partnerships Canada) under which a
contribution is made towards certain eligible research and development costs
incurred by the Company's Canadian subsidiary, Shire BioChem Inc.
At December 31, 2001 other receivables were in respect of research and
development tax credits.
At December 31, 2000 other receivables were in respect of accrued royalty income
and notes receivable related to the divestment of certain products.
(7) Inventory
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Finished goods 19,880 24,118
F-22
Work-in-process 18,262 12,544
Raw materials 8,548 12,950
------------ ------------
46,690 49,612
------------ ------------
(8) Prepaid Expenses and Other Current Assets
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Prepaid expenses 18,780 5,456
Deferred financing costs 1,077 500
Tooling costs 1,300 1,000
Income tax receivable 7,712 -
Other current assets 9,702 4,429
------------ ------------
38,571 11,385
------------ ------------
The deferred financing costs at December 31, 2001 were in respect of the $400
million convertible loan note (see Note 16). These costs are being amortized
over 10 years. The deferred financing costs at December 31, 2000 were in respect
of a $125.0 million long-term loan (see Note 16), which was being amortized over
the five-year term of the loan. This loan was repaid in full during the year
2001.
Tooling costs are being amortized over the manufacturing contract period. The
Company does not own the tools but has a non-cancelable right to use the tools
during the contract period. Production commenced during 2001 and, based on
expected production volumes, $1.3 million of the costs are classified as current
at December 31, 2001 (December 31, 2000: $1.0 million)
Included within other current assets at December 31, 2001 is valued added tax
recoverable of $5.4 million (December 31, 2000: $1.9 million).
(9) Investments
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Investments in private companies 65,404 73,615
Investments in public companies - 699
Equity method investment 3,339 -
------------ ------------
68,743 74,314
------------ ------------
(a) Investments in private companies
The Company holds investments in private companies at cost, less provision for
other than temporary impairments in value. The Company made investments in
private companies and partnerships totaling
F-23
$13.2 million during 2001. Total significant additions included investments made
to Genechem Technologies Venture Fund and Genechem Therapeutic of approximately
$4.7 million (CAN$ 7.5 million), EGS Private Healthcare of approximately $2.2
million (CAN$ 3.3 million) and Qualia Computing of approximately $6.0 million
(CAN$ 9.2 million).
During the year ended December 31, 2001, the Company wrote down the cost of
investments by $24.9 million as part of the one time charge resulting from the
merger with BioChem, due to a non-temporary impairment.
(b) Investments in public companies
In December 2000, the Company signed a research, development and licensing
agreement with CeNeS Pharmaceuticals plc for the development of CeNeS' dopamine
D1 agonist program for the treatment of Parkinson's disease. The Company
undertook to make milestone payments and pay CeNeS royalties on products
developed under the agreement. The Company made an equity investment in CeNeS of
approximately $0.7 million and undertook to fund all development work. During
the year ended December 31, 2001 the Company recorded an impairment charge of
$0.7 million due to a non-temporary impairment.
The Company recorded a loss of $0.1 million in respect of non-current
investments marked to market at December 31, 2000. As explained above, the
investment to which this relates has suffered a permanent diminution in value,
and hence the cumulative marked to market adjustment has been recorded through
the Consolidated Statement of Income for the year ended December 31, 2001.
(c) Equity method investment
The Company has accounted for its commercialization partnership with GSK
(through which the products 3TC and ZEFFIX are marketed in Canada) using the
equity method of accounting as the Company owns a 50% share of the partnership.
Accordingly, the Company's share of the earnings of the partnership is included
in "Other income, net" and the related equity investment is included above. The
amount included in "Other income, net" for the year ended December 31, 2001 was
$2.0 million.
(10) Property, Plant and Equipment
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Land and buildings 95,921 108,805
Office furniture, fittings and equipment 12,659 40,318
Warehouse, laboratory and manufacturing
equipment 46,613 13,272
------------ ------------
155,193 162,395
Less: Accumulated depreciation (41,846) (31,171)
------------ ------------
113,347 131,224
------------ ------------
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$14.4 million, $10.7 million and $9.2 million respectively.
F-24
Included within land and buildings at December 31, 2001 is a new office facility
purchased for approximately $17.4 million, which became the Company's new
worldwide headquarters effective from March 2001. The building, purchased in
October 2000, was not depreciated during the year ended December 31, 2000, as it
did not become operational until March 2001. Also included within land and
buildings at December 31, 2000 was $17.3 million in respect of items considered
construction in progress that therefore were not depreciated.
(11) Intangible Assets
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Intellectual property rights acquired 459,506 453,559
Goodwill arising on businesses acquired 220,890 227,105
------------ ------------
680,396 680,664
Less: Accumulated amortization (131,352) (102,228)
------------ ------------
549,044 578,436
------------ ------------
Amortization expense for the years ended December 31, 2001, 2000 and 1999 was
$31.4 million, $27.3 million and $25.0 million respectively.
During the first quarter of 2001, the Company purchased two new products,
Indurgan and Monocid, to be marketed and sold by the Company's Spanish and
Italian operations respectively. The purchase price was approximately $18.4
million.
In October 2001, the Company acquired the exclusive pan-European rights to
market Adept for (pound)5.0 million (approximately $7.3 million), a new therapy
containing Icodextrin, which reduces internal scarring following abdominal and
pelvic surgery. Adept was developed by ML Laboratories plc, which retains all
rights to Adept for the rest of the world. Adept has approval from the
regulatory bodies for the EU and will be launched in early 2002 across
continental Europe.
(12) Other Non-current Assets
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Deferred financing costs 8,617 2,341
Tooling costs 2,937 3,218
SERP investment 14,367 16,115
Other assets 247 4,601
------------ ------------
26,168 26,275
------------ ------------
The deferred financing costs at December 31, 2001 were in respect of the $400
million convertible loan note These costs are being amortized over 10 years. The
current element of these costs is included in
F-25
Prepaid Expenses and Other Current Assets (see Note 8). The deferred financing
costs and tooling costs at December 31, 2000 represent the non-current portion
of the total assets respectively. For further details see Note 8.
For further details of the SERP investment, see Note 24. The amount shown above
is the cash surrender value of life insurance policies which is backed by
marketable securities. A liability of $11.3 million is included within Note 17
"Other Non-current Liabilities" (2000: $13.6 million).
(13) Current Portion of Long-term Debt
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Current portion of notes payable
(see Note 16) 4,325 81,811
------------ ------------
(14) Accounts Payable and Accrued
Expenses
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Trade accounts payable 51,952 53,604
Accrued expenses 115,200 59,842
----------- -----------
167,152 113,446
----------- -----------
Included within accrued expenses at December 31, 2001 is $55.9 million in
respect of accrued Medicaid rebates, charge-backs and product return reserves,
all relating to the Company's U.S. operations (December 31, 2000: $25.3
million).
(15) Other Current Liabilities
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Income taxes payable 25,604 13,746
Payable for termination of license
agreement 738 747
Interest on long-term debt 2,928 5,916
Other accrued liabilities 13,460 12,184
------------ ------------
42,730 32,593
------------ ------------
F-26
Included within other accrued liabilities at December 31, 2001 is $1.1 million
for value added taxes, $7.3 million for social security liabilities, and $0.8
million payable to Knoll AG related to the acquisition of the Fuisz
subsidiaries. At December 31, 2000 other accrued liabilities included $1.0
million for value added taxes, $0.8 million for social security liabilities, and
$0.9 million payable to Knoll AG.
(16) Long-term Debt
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Notes payable 406,806 213,874
Less: current installments (4,325) (81,811)
------------ ------------
Total, less current liabilities 402,481 132,063
------------ ------------
Principal payments in each of the next five years and thereafter on long-term
debt outstanding at December 31, 2001 amount to:
December 31,
2001
$'000
------------
2002 4,325
2003 827
2004 400,827
2005 827
2006 -
Thereafter -
------------
406,806
------------
The principal payments presented above have been calculated on the basis that
the $400.0 million convertible notes due 2011 convert to ordinary shares at the
earliest opportunity, which is August 21, 2004. Further details are presented
below.
Convertible notes due 2011
On August 15, 2001, Shire Finance Limited, a wholly-owned subsidiary of the
Company, placed an offering of $350.0 million principal amount of Guaranteed
Convertibles Notes due 2011 with international institutional investors at an
issue price of 100%. In connection with the issue, the initial purchasers
exercised in full the option to subscribe or procure subscribers for an
additional $50.0 million principal amount of notes. The total principal amount
of the issue was therefore $400.0 million.
The notes are guaranteed by the Company and are convertible into redeemable
preference shares of the issuer which upon issuance will be immediately
exchanged for either (I) ordinary shares or (ii) American Depository Shares
(ADS's) of Shire, or, at the Issuers option, cash.
F-27
The notes bear interest of 2% per annum, paid semi-annually. The effective
initial exchange price is $20.154 per ordinary share and $60.4625 per ADS. This
exchange price represented a premium of 25% over the closing price of Shire
ADS's on August 14, 2001.
Investors have the right to require the Issuer to redeem the notes at par on
August 21, 2004, 2006 or 2008. Subject to certain conditions, the notes will be
callable after August 21, 2004.
The interest expense recorded in the year ended December 31, 2001 was $2.9
million (2000: nil).
Five year term loan
The Company entered into a $125.0 million five year term loan and a $125.0
million revolving credit facility with Credit Suisse First Boston (CSFB),
previously known as DLJ Capital Funding, Inc. on November 19, 1999. This loan
replaced an existing $125.0 million loan facility in the name of Roberts
Pharmaceutical Corporation that had been taken out to finance the acquisition of
PENTASA in 1998. The new loan was in the name of the parent company, Shire
Pharmaceuticals Group plc. The applicable interest rate ranged between 0.5 per
cent and 1.5 per cent over the higher of the prime rate of CFSB or the Federal
Funds Rate plus 0.5 per cent or between 1.5 per cent and 2.5 per cent over the
London Interbank Overnight Rate (as adjusted in accordance with the loan
agreement), in each case depending on Company's credit rating.
All obligations under the facility were jointly and severally guaranteed by the
Company and by its subsidiaries and were initially secured by all material
property owned by the Company and its subsidiaries and the capital stock of the
subsidiaries. If the Company's credit rating reached specified levels, the
facility would no longer be secured. The facility contained covenants and
maintenance tests that required the Company to maintain a minimum net worth, a
specified leverage ratio and a specified coverage ratio. At December 31, 2000
the Company satisfied the aforementioned covenants and maintenance tests.
In May 2001, the Company repaid the term loan in full and terminated the credit
facility. Deferred financing costs of $2.6 million were expensed as an
extraordinary item.
Unsecured Convertible Zero Coupon Loan Note
The Company financed the purchase of intellectual property relating to the
manufacture of ADDERALL from Arenol Corporation by a total of $11.8 million in
loan notes. On March 5, 1999 the Company issued a $5.8 million principal amount
Unsecured Convertible Zero Coupon Loan note due July 30, 2001 (the First Loan
Note) and a $6.0 million principal amount Unsecured Convertible Zero Coupon Loan
Note due July 30, 2004 (the Second Loan Note). Both loan notes are in the name
of the parent company, Shire Pharmaceuticals Group plc. The agreement provides
for the cancellation of certain specified amounts of the aggregate principal
amount of the First Loan Note and of such amounts of the Second Loan Note on
certain dates to the extent of certain indemnified losses or, to the extent that
such amounts of the First Loan Note or the Second Loan Note (together the Loan
Notes) are not so cancelled, for their conversion into Ordinary Shares. The
number of Ordinary Shares is calculated by dividing the amount not cancelled by
the lower of (pound)3.565 (approximately $5.75) and the midweek closing price of
the Ordinary Shares on the London Stock Exchange on the relevant date.
Translation from pounds sterling to U.S. dollars is made using the exchange rate
on the relevant date. The Company issued 533,279, 560,076, 541,478 and 295,061
Ordinary Shares on March 13, 2000, August 3, 2000 and November 6, 2000, and July
30, 2001, respectively to Arenol Corporation (or its nominee broker) in
consideration of the conversion of part of each of the Loan Notes in the
Company.
Promissory note
F-28
Included in the current portion of long-term debt at December 31, 2000 is an
$80.0 million promissory note to a shareholder, bearing interest at 5% per
annum. This note was repaid in full during 2001.
Canadian federal and provincial government loan
The Company has a Canadian federal and provincial government loan outstanding of
$3.1 million (CAN$5.0 million). This facility is non-interest bearing and is
repayable in annual installments of $0.8 million (CAN$1.2 million) commencing in
May 2002.
Bank term loans
The Company has a bank loan at December 31, 2001 bearing interest at the
lender's prime rate. The loan is secured by a charge on land and buildings, and
is repayable in annual installments of $0.4 million (CAN$0.6 million) with a
final payment of $2.4 million (CAN$3.6 million) in May 2002. The loan is
renegotiable for an additional five year period.
(17) Other Non-current Liabilities
December 31, December 31,
2001 2000
$'000 $'000
------------ ------------
Payable for termination of license
agreement - 373
SERP 11,348 13,609
Other accrued liabilities 2,297 214
------------ ------------
13,645 14,196
------------ ------------
For further details of the Supplemental Executive Retirement Plan (SERP) see
Note 24.
(18) Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each material class of financial instrument:
Cash and cash equivalents - carrying amount approximates fair value due to the
short-term nature of these instruments
Marketable securities and other current asset investments - the fair value of
marketable securities is estimated based on quotes obtained from brokers.
Investments - non-current investments with readily determinable market values
are marked to market. The fair value of investments in private entities and
non-traded securities are measured by valuation methodologies including
discounted cash flows.
Accounts receivable - carrying amount approximates fair value due to the
short-term nature of these instruments.
Accounts payable and accrued expenses - carrying amount approximates fair value
due to the short-term nature of these instruments.
F-29
Long-term debt - the fair value of long-term debt is estimated based on the
discounted future cash flows using currently available interest rates or, where
the debt instrument is traded, by reference to the market price.
The carrying amounts and corresponding fair values of financial instruments at
December 31, 2001 and 2000 were as follows:
December 31, 2001
Carrying
Amount Fair Value
$'000 $'000
------------ ------------
Financial assets:
Cash and cash equivalents 118,400 118,400
Marketable securities and other current
asset investments 723,911 723,911
Investments 68,743 68,743
Financial liabilities:
Accounts payable and accrued expenses 167,152 167,152
Long-term debt 406,806 394,206
------------ ------------
December 31, 2000
Carrying
Amount Fair Value
$'000 $'000
------------ ------------
Financial assets:
Cash and cash equivalents 93,266 93,266
Marketable securities and other
current asset investments 370,425 370,425
Investments 74,314 74,314
Financial liabilities:
Accounts payable and accrued expenses 113,446 113,446
Long-term debt 213,874 213,874
------------ ------------
The carrying amounts in the table are included in the Consolidated Balance Sheet
under the indicated captions.
(19) Leases and Other Commitments
(a) Leases
The Company leases facilities, motor vehicles and certain office equipment under
operating leases. The Company's commitments under the non-cancelable portion of
all operating leases for the next five years and thereafter as of December 31,
2001 are as follows:
F-30
December 31,
2001
$'000
------------
2002 6,166
2003 3,545
2004 1,693
2005 599
2006 311
Thereafter 1,996
------------
14,310
Lease and rental expense included in selling, general and administrative
expenses in the accompanying statements of operations amounts to approximately
$6.1 million $4.3 million and $3.2 million for the fiscal years ended December
31, 2001, 2000 and 1999 respectively.
(b) Contingent liabilities
(i) Phentermine
Shire US Inc. (Shire US) has been named as a defendant in approximately 3,784
lawsuits, in both U.S. federal and state courts, which seek damages for, among
other things, personal injury arising from phentermine products supplied for the
treatment of obesity by Shire US and several other pharmaceutical companies.
Shire US has been sued as a manufacturer and distributor of phentermine, an
anorectic used in the short-term treatment of obesity and one of the products
addressed by the lawsuits. The suits relate to phentermine either alone or
together with fenfluramine or dexenfluramine. As at December 31, 2001 Shire US
had been named as a defendant in approximately 3,784 cases. Shire US has been
dismissed from 3,619 cases. As at December 31, 2001 approximately 111 cases were
pending dismissal. The lawsuits generally allege the following claims:
o the defendants marketed phentermine and other products for the
treatment of obesity and misled users about the products and territory
dangers associated with them;
o the defendants failed adequately to test phentermine individually and
when taken in combination with the other drugs; and
o the defendants knew or should have known about the negative effects of
the drugs and should have informed the public about such risks and/or
failed to provide appropriate warning labels.
Shire US became involved with phentermine through its acquisition of certain
assets of Rexar in January 1994. In addition to Shire US potentially incurring
liability as a result of its own production of Oby-Cap, the plaintiffs may
additionally seek to impose liability on Shire US as successor to Rexar. Class
certification has been sought for certain of the claims made against Shire US.
In addition, pending U.S. federal lawsuits have been consolidated as a
multi-district litigation in the Eastern District of Pennsylvania. Shire US
intends vigorously to defend all the lawsuits and pursue all available
reasonable defenses. Shire US currently has only one lawsuit pending against it
in federal court. Shire US denies liability on a number of grounds including
lack of scientific evidence that phentermine, properly described, causes the
alleged side effects and that Shire US did not promote phentermine for long-term
combined use as part of the "fen/phen" diet. Accordingly, Shire US intends to
defend vigorously any and all claims made against the Group in respect of
phentermine and believes that liability is neither probable nor quantifiable at
this stage of litigation. Legal
F-31
expenses have been paid by Eon, the supplier to Shire US, or Eon's insurance
carriers but such insurance is now exhausted. Eon has agreed to defend and
indemnify Shire US in this litigation pursuant to an agreement dated November
30, 2000 made between Eon and Shire US.
(ii) ADDERALL
On September 22, 2000, a lawsuit was filed against Shire in the United States
District Court for the District of North Dakota. The suit involves an incident
in 1999 in which a young North Dakota man, Ryan Ehlis, shot and killed his
infant daughter and wounded himself, allegedly as a result of a psychotic
reaction to ADDERALL. Mr Ehlis' physician had prescribed ADDERALL for the
treatment of ADHD. Shire filed its answer to the complaint on November 24, 2000
and discovery related to the litigation is ongoing. Shire intends to robustly
defend such action.
On October 3, 2001, a lawsuit was filed against Shire in a Kentucky state court.
The lawsuit involves a 34 year old woman who alleges that she experienced a
psychotic episode from her ingestion of ADDERALL which led to the death of her
child in an auto accident. Shire intends to robustly defend such action.
On July 27, 2001, Shire received service of a complaint filed in state court in
Texas that alleged that ADDERALL caused or contributed to a stroke. The
plaintiff, an adult female aged 39, was prescribed ADDERALL as treatment for her
ADHD. The complaint alleges that the plaintiff used ADDERALL during the period
from January 1999 to September 1999. Also named as defendants are two doctors
who were involved in diagnosing the plaintiff's ADHD and for prescribing
ADDERALL for its treatment. Discovery in this litigation is ongoing. Shire
intends to robustly defend such action.
(iii) AGRYLIN
Shire US has been named as a defendant in a recently filed lawsuit in a Texas
state court involving AGRYLIN. The complaint was filed in late December and
served on Shire on December 26, 2001. Shire's contract manufacturer for AGRYLIN,
Mallinckrodt, Inc., is also a named defendant.
The complaint alleges that the Plaintiff suffered a debilitating stroke due to
the fact that the Plaintiff was allegedly unable to procure this product in some
fashion. Shire has filed an answer to the complaint in which it denies the
allegations in the Plaintiff's original petition. Shire intends to robustly
defend such action.
(iv) Emory
Shire BioChem is involved in worldwide patent disputes with Emory University
(Emory) relating to lamivudine wherein Shire BioChem is opposing certain patents
and patent applications of Emory and wherein Emory is opposing certain patents
and patent applications of Shire BioChem. Further detail regarding these
disputes is provided below. In November 2001, Shire and GlaxoSmithKline (GSK)
signed an agreement as to the key terms of a global settlement agreement with
Emory. The parties are in the process of finalizing the settlement agreement.
Pursuant to the settlement agreement, Emory will grant Shire and GSK an
exclusive license under Emory's patent rights for lamivudine. The agreement
provides for the resolution of the below noted worldwide patent disputes between
the parties relating to lamivudine. The settlement involves an upfront payment
to Emory by Shire of $2.5 million and a royalty payment from Shire of 0.5% on
worldwide sales of lamivudine over an 11 year period commencing on January 1,
2001 and a licence under Shire's FTC patent rights, in consideration for the
settlement of all claims against Shire and GSK relating to lamivudine. The total
cost to Shire in 2001 of the settlement (including upfront payment) was $7.7
million.
Emory filed oppositions to two of Shire BioChem's granted patent applications in
Europe which cover oxathiolane nucleosides including lamivudine and dioxolane
nucleosides, including troxacitabine, related nucleoside analogues and use of
these analogues for treating viral infections. In oral hearings held in 1999,
F-32
both of these oppositions were dismissed by the Opposition Division of the
European Patent Office. Emory is not pursuing its appeal of the decision
relating to oxathiolanes. Emory has not to date filed revocation actions with
respect to any Shire BioChem lamivudine patents in issue in individual European
countries.
Emory has filed an appeal against the dioxolane-related decision and this appeal
is pending in the European Patent Office. This appeal does not relate to
lamivudine and is not included in the settlement agreement with Emory.
In Japan, Emory filed an opposition to Shire BioChem's granted patent which
covers lamivudine, related analogues and use of the analogues for treating viral
infections. The Trial Board of the Japanese Patent Office dismissed Emory's
opposition to Shire BioChem's patent covering lamivudine. Emory has filed
revocation actions in Australia and South Korea against Shire BioChem's granted
patents covering lamivudine. Shire BioChem is aggressively defending these
patents.
On July 23, 1996, Emory filed a complaint in the U.S. alleging infringement from
the commercialization of Epivir by Shire BioChem and GSK, Shire BioChem's
exclusive licensee in the U.S., of an Emory U.S. patent granted that same day.
Shire BioChem considers this patent infringement suit to be without merit and
has successfully challenged the validity of Emory's patent.
On May 19, 1998, the USPTO declared an interference between the Emory patent
that is the subject of a lawsuit and a pending patent application of Shire
BioChem. The Board of Patent Appeals and Interferences issued a decision on
December 21, 2000 invalidating Emory's patent. Emory has appealed the decision.
Pursuant to the lamivudine settlement agreement, Emory will accept the Board's
decision as final and the infringement suit will be dismissed with prejudice.
Emory has obtained a granted patent application in Europe relating to
oxathiolane nucleosides, including lamivudine. Shire BioChem and GSK filed an
opposition to this grant and are vigorously opposing the grant. An examined
patent application, filed by Emory claiming lamivudine, was successfully opposed
by Shire BioChem in Australia and Norway. Emory has filed an appeal from the
Australian decision in the Federal Court of Australia. Shire BioChem also filed
an appeal from certain portions of the decision. An examined patent application
filed by Emory claiming lamivudine was also opposed by Shire BioChem in Japan.
The opposition was dismissed in April 1999 because it was improperly filed by a
representative who had previously represented Emory. Notwithstanding the
dismissal, the Japanese Patent Office issued an ex-officio action rejecting all
of Emory's claims. There can be no assurance that Emory will not be able to
overcome this rejection.
An examined patent application filed by Emory claiming lamivudine was opposed by
Shire BioChem and GSK in South Korea and such Emory claims to lamivudine were
cancelled by the South Korean Patent Office. Shire BioChem is aware that Emory
has filed patent applications in other countries, which Shire BioChem believes
may claim similar subject matter.
(v) Yale
On November 23, 1999, the USPTO declared an interference between BioChem's
hepatitis B patent for lamivudine and a patent application filed by Yale
University (Yale) claiming methods of treating hepatitis B using lamivudine. The
Company believes that this application is licensed to Vion Pharmaceuticals, Inc.
(Vion), formerly known as OncoRx, Inc., a New Haven, Connecticut-based company.
The Company believes that its patent is valid and intends to vigorously defend
the patent. The Company is not aware of corresponding patent applications by
Yale or Vion in countries other than the U.S. On April 14, 2000, the USPTO
declared a further interference between BioChem's hepatitis B patent for
lamivudine and a patent application by GSK claiming methods of treating
hepatitis B using lamivudine. There is no guarantee that Shire will be
successful in both interferences and that Shire's patent will be maintained.
There can also be
F-33
no reassurance that Yale will not prevail in both interferences and obtain
claims in the U.S. directed to methods of treatment for hepatitis B using
lamivudine.
(vi) Interests in companies and partnerships
The Company has undertaken to subscribe to interests in companies and
partnerships for amounts totaling $37.7 million. As at December 31, 2001 an
amount of $20.1 million (December 31, 2000: $17.1 million) has been subscribed.
In addition, the Company has undertaken to subscribe to additional amounts and
to pay royalties on certain future sales upon realization of certain conditions.
(vii) FLUVIRAL
The Company has signed a ten-year contract with the Government of Canada to
assure a state of readiness in the case of an influenza pandemic (worldwide
epidemic) and to provide influenza vaccine for all Canadian citizens in such an
event. Under the contract, Shire Biologics will also supply the Government of
Canada with a substantial proportion of its annual influenza vaccine
requirements over the ten-year period. The value of the agreement may exceed
CAN$300 million (approximately $190 million) over the ten-year term, with an
option for the Government of Canada to extend the contract.
The concept of a state of readiness against an influenza pandemic requires the
development of sufficient infrastructure and capacity in Canada to provide 100%
of domestic vaccine needs in the event of an influenza pandemic. Canada would
require 32 million doses of single-strain (monovalent) flu vaccine within a
production period of 16 weeks. Shire Biologics will therefore begin expanding
its current production capacity in order to meet this objective within a
five-year period.
Shire Biologics is committed to CAN$4.5 million (approximately $2.8 million) of
capital expenditure on immoveables for the purpose of achieving the level of
Pandemic Readiness required. In addition, a performance bond equal to 10% of the
minimum estimated contract value in any year, which for 2001/2002 is CAN$17.5
million (approximately $11 million), would become payable to the Government of
Canada if contracted penalty clauses were triggered.
(vii) Other matters
In addition, the Company is involved in other claims and lawsuits in the normal
course of business. It is not possible at this time to determine the ultimate
outcome of any of these claims.
(20) Related Parties
(a) Mr Spitznagel
Mr Spitznagel, a former Director of the Company, who resigned during the year
ended December 31, 2001, entered into a consultancy agreement with the Company
in December 1999, which provided that:
If he had good reason, as defined in his service agreement with Roberts, to
terminate his employment with Roberts under his service agreement, the
Company would cause Roberts to provide him with the payments and benefits
he would be entitled to upon a `good reason' termination;
Mr Spitznagel would provide consulting services to the Company for at least
42 months following the acquisition of Roberts, unless Mr Spitznagel
terminated the consultancy agreement prior to the end of the 42nd month
upon 30 days notice; and
The Company would pay Mr Spitznagel at a rate of $400,000 per annum for his
consulting services, $150,000 per annum as an office holder, $250,000 per
annum to comply with certain restrictive
F-34
covenants contained therein and $150,000 per annum for tax, financial and
estate planning advice, life insurance and health insurance.
(b) Dr Bellini
Prior to the Company's merger with BioChem, Dr Bellini entered into an agreement
with BioChem whereby BioChem granted to Dr Bellini an option to purchase from
BioChem its interest in a company that owned land and buildings located on
Province Island, Quebec for the fair market value of CAN$225,000 (approximately
$141,000). Dr Bellini exercised his option and the transaction was completed in
accordance with the terms of the option agreement on November 29, 2001.
(c) Professional fees
The Company incurred professional fees with a law firm, in which the Hon James
Grant is a partner, totaling $1.9m for the year ended December 31, 2001 ($0.4
million for the year ended December 31, 2000 and $0.2 million for the year ended
December 31, 1999).
(d) Immunosystems
BioChem Immunosystems Inc (Immunosystems), formally a wholly owned subsidiary of
BioChem, was sold in February 2000 to a third party. Dr Bellini, the former
chief executive officer of BioChem, continued as a director of Immunosystems. In
December 2001, the Company acquired a 19.9% equity interest in Immunosystems in
consideration for the release of a debt owing to the Company from Immunosystems.
This debt existed prior to the Company's merger with BioChem. As part of the
same transaction, the Company was released from a pre-existing BioChem guarantee
over other Immunosystems' liabilities.
(21) Net Income/(Loss) per Share
Basic net income/(loss) per share is based upon the income available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted net income/(loss) per share is based upon income
available to common stockholders divided by the weighted-average number of
common shares outstanding during the period and adjusted for the effect of all
dilutive potential common shares that were outstanding during the period.
The following table sets forth the computation for basic and diluted net
income/(loss) per share:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
----------------- ----------------- -----------------
Numerator for basic and diluted net income/(loss) per share 38,759 211,727 (47,432)
No. of shares No. of shares No. of shares
Weighted average number of shares ----------------- ----------------- -----------------
Basic 492,594,226 482,890,070 484,358,876
Effect of dilutive shares
share options 11,362,332 11,801,735 -
convertible debt - - -
warrants 919,029 - -
----------------- ----------------- -----------------
12,281,361 11,801,735 -
----------------- ----------------- -----------------
Diluted 504,875,587 494,691,805 484,358,876
----------------- ----------------- -----------------
F-35
Basic net income/(loss) per share 7.9c 43.8c (9.8)c
Diluted net income/(loss) per share 7.7c 42.8c (9.8)c
----------------- ----------------- -----------------
The calculation of weighted average number of shares for the year ended December
31, 2000 does not include convertible debt because, after eliminating interest
charged in the income statement from the numerator, the inclusion would be
anti-dilutive.
The calculation of weighted average number of shares for the year ended December
31, 1999 does not include potentially dilutive stock options and convertible
debt because the inclusion would be anti-dilutive.
The warrants included in the diluted net income per share calculation are
issuable in respect of a research and development agreement. A charge of $4.5
million has been made included in the results for the year ended December 31,
2001. No warrants have been issued as at December 31, 2001 although an
obligation does exist.
(22) Analysis of Revenue, Operating Income/(Loss), Assets and Reportable
Segments
The Company has disclosed segment information for the individual operating areas
of the business, based on the way in which the business is managed and
controlled. Shire's principal reporting segments are geographic, each being
managed and monitored separately and serving different markets. The Company
evaluates performance based on operating income or loss before interest and
income taxes. All inter-company items are eliminated. The accounting policies of
each reportable segment are the same as those of the Group.
Year ended December 31, 2001 U.S. International R&D Total
$'000 $'000 $'000 $'000
--------- -------- --------- ---------
Product sales 612,062 111,902 - 723,964
Licensing and development 4,507 991 - 5,498
Royalties 264 144,891 - 145,155
Other revenues - 2,952 - 2,952
--------- -------- --------- ---------
Total revenues 616,833 260,736 - 877,569
Cost of revenues 64,934 53,351 - 118,285
Research and development - - 171,029 171,029
Selling, general and administrative 203,061 108,042 - 311,103
Asset impairments and restructuring charges - 85,447 - 85,447
Merger transaction expenses - 83,470 - 83,470
Loss on disposition of assets 2,052 8,112 - 10,164
--------- -------- --------- ---------
Total operating expenses 270,047 338,422 171,029 779,498
--------- -------- --------- ---------
Operating income/(loss) 346,786 (77,686) (171,029) 98,071
--------- -------- --------- ---------
Total assets 628,350 1,260,444 21,937 1,910,731
Long-lived assets 9,202 80,859 23,286 113,347
--------- -------- --------- ---------
F-36
Capital expenditure on long-lived assets 3,077 8,039 2,488 13,604
--------- -------- --------- ---------
Year ended December 31, 2000 U.S. International R&D Total
$'000 $'000 $'000 $'000
--------- -------- --------- ---------
Product sales 414,624 105,607 - 520,231
Licensing and development 1,326 12,821 - 14,147
Royalties 266 135,204 - 135,470
Other revenues 20 1,242 - 1,262
--------- -------- --------- ---------
Total revenues 416,236 254,874 - 671,110
Cost of revenues 53,393 47,978 - 101,371
Research and development - - 155,145 155,145
Selling, general and administrative 122,834 113,455 - 236,289
Asset impairment and restructuring charges - 26,947 - 26,947
--------- -------- --------- ---------
Total operating expenses 176,227 188,380 155,145 519,752
--------- -------- --------- ---------
Operating income/(loss) 240,009 66,494 (155,145) 151,358
--------- -------- --------- ---------
Total assets 560,864 943,687 43,944 1,548,495
Long-lived assets 7,895 75,249 48,080 131,224
--------- -------- --------- ---------
Capital expenditure on long-lived assets 3,636 15,517 25,090 44,243
--------- -------- --------- ---------
Year ended December 31, 1999 U.S. International R&D Total
$'000 $'000 $'000 $'000
--------- -------- --------- ---------
Product sales 313,582 87,377 - 400,959
Licensing and development 1,097 13,488 - 14,585
Royalties - 119,714 - 119,714
Other revenues 517 1,478 - 1,995
--------- -------- --------- ---------
Total revenues 315,196 222,057 - 537,253
Cost of revenues 62,375 40,672 - 103,047
Research and development - - 141,112 141,112
Selling, general and administrative 109,327 85,186 - 194,513
Asset impairment and restructuring charges 93,603 3,529 - 97,132
Merger transaction expenses 9,312 22,967 - 32,279
Loss on disposition of assets 5,824 - - 5,824
--------- -------- --------- ---------
Total operating expenses 280,441 152,354 141,112 573,907
--------- -------- --------- ---------
Operating income/(loss) 34,755 69,703 (141,112) (36,654)
--------- -------- --------- ---------
F-37
Total assets 542,111 783,807 25,873 1,351,791
Long-lived assets 17,033 77,083 22,597 116,713
--------- -------- --------- ---------
Capital expenditure on long-lived assets 1,738 5,226 19,495 26,459
--------- -------- --------- ---------
Material customers
In the periods set out below, certain customers accounted for greater than 10%
of total revenues:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
----------- ------------ ------------
Customer A 176,941 132,913 100,267
Customer B 123,350 80,293 54,498
(23) Other Charges
Year ended December 31, 2001
(a) BioChem merger
As a result of the merger with BioChem on May 11, 2001, the Company recorded
pre-tax charges totaling $177.0 million, comprising asset impairment and
restructuring costs ($85.4 million), merger-related transaction expenses ($83.5
million), and a loss on the sale of a duplicated facility in Toronto, Canada
($8.1 million).
The restructuring costs include an impairment charge of $20.9 million to adjust
intangible asset values, primarily trademark and patent costs but also an
element of product rights, to their estimated fair value. These charges are
consistent with the Company's accounting policy to review periodically the
carrying value of the intangibles and evaluate whether there has been any
impairment in the value of those intangibles as compared with estimated
undiscounted future cash flows relating to those intangibles. Other asset
impairments included the write down of long-term unquoted investments ($24.9
million) and a write down of $30.8 million to a debenture held by BioChem, which
was received on divestiture of its diagnostics subsidiary. These charges are
consistent with the Company's policy to provide for other than temporary
impairments in investment by reference to the fair value of the investment using
established financial methodologies. There was also a total of $8.8 million
recorded in respect of employee related costs.
The employee terminations related to the closure of the Toronto facility and the
elimination of duplicate positions across the combined organization. Shire's
existing Canadian based sales and marketing operations in Toronto have been
combined with those of BioChem in Laval. A total of 57 employees were identified
to be terminated. As of December 31, 2001 all of the planned terminations were
completed.
(b) Product disposals
During the third quarter of 2001, we disposed of certain non strategic products
for net proceeds of approximately $4.5 million. A loss on disposition of $2.0
million was recorded.
F-38
Year ended December 31, 2000
As a result of the merger with BioChem, the Company incurred a charge of $26.9
million relating to the acquisition of in process research and development in
accordance with SFAS No. 2.
Year ended December 31, 1999
As a result of the merger with Roberts on December 23, 1999, which was accounted
for as a pooling of interests, the Company recorded charges totaling $135.2
million pre tax which comprised asset impairments ($48.5 million), merger
related transaction expenses ($32.3 million), restructuring costs ($43.6
million), loss on product dispositions ($5.8 million) and other charges ($5.0
million). These charges are disclosed separately within operating expenses in
the consolidated statements of operations.
The Company recorded an impairment charge of $34.2 million to adjust intangible
asset values, primarily product rights, to their estimated fair value. These
charges are consistent with the Company's accounting policy to review
periodically the carrying value of the intangibles and evaluate whether there
has been any impairment in the value of those intangibles as compared with
estimated undiscounted future cash flows of the products. Other asset
impairments consisted of the write off of inventory held for research and
development work and duplicate equipment ($3.2 million), adjustments to the
carrying value of the RiboGene investment to market value at December 31, 1999
($7.6 million), and write down of receivables to their estimated realizable
value ($3.5 million).
The components of the restructuring charge were as follows:
$m
------------
Employee termination costs 37.9
Property 5.7
------------
43.6
------------
In December 1999, the decision was made to close the office facility in
Eatontown, New Jersey and consolidate the sales and marketing operations into
the existing facility in Florence, Kentucky and to transfer the research and
development activities to Shire's facility in Rockville, Washington. Similarly,
Roberts' sales and marketing operation in the U.K. was combined with Shire's
established operation in Andover, Hampshire. The property at Eatontown was
written down to its estimated fair value and subsequently sold.
As a result of the restructuring and elimination of duplicate facilities, the
Company identified a number of sales and marketing, research and development and
administrative positions to be terminated. These employees were notified of
their termination prior to December 31, 1999. The employee termination costs
consisted of payments for severance, medical and other benefits, outplacement
counseling, acceleration of pension benefits and excise taxes. The Company
completed the restructuring program during the fourth quarter of 2000, and the
restructuring reserve of $43.6 million was fully utilized by December 31, 2000.
(24) Retirement Benefits
(a) Personal defined contribution pension plans
F-39
The Company makes contributions to defined contribution retirement plans that
together cover substantially all employees within the Group. For the defined
contribution retirement plans, the level of company contribution is fixed at a
set percentage of employee's pay.
Company contributions to personal defined contribution pension plans totaled
$4.9 million, $2.6 million and $1.6 million for the years ended December 31,
2001, 2000 and 1999 respectively, and were charged to operations as they became
payable.
(b) Defined benefit pension plan
Roberts Pharmaceutical Corporation, a company with whom Company merged in
December 1999, operated a defined Supplemental Executive Retirement Plan (SERP)
for certain U.S. employees, which was established in 1998. This plan was
available to former employees of Roberts who met certain age and service
requirements.
As part of the restructuring of the Group following the merger, the SERP was
closed to new members and contributions have ceased being paid into the plan for
existing members. As part of this arrangement, the Company paid a lump sum
contribution into the plan of $18.0 million, the result of which is that the
Company has no future contributions under the plan.
In accordance with EITF 97-14, the asset and liability of $14.4 million and
$11.3 million respectively are shown on the balance sheet within the categories
investments and other non-current liabilities. See Notes 12 and 17 above.
(25) Income Taxes
The provision for income taxes consists of:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
---------- ---------- ----------
Current
U.S. Federal (44,781) (26,534) (14,007)
State and foreign (26,850) (17,348) (7,365)
---------- ---------- ----------
Total current (71,631) (43,882) (21,372)
---------- ---------- ----------
Deferred
U.S. Federal (20,586) (4,268) (622)
State and foreign 19,357 486 331
---------- ---------- ----------
Total deferred (1,229) (3,782) (291)
---------- ---------- ----------
Total attributable to continuing operations (72,860) (47,664) (21,663)
---------- ---------- ----------
Total attributable to discontinued operations - - (948)
---------- ---------- ----------
(72,860) (47,664) (22,611)
---------- ---------- ----------
F-40
December 31, December 31,
2001 2000
$'000 $'000
---------- ----------
Approximate net operating loss carry-forwards against future U.S. federal tax
liabilities 55,803 60,451
---------- ----------
Approximate net operating loss carry-forwards against future state and foreign tax
liabilities 470,177 310,204
---------- ----------
Total 525,980 370,655
---------- ----------
The tax losses shown above have the following expiration dates:
December 31,
2001
$'000
------------
2002 1,885
2003 1,327
2004 3,607
2005 150,404
2006 101,657
2007 57,772
2008 16,071
2009 3,346
2010 3,119
2011 4,820
Available indefinitely 181,972
-------
525,980
-------
The losses stated above include approximately $78.0 million of state tax losses
for which relief is available at state tax rates of approximately 3%.
A comparison of the provision for income taxes as reported to a
(provision)/benefit based on federal statutory rates and consolidated income
before income taxes is as follows:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
---------- ---------- ----------
(Provision)/benefit at federal statutory rates (39,066) (90,787) 4,757
Adjusted for:
Permanent differences (32,268) (963) (6,783)
Difference in taxation rates 32,307 44,233 25,755
Adjustment to prior year liabilities 2,958 (1,950) 4,004
Goodwill amortization (3,309) (3,783) (9,758)
Other (6,087) (2,652) (531)
F-41
Movement in valuation allowance (27,395) 8,238 (39,107)
---------- ---------- ----------
Provision for income taxes (72,860) (47,664) (21,663)
---------- ---------- ----------
Permanent differences arising in the year ended December 31, 2001 are mainly
attributed to non-deductible one time merger related costs incurred as a result
of the Company's merger with BioChem during the year.
An analysis of the deferred tax asset is as follows:
December 31, December 31,
2001
2000
$'000 $'000
------------ ------------
Losses carried forward 170,512 108,617
Amounts deductible when paid 6,238 34,307
Valuation reserves and provisions 7,874 6,915
Other 6,267 1,447
------------ ------------
190,891 151,286
Valuation allowance (125,565) (97,585)
------------ ------------
Deferred tax assets 65,326 53,701
Excess of tax value over book value of assets (33,022) (20,168)
------------ ------------
Net deferred tax assets 32,304 33,533
------------ ------------
Valuation allowances against deferred tax assets have not been provided to the
extent that it is more likely than not that future income and tax planning
strategies will enable losses brought forward to be utilized.
The income/(loss) before taxes by tax jurisdiction is as follows:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
----------- ----------- -----------
U.S. 200,160 77,974 (33,924)
U.K. (101,756) (37,577) (33,996)
Canada (164,188) 13,663 (50,806)
Other 177,403 205,331 105,136
----------- ----------- -----------
111,619 259,391 (13,590)
----------- ----------- -----------
F-42
(26) Stock Incentive Plans
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 (APB 25) and related interpretations in accounting for its
plans. In the years ended December 31, 2001, 2000 and 1999 the Company
recognized a charge under APB 25 of $2.3 million $21.9 million and $11.9 million
respectively. Had compensation for stock options awarded under the plans been
determined in accordance with SFAS 123, the Company's net income/(loss) and per
share data would have been changed to the pro forma amounts indicated below:
Years ended December 31, 2001 2000 1999
$'000 $'000 $'000
---------- ---------- ----------
Net income/(loss)
As reported 38,759 211,727 (47,432)
Pro forma 8,791 227,018 (37,919)
Income/(loss) per share
As reported - basic 7.9c 43.8c (9.8)c
As reported - diluted 7.7c 42.8c (9.8)c
Pro forma - basic 1.8c 47.0c (7.8)c
Pro forma - diluted 1.7c 45.9c (7.8)c
The fair value of stock options used to compute pro forma net income/(loss) and
per share disclosures is the estimated present value at grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Years ended December 31, 2001 2000 1999
---------- ---------- ----------
Risk free interest rate 3.43 - 5.22% 5.68% - 6.58% 4.76% - 6.25%
Expected dividend yield 0% 0% 0%
Expected life 5 years 5 years 5 years
Expected volatility 59.5% 64.2% 53.4%
Directors and employees have been granted options over ordinary shares under the
following stock option plans: the Shire Pharmaceuticals Group plc 2000 Executive
Share Option Scheme (2000 Executive Scheme), the Shire Holdings Ltd Share
Options Scheme (SHL Scheme), the Pharmavene 1991 Stock Option Plan (SLI Plan),
the Shire Pharmaceuticals Executive Share Option Scheme (Parts A and B)
(Executive Scheme), the Shire Pharmaceuticals Sharesave Scheme (Sharesave
Scheme), the Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (Stock
Purchase Plan), the Richwood Stock Options Plan (Richwood Plan), the Roberts
Stock Option Plans (Roberts Plan) and the BioChem Stock Option Plan (BioChem
Plan).
On February 28, 2000, the Remuneration Committee of the Board exercised its
powers to amend the terms of the Executive Share Option Scheme so as to include
a cliff vesting provision.
No further options will be granted under the SHL Scheme, SLI Plan, Richwood
Plan, Roberts Plan, Executive Scheme or BioChem Plan. In a period of five years,
not more than 5% of the issued share capital of the Company may be placed under
option under any employee share scheme. In a period of ten years, not more than
10% of the issued share capital of the Company may be placed under option under
any
F-43
employee share scheme. In addition, the following terms apply to options that
may be granted under the various plans:
Executive Scheme: up to 5% of the issued ordinary share capital of the Company,
in any period of ten years, subject to a limit of 2.5% in the period of four
years following adoption of the Scheme and a limit of three per cent in any
period of three calendar years.
Stock Purchase Plan: up to 2,000,000 ordinary shares.
The Company has granted options through December 31, 2001 under the various
plans as follows:
Expiry period from date of
Scheme Number of options issue Vesting period
--------------- ------------------------ ---------------------------- -------------------
SHL Scheme 556,560 7 years, or 3 months after 1 - 3 years
end of employment
Executive Scheme 4,994,638 10 years 3 years, subject to
performance criteria
2000 Executive Scheme 3,657,289 10 years 3 years, subject to
performance criteria
Sharesave Scheme 178,023 6 months after vesting 3 or 5 years
Stock Purchase Plan 429,026 27 months
SLI Plan 42,909 10 years Immediate on acquisition by
Shire
Richwood Plan 358,215 5 years Immediate on acquisition by
Shire
Roberts Plan 790,914 6 years Immediate on acquisition by
Shire
BioChem Plan 5,242,270 10 years Immediate on acquisition by
Shire
------------------------
Total 16,249,844
------------------------
2000 Executive Scheme: the maximum number of shares over which incentive options
may be granted under Part 3 of the scheme is 25,000,000.
A summary of the status of the Company's stock option plans as of December 31,
2001, 2000 and 1999 and the related transactions during the periods then ended
is presented below:
Year ended December 31, 2001 Weighted
average
exercise Number of
price $ shares
-------------- ----------------
Outstanding at beginning of period 7.83 24,790,322
Granted 17.24 4,405,089
Exercised 6.29 (11,443,831)
Forfeited/expired 13.86 (1,501,736)
-------------- ----------------
Outstanding at end of period 10.80 16,249,844
-------------- ----------------
F-44
Exercisable at end of period 7.50 9,054,150
-------------- ----------------
All options granted under the Executive and 2000 Executive schemes and BioChem
stock options were issued with exercise prices equivalent to the fair market
value of the Company's common stock on the date of grant as these options were
granted at market prices. 81,888 options were granted under the Sharesave Scheme
at a price of (pound)8.41 (approximately $12.24). These options were granted
with an exercise price equal to 80% of the mid-market price on the day before
invitations were issued to employees.
The average fair value of options granted in the year ended December 31, 2001 is
$17.30.
Year ended December 31, 2000 Weighted
Average
Exercise Number of
price $ Shares
-------------- -------------------
Outstanding at beginning of period 5.99 32,540,132
Granted 14.53 4,386,258
Exercised 4.30 (11,491,088)
Forfeited/expired 10.95 (644,980)
-------------- -------------------
Outstanding at end of period 7.83 24,790,322
-------------- -------------------
Exercisable at end of period 6.84 13,385,095
-------------- -------------------
All options granted under the Executive and 2000 Executive schemes and BioChem
stock options were issued with exercise prices equivalent to the fair market
value of the Company's common stock on the date of grant as these options were
granted at market prices. 79,424 options were granted under the Sharesave Scheme
at a price of (pound)8.56 (approximately $12.79). These options were granted
with an exercise price equal to 80% of the mid-market price on the day before
invitations were issued to employees.
The average fair value of options granted in the year ended December 31, 2000 is
$8.80.
Year ended December 31, 1999 Weighted
Average
Exercise Number of
price $ Shares
------------- ---------------------
Outstanding at beginning of period 4.88 35,623,241
Granted 7.99 3,960,869
Exercised 2.60 (5,189,359)
Forfeited/expired 5.54 (1,854,619)
------------- ---------------------
Outstanding at end of period 5.99 32,540,132
------------- ---------------------
Exercisable at end of period 5.74 21,662,275
------------- ---------------------
For the year ended December 31, 1999, the weighted average fair value of options
granted equates to the weighted average exercise price of $7.99 as all options
were granted at market prices.
F-45
Options outstanding at December 31, 2001 have the following characteristics:
Weighted average
Weighted exercise price of
Number of options average Weighted average exercise Number of options options exercisable
outstanding remaining price of options exercisable
Exercise prices life outstanding
----------------- ------------------- ------------- ------------------- ------------------ -------------------
1,021,402 $1.01-$2.00 0.9 $1.49 1,021,402 $1.49
445,488 $2.01-$3.00 1.5 $2.54 445,488 $2.54
721,794 $3.01-$4.00 2.3 $3.59 707,055 $3.59
668,796 $4.01-$5.00 3.5 $4.93 668,796 $4.93
826,631 $5.01-$6.00 3.3 $5.27 826,631 $5.27
1,451,724 $6.01-$7.00 4.1 $6.69 338,724 $6.12
46,344 $7.01-$8.00 4.8 $7.44 26,344 $7.20
204,530 $8.01-$9.00 5.3 $8.70 174,530 $8.78
187,051 $9.01-$10.00 5.0 $9.17 187,051 $9.17
4,097,796 $10.01-$11.00 5.2 $10.34 4,047,796 $10.34
528,071 $11.01-$12.00 4.6 $11.72 226,415 $11.71
145,811 $12.01-$13.00 3.7 $12.34 - -
504,737 $13.01-$14.00 6.3 $13.19 383,918 $13.17
1,980,303 $14.01-$15.00 6.4 $14.86 - -
3,415,366 $18.01-$19.00 9.2 $18.31 - -
4,000 $19.01-$20.00 8.9 $19.21 - -
----------------- --------- ------------ ---------------- -----------------
16,249,844 5.4 $10.80 9,054,150 $7.50
----------------- --------- ------------ ---------------- -----------------
F-46
Quarterly Results of Operations (Unaudited)
The following table presents summarized unaudited quarterly results for the
years ended December 31, 2001 and 2000. The unaudited quarterly results for 2001
and 2000 have been restated to reflect the merger with BioChem. The 2001 revenue
and gross profit numbers have been restated to reflect a Canadian to US GAAP
adjustment not previously included in the quarterly results.
2001 First Second Third Fourth
$'000 $'000 $'000 $'000
-------- -------- -------- --------
Revenues 187,722 208,464 216,812 264,571
Gross profit 159,337 181,805 189,775 228,367
Net income/(loss) 41,465 (124,191) 58,111 63,374
Basic net income/(loss) per share 8.5c (25.3)c 11.8c 12.7c
-------- -------- -------- --------
Diluted net income/(loss) per share 8.3c (25.3)c 11.4c 12.4c
-------- -------- -------- --------
2000 First Second Third Fourth
$'000 $'000 $'000 $'000
-------- -------- -------- --------
Revenues 151,095 159,563 179,323 181,129
Gross profit 128,638 136,923 147,189 156,989
Net income 12,960 128,266 43,176 27,325
Basic net income per share 2.7c 26.6c 8.9c 5.6c
-------- -------- -------- --------
Diluted net income per share 2.6c 25.9c 8.8c 5.5c
-------- -------- -------- --------
F-47
EXHIBIT INDEX
Exhibit
Number Description
2 Merger Agreement, dated as of December 11, 2000, among BioChem Pharma Inc.,
3829341 Canada Inc. and Shire Pharmaceuticals Group plc. (1)
3.1 Amended and Restated Memorandum and Articles of Association of Shire
Finance Limited.(2)
3.2 Memorandum and Articles of Association of Shire.(3)
4.1 Deposit Agreement among Shire Pharmaceuticals Group plc, JP Morgan Chase
Bank (f/k/a Morgan Guaranty Trust Company of New York) and Holders from
time to time of Shire ADSs.(3)
4.2 Form of Ordinary Share Certificate.(3)
4.3 Form of ADR certificate (included within Exhibit 4.1).(3)
4.4 Indenture dated August 21, 2001 by and among Shire Finance Limited, Shire
Pharmaceuticals Group plc and The Bank of New York, as Trustee.(2)
4.5 Form of 2% Senior Guaranteed Note due 2011 (included in Exhibit 4.4).(2)
4.6 Registration Rights Agreement dated August 21, 2001, between Shire Finance
Limited, Shire Pharmaceuticals Group plc and Bear, Stearns International
Limited and Goldman Sachs International, as representatives of the Initial
Purchasers.(2)
4.7 Preference Share Guarantee Agreement dated August 21, 2001 among Shire
Finance Limited, Shire Pharmaceuticals Group plc and The Bank of New York
(f/k/a Morgan Guaranty Trust Company of New York), as Guarantee Trustee.(2)
4.8 Form of Shire Pharmaceuticals Group plc Guarantee.(2)
4.9 Form of Plan of Arrangement including Exchangeable provisions.(4)
4.10 Form of Voting and Exchange Trust Agreement.(4)
4.11 Form of Exchangeable Share Support Agreement.(4)
10.1 BioChem Pharma Inc. Directors, Officers, Employees and Consultant's Stock
Option Plan, as amended.(5)
E-1
10.2 BioChem Pharma Inc. Deferred Share Unit Plan for Key Executives. (5)
10.3 BioChem Pharma Inc. Deferred Share Unit Plan for Non-Employee Directors.
(5)
10.4 SHL Scheme.(3)
10.5 Executive Scheme.(3)
10.6 Sharesave Scheme.(3)
10.7 Employee Stock Purchase Plan.(3)
10.8 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.(6)
10.9 Technology Partnership Canada, Development of Recombined Protein Vaccine
Technologies Agreement, dated March 31, 2000 by and between the Canadian
Government and Shire BioChem Inc (f/k/a BioChem Pharma Inc.). (6)
21 List of Subsidiaries.
23.1 Consent of Arthur Andersen.
23.2 Consent of Raymond Chabot Grant Thornton.
99 Representations by Arthur Andersen.
- ------------------
(1) Incorporated by reference to the exhibits to Shire's Form 8-K filed on
December 11, 2000.
(2) Incorporated by reference to the exhibits to Shire's Registration Statement
on Form S-3 (No. 333-72862).
(3) Incorporated by reference to the exhibits to Shire's Registration Statement
on Form F-1 (No. 333-8394).
(4) Incorporated by reference to the exhibits to Shire's Registration Statement
on Form S-4 (No. 333-55696).
(5) Incorporated by reference to the exhibits to Shire's Registration Statement
on Form S-8 (No. 333-60952).
E-2
(6) Incorporated by reference to the exhibits to BioChem's Form 20-F filed on
June 9, 2000.
E-3
Exhibit 21
List of subsidiaries
Subsidiary/Undertaking Country of Incorporation
Roberts Pharmaceutical Corporation USA, State of New Jersey
Shire Pharmaceutical Limited England and Wales
Shire Pharmaceutical Development Limited England and Wales
Shire International Licensing BV Netherlands
Shire Laboratories Inc. USA, State of Delaware
Shire Supplies U.S., LLC USA, State of Delaware
Shire France S.A. France
Shire Deutscheland GmbH & Co. KG Germany
Shire US Inc. USA, State of New Jersey
Shire Italia SpA Italy
Shire Pharmaceutical Iberica S.L. Spain
Shire Canada Inc Canada
Shire Pharmaceutical Development US Inc USA, State of Maryland
Shire BioChem Inc Canada
Shire Finance Limited Cayman Islands
Shire Biologics Inc. USA, State of Massachusetts
All of the Group's subsidiary undertakings are beneficially owned (directly or
indirectly) as to 100% and are all consolidated in the results of the Group.
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN, INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-8 (File Nos. 333-09168, 333-93543 and 333-60952), Form S-4 (333-55696)
and Form S-3 (333-72862-01) of our report dated 27 February 2002 on our audits
of the financial statements of Shire Pharmaceuticals Group plc as of December
31, 2001, 2000 and 1999 and for the periods then ended included in the annual
report in Form 10-K of Shire filed March 28, 2002 and to the use of our report
in such Shire annual report on Form 10-K.
/s/ Arthur Andersen
March 28, 2002
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Shire Pharmaceuticals Group
plc ("Shire") Registration Statements on Form S-8 (Nos. 333-09168, 333-93543 and
333-60952), Form S-4 (333-55696) and Form S-3 (333-72862-01) of our report dated
January 25, 2001, included in the annual report on Form 10-K of Shire filed
March 28, 2002, on our audits of the consolidated financial statements of
BioChem Pharma Inc., prepared in United States of America dollars and in
accordance with generally accepted accounting principles in United States of
America, as of December 31, 2000 and 1999 and for the years ended December 31,
2000, 1999 and 1998 and to the use of our report with respect to the financial
statements in the Shire annual report on Form 10-K filed March 28, 2002.
/S/ Raymond Chabot Grant Thornton
Chartered Accountants
General Partnership
Montreal, Canada
March 28, 2002
Exhibit 99
[SHIRE PHARMACEUTICALS GROUP LETTERHEAD]
28 March 2002
US Securities & Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
USA
Ladies and Gentlemen:
Re: Representations by Arthur Andersen
Pursuant to Temporary Note 3T to Article 3 of Regulation S-X of the Securities
Exchange Act of 1934, as amended, I acknowledge on behalf of Shire
Pharmaceuticals Group plc (the "Company") that Arthur Andersen ("Andersen"), the
Company's independent public accountants, has represented to the Company that
its audit of the financial statements contained in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001, was subject to
Andersen's quality control system for the US accounting and auditing practice to
provide reasonable assurance that the engagement was conducted in compliance
with professional standards and that there was appropriate continuity of
Andersen personnel working on the audit, availability of national office
consultation and availability of personnel at foreign affiliates of Andersen to
conduct the relevant portions of the audit.
Sincerely,
/s/ Angus Russell
Angus Russell
Group Finance Director