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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, 2002
[ ] 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 incorporation or organization) (I.R.S. Employer Identification No.)
Hampshire International Business Park, Chineham, Basingstoke, RG24 8EP
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Hampshire, England (Zip Code)
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(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 Common Shares NASDAQ National Market
- -------------------------------------------------------------- ----------------------
5 pence par value per share
-----------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
--------
(Title of class)
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 [ ]
1
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X], No [ ].
As of June 30, 2002, the aggregate market value of the common shares,
(pound)0.05 par value per share of the Registrant held by non-affiliates was
approximately $4,153 million. This was computed using the average bid and ask
price at the above date.
As of March 24, 2003, the number of outstanding common shares of the Registrant
was 484,523,040.
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Statements included herein that are not historical facts, are forward-looking
statements. Such forward-looking statements involve a number of risks and
uncertainties and are subject to change at any time. In the event that such
risks or uncertainties materialize, Shire's 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, manufacturing and commercialization, the impact of competitive
products, including, but not limited to, the impact on Shire's Attention Deficit
Hyperactivity Disorder (ADHD) franchise patents including, but not limited to,
legal challenges relating to Shire's ADHD franchise, government regulation and
approval, including, but not limited to, the expected approval date of lanthanum
carbonate (FOSRENOL(R)) and METHYPATCH(R), 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, 2002.
2
PART I
ITEM 1: Business
(a) General development of the business
Shire is an emerging global pharmaceutical company with a strategic focus on
four therapeutic areas: central nervous system disorders, gastro intestinal,
oncology, and anti-infectives. Our strategy is further supported by three
platform technologies: advanced drug delivery, lead optimization for small
molecules, 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 where we have out-licensed product
rights to third parties, and licensing and development fees.
We were incorporated under the laws of England and Wales on January 1, 1994 and
are now a public limited company under the same laws. As part of a
recapitalization, we acquired the entire share capital of Shire Holdings Limited
on December 19, 1994, including the operations of Rybar Laboratories Limited, a
U.K. based sales and marketing company acquired by our predecessor in July 1992.
In September 1995, we acquired Imperial Pharmaceutical Services Limited
(subsequently renamed Shire Pharmaceutical Contracts Limited). 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 Limited (the subsidiaries were subsequently
renamed Shire Deutschland GmbH, Shire France SA and Shire Italia SpA
respectively). We merged with Roberts Pharmaceutical Corporation (Roberts) in
December 1999. Following the merger, the U.S. sales and marketing operations of
Roberts were merged with Shire Richwood, 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 SL. In 2002, we established Shire
Pharmaceuticals Ireland Limited.
In May 2001, Shire merged with BioChem Pharma, Inc. (BioChem), an international
specialty pharmaceutical company based in Laval, Canada, which provided two
major development capabilities in lead optimization and biologics. This brought
an anti-infective pipeline to Shire, as well as the royalty stream on sales of
3TC and ZEFFIX, by GlaxoSmithKline (GSK). In addition, it further strengthened
our know-how and expertise in oncology.
We have expanded our business both organically and through acquisitions. In
February 2003, we agreed to acquire, from Noven Pharmaceuticals Inc., the
worldwide sales and marketing rights to METHYPATCH, a methylphenidate
transdermal delivery system for the once-daily treatment of ADHD. In addition,
we acquired a pharmaceutical manufacturing facility, Atlantic Pharmaceutical
Services Inc. (APS) (subsequently renamed Shire US Manufacturing Inc.), from
Niro Inc. in September 2002. The APS facility will become one of the principal
manufacturing sites for Shire US operations and will support the strategy of
dual sourcing for key products.
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 "Shire" refers to Shire Pharmaceuticals Group plc and
the term "the Company" refers to Shire Pharmaceuticals Group plc and its
subsidiaries, unless the context indicates otherwise.
(b) Financial information about operating segments
Substantially, all of our revenues, operating profits or losses and assets are
attributable to the acquisition, research and development, manufacture, sale and
distribution of pharmaceutical products within three individual operating
segments: U.S., International, and Global Research and Development.
3
(c) Description of the business
(i) Strategy and approach
Whilst the balance of revenue and profit growth has been towards the U.S.,
during the last two years we have continued to develop our global strategy by
launching two new specialty pharmaceutical products, SOLARAZE(R) (diclofenac
sodium 3%) and ADEPT(R) (4% icodrextrin), in European countries, including the
U.K., Spain, Italy, France, Germany and the Republic of Ireland. These two new
products have already contributed to our International segment, which has
delivered total sales growth of 29% in 2002.
Shire has a risk-balanced research and development portfolio with a clear focus
on future product needs. To enhance the potential for future growth, we follow
two main approaches; firstly, to start projects in-house through research and
advanced drug delivery and secondly to in-license projects and products on
reasonable commercial terms, and then to develop and launch them. This broad
approach strengthens our strategy.
We remain an acquisitive company. In the past eight years we have completed six
major mergers and acquisitions, each one providing or building on our internal
platforms for growth. We will continue to evaluate companies, products and
project opportunities that offer a good strategic fit and provide additional
shareholder value.
Our business model has five levels of focus: functional, customer, therapeutic,
geographic and technology.
o Functional focus
We focus on specific functional areas of the business that are identified
as being key drivers for success, such as research and development and
sales and marketing.
Our current R&D pipeline of projects includes 13 that are either in or post
Phase II development. 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 that, as a
consequence, the average risk profile of projects in our R&D portfolio is
targeted to be lower than the industry average.
Our sales and marketing function is another essential factor contributing
to our success. We take pride in our well-trained and highly-motivated
sales forces that have, through the success of our key marketed products
and successful introduction of ADDERALL XR(R) (mixed amphetamine salts) and
conversion of patients from ADDERALL(R) (mixed amphetamine salts),
demonstrated outstanding professionalism and performance.
We continue to outsource non-core activities in order to keep the Company
dynamic and efficient.
o Customer focus
We have a particular interest in innovative therapies that are prescribed
by specialist doctors, as opposed to those prescribed by primary care or
general practitioners. We target specialist doctors because they usually
lead innovations in prescribing. They are smaller in number and easier to
target effectively for a company of our size.
o Therapeutic focus
Our main areas of therapeutic focus are: central nervous system disorders,
gastro intestinal, oncology, and anti-infectives, supported by three
platform technologies: advanced drug delivery, lead optimization for small
molecules, and biologics.
In December 2002, we completed the sale of our U.S. `Over-The-Counter'
(OTC) products to Purdue Pharmaceuticals Inc. This divestment represents
our complete exit from OTC operations in the US and will allow us to focus
resources on our core strategy of providing prescription pharmaceuticals to
specialist doctors.
4
o Geographic focus
We currently market our products using our own sales forces in seven of the
eight major pharmaceutical markets of the world. We also cover other
significant pharmaceutical markets indirectly through distributors. In
addition, one of our strategic goals is to establish a presence in Japan in
the future.
o Technology focus
Our three platform technologies, advanced drug delivery, lead optimization
for small molecules and biologics, are an important part of our
risk-balanced approach.
We seek to obtain patent protection through our advanced drug delivery
expertise wherever possible. Importantly, these three platform technologies
also widen our ability to in-license research programs, development
projects and products. We can use these technologies either to develop them
internally or to manage the life-cycle of existing products.
Our strategy includes the identification of off patent products that could
be enhanced using the technologies of our oral drug delivery company, Shire
Laboratories Inc., based in Maryland, U.S. Examples of such projects are
ADDERALL XR and CARBATROL(R) (carbamazepine).
(ii) Sales and marketing
Our sales and marketing operations in the U.S., the U.K., the Republic of
Ireland, the key countries of continental Europe and Canada presently consist of
603 sales representatives. We believe that our sales and marketing
infrastructure can be expanded rapidly to meet product opportunities.
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(R) ADHD Shire Shire - U.S.
Adderall(R) ADHD Shire Shire - U.S.
Carbatrol(R) Epilepsy Shire Shire - U.S.
REMINYL(R)(galantamine Alzheimer's disease Synaptech Inc. Shire and Janssen - U.K. & Republic of
hydrobromide) Ireland
Janssen - RoW
Treatments for gastro intestinal diseases
Pentasa(R) Ulcerative colitis Ferring Shire - U.S.
(mesalamine)
Oncology treatments
Agrylin(R)(anagrelide) Essential thrombocythemia Shire Shire - U.S. and Canada
5
Products Principal indication(s) Owner/licensor Marketed by/relevant territory
- --------- -------------------- -------------- ----------------------------
Treatments for infections
3TC*/EPIVIR* HIV/AIDS Shire** Shire & GSK - Canada, GSK - RoW
COMBIVIR* HIV/AIDS Shire** Shire & GSK - Canada, GSK - RoW
TRIZIVIR* HIV/AIDS Shire** Shire & GSK - Canada, GSK - RoW
ZEFFIX*/EPIVIR HBV*/ HEPTOVIR*1 Hepatitis B infection Shire** Shire & GSK - Canada, GSK - RoW
Treatments for other diseases
ProAmatine(R)/ Orthostatic hypotension Nycomed Shire - U.S. and Canada
(midodrine hydrochloride)
Amatine(R)
CALCICHEW(R)(calcium
carbonate) range Adjunct in osteoporosis Nycomed Shire - U.K. and Republic of Ireland2
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.
(R) Our trademarks or those of our subsidiaries.
* Trademarks of 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 originally thought to be a childhood disorder only, but
has now been fully recognized as a disorder in adults as well. According to IMS
America, the U.S. market for ADHD treatments was approximately $1.5 billion for
the year ended December 31, 2002. It is estimated that between 3% and 7% of
children in the U.S. suffer from the condition.
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(R) drug 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 soft food. In the ADHD market, a once a day formulation
is accepted to be an important benefit as it:
o provides all day control of 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.
ADDERALL XR was approved by the U.S. Food and Drug Administration (FDA) 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 IMS Health had already achieved a 23.7% share
of the U.S. prescription ADHD market for the week ending December 27, 2002.
Sales of ADDERALL XR and ADDERALL during 2002 were $427.7 million, representing
approximately 41% 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.
6
On February 11, 2002 Barr Laboratories Inc. (Barr) announced FDA approval to
market a generic version of the original ADDERALL formulation which is not
patent protected. Since then, several other companies have also obtained
approval and launched generic versions of ADDERALL.
In November 2002 we received approval from the FDA for a new formulation of
ADDERALL which is patent protected. In January 2003 we received a Paragraph IV
notice from Barr alleging that this patent is invalid and not infringed by
Barr's 7.5 mg, 12.5 mg and 15 mg mixed amphetamine salt products. Further
details are included in the intellectual property section below.
Our extended release product ADDERALL XR is covered by a US patent . In January
2003 we received a Paragraph IV notice from Barr alleging that this patent is
invalid and not infringed by Barr's extended release mixed amphetamine salt
product, the subject of a pending Barr Abbreviated New Drug Application (ANDA).
In February 2003, Shire Laboratories Inc. filed suit against Barr for
infringement of this U.S. patent. For more details see sections headed
intellectual property and legal proceedings below . There can be no assurance
that the Company will prevail in the suit and in the event it does not this may
have a material adverse impact on the Company's results and financial position .
A Supplemental New Drug Application (sNDA) filing was made in December 2002 for
use of ADDERALL XR in adults. Two new life cycle management projects for the
ADDERALL franchise are currently under development (SPD465 and SPD483).
Carbatrol
Approximately 2.3 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 uses Shire Laboratories' Microtrol technology.
It can be administered as a capsule or sprinkled on food and delivers consistent
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 10% of total U.S. anti-epileptic
prescriptions written in 2002. Prescription numbers for Carbatrol increased from
853,000 in 2001 to 909,000 in 2002.
In 1994, we obtained a patent in the U.S. covering the formulation of Carbatrol
with an expiration date of 2011. The FDA approved CARBATROL on September 30,
1997 for marketing in the U.S. The product was originally out-licensed to Athena
Inc., a subsidiary of Elan Corporation plc. In December 1997, we re-acquired the
worldwide rights to Carbatrol, together with inventory, certain plants 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. Patent
applications covering this technology are pending in other countries.
We announced on November 6, 2002, that with enhanced supply capability,
including the recent acquisition of APS, we planned to re-launch CARBATROL in
the U.S. market early in 2003.
In the year ended December 31, 2002, sales of CARBATROL were $45.3 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 4 million people in
the U.S. suffer from Alzheimer's disease. It is estimated that one in four
people over the age of 75 suffers with the disease.
REMINYL, a 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.
7
In the U.S., REMINYL was approved by the FDA on February 28, 2001 and launched
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, but 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 gastro intestinal diseases
PENTASA
Ulcerative colitis, a component of inflammatory bowel disease, is a chronic,
relapsing disease in which part or all of the large intestine becomes inflamed
and often ulcerated. The mainstay of treatment for inflammatory bowel disease is
5-aminosalicylate-based (mesalamine) products.
PENTASA controlled-release capsules are indicated for the induction of remission
and for the treatment of patients with mildly to moderately active ulcerative
colitis. PENTASA is an ethylcellulose-coated, controlled release capsule
formulation of mesalamine designed to release therapeutic quantities of
mesalamine throughout the gastrointestinal tract.
In April 1998, exclusive U.S. marketing rights to PENTASA were acquired from
Hoechst Marion Roussel for $136.0 million. Sales of PENTASA in the year ended
December 31, 2002 were $87.2 million, representing approximately 8% of our total
revenues.
Oncology treatments
Agrylin
Essential 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 bleeding, with the consequence of an increased risk of
gastrointestinal bleeding, heart attack and stroke.
In 1991, the exclusive worldwide license was obtained from Bristol-Myers Squibb
to develop, market and sell Agrylin (anagrelide) as an oral treatment for
essential thrombocythemia. In March 1997, the NDA for Agrylin was approved in
the U.S.. We also market AGRYLIN in Canada and in other countries on a named
patient basis. There is no other U.S. or Canadian approved treatment available
for essential 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 January 1999, we
purchased the intellectual property rights to Agrylin from Bristol-Myers Squibb
for $35.0 million.
In the year ended December 31, 2002, our worldwide sales of Agrylin were $119.2
million, representing approximately 11% of our total revenues.
In January 2001, the Committee for Proprietary Medicinal Products (CPMP) on
behalf of the European Medicines Evaluation Agency (EMEA) granted orphan drug
designation to anagrelide for the treatment of essential thrombocythemia. This
designation covers the EU, 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.,
8
where market exclusivity is available until 2004, and in Japan where it will run
for ten years following marketing approval. The European Marketing Authorization
Application (MAA) filing was made in March 2002.
Treatments for infections
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
exhibit the same disease mechanism. The RNA of the virus 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 2002 there were 42 million adults and children
living with the HIV infection worldwide. Estimates suggest that there are 14,000
new infections each day.
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
GSK. These products are now sold worldwide.
3TC royalties for the year ended December 31, 2002, were $132.5 million, up 10%
on 2001.
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, at some point, been
infected with the HBV virus. Of these 2 billion, there are over 350 million
people chronically infected, (World Health Organization 2000). Vaccines to
prevent HBV are currently available, however, they have not been shown to be
effective in those already infected with the virus.
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.
ZEFFIX royalties for the year ended December 31, 2002, were $21.2 million, up
25% on 2001.
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
oestrogen production following menopause.
Our principal products for the adjunctive treatment of osteoporosis 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,
CALCICHEW(R) 500mg, CALCICHEW FORTE(R), CALCICHEW-D3(R) and CALCICHEW-D3
FORTE(R). We believe this range is 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
orthostatic hypotension. This is a condition involving low blood pressure upon
assuming an upright posture, resulting in dizziness, weakness or
unconsciousness. PROAMATINE has been
9
designated as an orphan drug by the FDA, giving it a seven year period of market
exclusivity in the U.S., which will expire in September 2003. Sales of
ProAmatine in 2002 were $50.9 million, representing approximately 5% of our
total revenues.
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,
although we do not focus on non-validated targets. 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, 2002, we spent $189.2 million on research and
development, representing approximately 18% 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.
Most advanced development
Product(s) Principal indication(s) status Shire's territorial rights
- --------- ----------------------- -------------------------- --------------------------
Treatments for central nervous system disorders
SPD417 Bipolar disorder Phase III Global
SPD451 Parkinson's disease Preclinical Global
SPD473 ADHD Phase I Global
SPD503 ADHD Phase III Global
SPD465 ADHD Phase I Global
SPD483 ADHD Preclinical Global
SPD485 ADHD In registration in U.S. Global
Treatments for gastro intestinal
diseases
SPD476 Ulcerative colitis Phase II Global
SPD480 Ulcerative colitis Phase II Global
PENTASA (500mg) Ulcerative colitis Phase II U.S.
Balsalazide Ulcerative colitis Phase II complete(2) Certain countries within
Europe
Oncology treatments
AGRYLIN(R)/ XAGRID(R) Essential thrombocythemia In registration in Europe(1) Global
TROXATYL(R)(troxacitabine) AML Phase II Global
TROXATYL Pancreatic cancer Phase II Global
10
Most advanced development
Product(s) Principal indication(s) status Shire's territorial rights
- --------- ----------------------- -------------------------- --------------------------
Treatments for infections
SPD701 Influenza vaccine(3) Phase I Global
SPD703 Streptococcus pneumoniae Phase I Global
vaccine
SPD704 Neisseria meningitidis Phase I Global
vaccine
SPD705 Pseudomonas aeruginosa Phase I Global
vaccine(4)
SPD707 Influenza vaccine Phase II(5) Global
SPD754 HIV Phase II Global
SPD756 HIV Phase I Global
Most advanced development
Product(s) Principal indication(s) status Shire's territorial rights
- --------- ----------------------- ------------------------- --------------------------
Treatments for other diseases
FOSRENOL(R)(Ianthanum
carbonate)(6) Hyperphosphataemia In registration EU, U.S. and Global
Canada
In Phase 1 in Japan
1 This product is marketed in the U.S. and Canada under the trademark AGRYLIN
and is currently in registration in Europe, under the name XAGRID.
2 This product is marketed in the U.K. by us and in various European
countries by our distributors. Shire has rights for various European
markets.
3 This influenza vaccine antigen is produced in cell culture, in contrast to
SPD707, which is produced in chicken eggs.
4 The initial Phase I clinical trial is being conducted by Cytovax
Biotechnologies.
5 This product is marketed in Canada under the trademark FLUVIRAL S/F(R) and
is under development for markets outside of Canada.
6 This project is referred to as FOSRENOL throughout this document, but was
previously known as Project Lambda or Foznol.
Treatments for central nervous system disorders
SPD417 for bipolar disorder
SPD417 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
A successful sNDA filing for ADDERALL XR was made in 2001, culminating in the
U.S. launch on November 5, 2001. An sNDA for ADDERALL XR was also filed in the
U.S. for the Adult ADHD indication in December 2002.
ADDERALL XR is currently in registration in Canada.
We have five further projects in development for ADHD; SPD473, SPD503, SPD465,
SPD483 and SPD485.
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SPD473
SPD473 is a multiple monoamine reuptake inhibitor acting on dopamine,
noradrenaline and 5-HT. Activity is focused on proof of concept in ADHD.
Parkinson's disease and depression indications have been explored but are not
being progressed.
Shire also has two new life cycle projects for the ADDERALL franchise, SPD465
and SPD483, which are in Phase I and preclinical stage respectively.
SPD503
SPD503 is a potentially non scheduled compound and is in Phase III. The compound
is an established chemical entity that has been reformulated by Shire for use in
ADHD.
SPD485
On February 27, 2003, Shire announced the acquisition of the worldwide sales and
marketing rights of METHYPATCH, from Noven Pharmaceuticals Inc.
METHYPATCH/SPD 485, is a methylphenidate transdermal delivery system, for the
once-daily treatment of ADHD, which was filed with the U.S. FDA on June 27,
2002.
The acquisition of METHYPATCH will enable Shire to develop a new presence in the
methylphenidate segment of the market which currently represents over half of
the U.S. ADHD prescription volume.
METHYPATCH has a technology patent until 2012 and composition patents in the
U.S. and other key markets until December 2018.
Epilepsy
Epilepsy is a condition currently affecting a large market of approximately 2.3
million people in the U.S. Shire maintains interest in a number of possible
treatments for this condition, with the aim of building a franchise based on our
existing U.S. marketed product, CARBATROL.
Shire has recently reviewed a series of results from studies on the epilepsy
project SPD421 and has concluded that it does not meet Shire's criteria to
warrant investment in Phase III studies. The licensor, D-Pharm Ltd., has
indicated its intent to continue development and Shire is therefore currently
discussing the return of the project to D-Pharm.
Shire has also decided not to pursue two potential reformulation projects in
epilepsy, designated SPD452 and SPD453. Instead, Shire is actively reviewing
other potential in-licensing projects for epilepsy and related disorders.
Parkinson's disease
Parkinson's disease is a relatively common disease that causes a progressive
loss of movement, rigidity, postural abnormalities and tremor.
Shire obtained the rights to a dopamine D1 agonist project, SPD451, in December
2000, when it was in-licensed from CeNeS Pharmaceuticals plc. This project is
currently in the preclinical stage of development.
SPD474 is a dopamine reuptake inhibitor that was licensed from an undisclosed
third party in December 2001. This compound showed insufficient evidence of
efficacy and work has been terminated.
Treatments for gastro intestinal diseases
Ulcerative colitis is a serious chronic inflammatory bowel disease of the colon
and rectum. Typically patients go through periods of relapse and remission over
a number of years. 5-ASA (5-aminosalicylic acid) based products are the first
line treatment for ulcerative colitis. Existing treatments have a large pill
burden and are differentiated on the release mechanism and targeting.
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PENTASA for ulcerative colitis
PENTASA 250mg is a 5-ASA based product marketed by Shire in the U.S for
ulcerative colitis. A 500mg dosage form is being developed to aid compliance in
patients, who often need to take large doses of this medication.
COLAZIDE for ulcerative colitis
In May 2000, we in-licensed rights to COLAZIDE, a 5-ASA based product for
ulcerative colitis, from Salix Pharmaceuticals Inc. The first launch was in the
U.K. in September 2000.
SPD476
SPD476 is being developed as a high strength (1200mg) 5-ASA based product for
ulcerative colitis using a unique formulation and delivery platform. Rights to
SPD476 in key global markets were licensed from Giuliani SpA. on May 6, 2002.
The project is currently in Phase II.
SPD480
SPD480 is a 5-ASA based product formulated as a foam for rectal delivery in the
treatment of ulcerative colitis. Rights to key global markets were licensed from
Giuliani SpA on October 10, 2002. This product will provide an alternative
treatment for distal/rectal ulcerative colitis.
Oncology treatments
AGRYLIN for essential thrombocythemia
We market anagrelide as 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 anagrelide for other countries, where it
may be marketed as AGRYLIN or XAGRID. In January 2001, the Committee for
Proprietary Medicinal Products (CPMP) on behalf of the European Medicines
Evaluation Agency (EMEA) 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.
The European Marketing Authorization Application (MAA) filing was made in March
2002.
TROXATYL for acute myeloid leukemia (AML) and pancreatic cancer
TROXATYL is initially being clinically evaluated for two types of cancer; AML
and pancreatic cancer.
In children, cancer is second only to accident as a cause of death and leukemia
is the most common form of cancer found in this age group. In 2002 there have
been an estimated 30,000 new cases of pancreatic cancer across North America.
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.
Both projects are currently studying combination use with other agents and are
in Phase II.
Treatments for infections
(i) influenza vaccines
SPD707
SPD707, a split-virion influenza vaccine, was introduced as a project during the
third quarter of 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
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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 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 sales value of the agreement may exceed
CAN$300 million (approximately $190 million).
SPD701
SPD701 is a cell-based influenza vaccine. Prior to our merger, BioChem announced
in its first quarter 2001 financial results that the agreement with GSK to
develop SPD701 had been terminated. In our third quarter 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 SPD701 will not continue until a new partner has been found.
HIV
Our expertise in HIV that led to the discovery of 3TC has also led to the
discovery of two further antiretroviral compounds; SPD756 (formerly BCH 13520)
and SPD754 (formerly BCH 10618).
SPD754
SPD754 is a nucleoside (cytidine) analogue that also reduces the rate of
replication of HIV.
Preclinical data indicates that SPD754 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 SPD756, preclinical studies indicate that viral
resistance to SPD754 appears to develop very slowly. SPD754 is currently in
Phase II of development.
SPD756
SPD756 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 SPD756 emerged slowly. This
project entered Phase I clinical studies during the third quarter of 2001. This
project is currently subject to additional testing to determine if it should
progress to studies in humans.
(ii) 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, we concluded a partnership agreement with the Canadian government
though Technology Partnerships Canada (TPC). Under the agreement, the Canadian
government has agreed to contribute up to CAN$80 million (approximately $51
million) in the development of recombinant protein vaccines over a period of
approximately six years. For the year ended December 31, 2002, the contributions
due from the Canadian government amounted to CAN$3.1 million (approximately $2.0
million) based on eligible research and development expenditure. This
contribution is accounted for as a reduction against research and development
costs charged to operations.
We have three vaccines in development against the following bacteria: Neisseria
meningitidis, Streptococcus pneumoniae and Pseudomonas aeruginosa.
SPD704 - Neisseria meningitidis vaccine
Our meningococcal vaccine candidate, SPD704, is designed to protect against
infection by N. meningitidis. Two of the most common outcomes of infection by N.
meningitidis are meningococcal meningitis and septicaemia.
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Existing polysaccharide vaccines and current and future polysaccharide conjugate
vaccines against N. meningitidis only protect against four of the 12 serogroups
of N. meningitides. However, none protect against serogroup B, the most common
strains of the bacteria in industrialised countries such as Canada, the U.S. and
the U.K. SPD704 appears to have the potential to induce a potent and
long-lasting immunity against all strains of N. meningitidis, including type B.
If these properties are confirmed in clinical trials, our recombinant protein
vaccine against N. meningitidis will be a significant medical advance. This
vaccine is currently in Phase I clinical trials.
SPD703 - Streptococcus pneumoniae vaccine
We believe that our protein-based vaccine, SPD703, should more effectively
stimulate the immune system and has the potential to provide improved protection
for children and older people alike across all S. pneumoniae strains. This
project is at Phase I of development.
SPD705 - Pseudomonas aeruginosa vaccine
P.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% 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 P. aeruginosa, known as SPD 705. This project
moved into Phase I of development in February 2002, for which Cytovax
Biotechnologies is conducting the ongoing Phase I trial.
Treatments for other diseases
FOSRENOL for hyperphosphatemia
FOSRENOL (lanthanum carbonate) is being developed for the prevention and
treatment of high levels of phosphate in the blood of patients with chronic
kidney failure. The body absorbs phosphate from food and any excess to
requirements is excreted in urine. 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,
hyperphosphataemia can lead to the bone disease, renal osteodystrophy, which
causes bone pain, skeletal deformities, and can result in fractures. Recent
research also suggests that hyperphosphataemia is associated with the
development of cardiovascular disease, which accounts for nearly 50% of all
deaths in dialysis patients. Taking lanthanum carbonate with food results in the
formation of 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 FOSRENOL does not contain calcium it enables the physician
to separate the control of calcium from phosphate. In addition, since chronic
kidney failure patients are severely fluid restricted, FOSRENOL is presented as
a chewable tablet.
It is estimated that there are one million patients worldwide with end-stage
renal disease. We believe that current therapies are not ideal: aluminum salts
can cause bone and/or neural toxicity and are no longer widely used, and calcium
salts are inefficient binders requiring large doses and often causing
hypercalcaemia, which among other things, can result in calcification of blood
vessels. Other treatment options involve high pill burden and/or add to the
patients fluid intake needs.
On March 3, 2003 Shire received an approvable letter from the U.S. Food & Drug
Administration (FDA) for FOSRENOL. The approvable letter asks for additional
data and analysis to address a number of remaining questions. Shire is
initiating a dialogue with the FDA to agree the balance between pre and post
approval commitments which will resolve the questions. Shire will give further
updates when it is in a position to be more specific about the timing of
approval and subsequent launch.
Submissions have also been made by Shire to gain marketing approval for FOSRENOL
in Europe and Canada, whilst development continues for Japan.
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.
15
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.
(iii) Manufacturing and distribution
ADDERALL XR is manufactured by DSM Pharmaceuticals Inc. (DSM). We manufactured
and packaged ADDERALL and DEXTROSTAT(R) at our facility in Valley Stream, New
York throughout 2002. Shire received approval from the FDA to transfer
production of ADDERALL to DSM in 2002. DEXTROSTAT production will be transferred
to DSM in 2003.
Our other products marketed in the U.S. and Canada are manufactured and packaged
by third party contract manufacturers, except vaccines which are manufactured by
Shire in Quebec, Canada.
In February 2003, Shire discontinued production at the Valley Stream facility
and in June 2001, we sold our pharmaceutical manufacturing facility located in
Oakville, Ontario. These actions are part of a coordinated initiative to
upgrade manufacturing capacity and rationalize non-strategic manufacturing and
distribution facilities within North America.
On September 27, 2002, Shire acquired APS which includes a state-of-the-art
manufacturing facility located in Owings Mills, Maryland. It is expected that
the APS facility will become a primary or secondary supplier for ADDERALL XR,
CARBATROL, and PENTASA by 2005. The acquisition of APS mitigates our supply risk
in the U.S. and compliments our policy of dual sourcing key products.
As part of the acquisition agreement of METHYPATCH, Noven Pharmaceuticals Inc.
will manufacture this product . Our U.S. distribution center, which includes a
large vault to house DEA regulated Schedule II products, is located in Northern
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.
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., Spain, Italy, France, Germany, the Republic of Ireland
and to other 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 the U.S., our significant customers include McKesson Corp., Cardinal Health
Inc. and Bergen Brunswig Corp. In the U.K., our significant customers include
The Boots Company plc, AAH Pharmaceuticals Limited and Unichem plc. For the
fiscal year ended December 31, 2002, our three largest customers, McKesson
Corp., Cardinal Health Inc. and Bergen Brunswig Corp, accounted for
approximately 22%, 19% and 14% of total revenues, respectively. The loss of any
one of these three U.S. customer accounts could have a material adverse effect
on our financial condition and results of operations.
(iv) 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.
On February 11, 2002 Barr Laboratories Inc. (Barr) announced FDA approval to
market a generic version of the original ADDERALL formulation, which is not
patent protected. Since then, several other companies have also obtained
approval and launched generic versions of ADDERALL.
16
In November 2002 we received approval from the FDA for a new formulation of
ADDERALL which is patent protected. In January 2003 we received a Paragraph IV
notice from Barr alleging that this patent is invalid and not infringed by
Barr's 7.5 mg, 12.5 mg and 15 mg mixed amphetamine salt products. The Company
has taken no action with respect to this notice and Barr announced in March 2003
that it has now received FDA approval and 180 days exclusivity for these
strengths . The Company received a second Paragraph IV notice in March 2003 from
another generic alleging that this patent is invalid and is not infringed by its
products, which are the subject of a pending ANDA. The Company is reviewing this
notice . If the Company does not bring a suit or does not prevail in any such
suit then this company would be able to market its product upon FDA approval of
its ANDA application, subject to Barr's exclusivity period for the above doses.
The sales of any generic versions of ADDERALL may have a material adverse impact
on the Company's results and financial position .
Our extended release once daily version of ADDERALL, ADDERALL XR, is covered by
U.S. patent No. 6,322,819 (the '819 Patent). In January 2003 we received a
Paragraph IV notice from Barr alleging that this patent is invalid and not
infringed by Barr's extended release mixed amphetamine salt product which is the
subject of a Barr pending ANDA application. On February 24, 2003 Shire
Laboratories Inc. filed suit against Barr in the U.S. District Court for the
Southern District of New York for infringement of the '819 Patent with respect
to this ANDA. The Hatch-Waxman Act provides for an automatic stay of up to 30
months of FDA approval for Barr's ANDA to market its generic version of
ADDERALL XR to allow the Court to resolve the patent infringement lawsuit.
However, there can be no assurance that the Company will be successful in the
suit. In the event that the Company does not prevail, then Barr could be in a
position to market its extended release mixed amphetamine salt product upon FDA
final approval of its ANDA application. This may have a material adverse impact
on the Company's results and financial position. In the event that the Company
does not prevail in the suit, a generic version of ADDERALL XR could not be
launched before October 2004, the current expiry of the existing Hatch-Waxman
exclusivity.
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.
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 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.
17
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 analogues. 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 the
same in over 100 countries, including the U.S., Europe and Japan.
(v) Competition
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.
Competition in the U.S. ADHD market continues to increase. Eli Lilly launched
Straterra in January 2003, a non-stimulant, non-scheduled treatment for ADHD. We
are also aware of clinical development efforts by GSK, Gliatech, Cortex,
Boehringer Ingelheim, Cephalon, Eisai, Bristol-Myers Squibb (in collaboration
with Elan) and Abbott to develop additional indications and new non-stimulant
treatment options for ADHD.
With regard to the current stimulant class medications, we are also aware of
efforts by Celgene and Celltech Chiroscience plc to develop a single isomer
version of methylphenidate.
In 2002, Novartis (in conjunction with Elan) launched Ritalin LA, an extended
release formulation of methylphenidate and Focalin (in conjunction with
Cellgene), a short-acting formulation of dexmethylphenidate, the active isomer
of traditional methylphenidate preparations.
In 2001, Celltech (in collaboration with Eurand) launched Metadate CD, an
extended release formulation of methylphenidate.
Generic competition to our ADHD franchise is separately discussed within
Intellectual Property and Risk Factors.
(vi) 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 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. 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, conduct clinical trials, obtain regulatory approvals and manufacture
and market REMINYL.
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 with Janssen, under
which, among other things, we will receive royalties on sales of REMINYL by
Janssen in
18
the U.S. As a result, we are dependent on Janssen for revenues derived from
REMINYL. Moreover, there can be no assurance that our interests will continue to
coincide with those of Janssen.
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 (part of the Johnson & Johnson Group) 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. The amount of relevant patent prosecution costs 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.
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.
FLUVIRAL
The Company signed a ten-year contract with the Government of Canada in 2001 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.
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 has begun to expand its
production capacity in order to meet this objective within a five-year period.
Shire Biologics is committed to CAN$18 million (approximately $11.3 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 2002/2003 will be
CAN$19.2 million (approximately $12 million), would become payable to the
Government of Canada if contracted penalty clauses were triggered.
Johnson Matthey--FOSRENOL
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 FOSRENOL worldwide in consideration of an
upfront payment and a royalty on sales of FOSRENOL. We have consented to the
assignment by Johnson Matthey of its patents to AnorMed Inc., a Canadian
company, which is partially owned by
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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.
(vii) Government regulation
The clinical development, manufacturing and marketing of our products are
subject to regulation by various authorities in the U.S., the EU and other
international territories, 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 all 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, the proposed indication 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 FDA. Phase I studies in
human volunteers may commence only after the application becomes effective.
Prior regulatory approval for human healthy volunteer studies is not currently
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 submitted in summarized format
to the MCA as a Clinical Trial Certificate exemption (CTX) application in
support of a specific Phase II clinical study or program. The MCA has 35 days in
which to raise any objections to the proposed study, or to extend this review
period by a further 28 days at its discretion. For any additional studies, Phase
II and/or Phase III, further submissions to regulatory authorities are necessary
to update the existing IND and/or CTX. 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 application, 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 quality
(chemistry, manufacturing and pharmaceutical) aspects of the product as well as
the non-clinical and clinical data. The FDA undertakes the review for the U.S.;
in Europe the review may be undertaken by members of the CPMP on behalf of the
20
EMEA as part of a centralized procedure or by 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 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 relevant facilities,
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. An inspection of the clinical investigation sites by a
competent authority may be required as part of the regulatory approval
procedure. As a condition of approval, the regulatory agency may require
post-marketing surveillance to monitor for adverse effects, or other additional
studies as deemed appropriate. After approval for the initial indication,
further clinical studies are usually 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 Hatch-Waxman 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
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 Scheduled
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.
(viii) 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 pharmaco-economic 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. 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.
(ix) Employees
On December 31, 2002, we employed 1,847 individuals, 773 of whom were in sales
and marketing, 435 of whom were in research and development, 334 of whom were in
manufacturing and distribution, and 305 of whom were in general and
administrative. In addition to our employees, we engage professional personnel
on a consultancy basis and, from
21
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 inability to attract and retain
the additional highly skilled employees required for our activities, could have
an adverse effect on our business.
(d) Financial information about foreign and domestic operations
Financial information about foreign and domestic operations is presented in note
22 to the consolidated financial statements.
(e) 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 generally associated with our business
that have been identified through our approach to risk management. These,
together with other risks generally associated with companies that operate in
the pharmaceutical industry, should be carefully considered before any
investment is made in our company.
(i) 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.
(ii) 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
discover or in-license research and development projects for development or to
acquire new products. The failure to discover, in-license, or acquire projects
or products, on a commercially viable basis, could have a material adverse
effect on our financial position.
(iii) 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:
o the ongoing trend toward managed health care in the U.S.,
o a change in the quotas for Scheduled drugs regulated by the DEA,
o legislative proposals to reform health care and government insurance
programs, or
o price controls and non-reimbursement of new and highly priced medicines for
which the economic and therapeutic rationales are not established.
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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.
(iv) 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.
(v) 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.
(vi) 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.
If we complete one or more significant acquisitions through the issuance of
common shares or ADS's, holders of common shares and ADS's could suffer
significant dilution of their ownership interests.
(vii) 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 are required to obtain regulatory approval before manufacturing
and marketing most drug products. Regulatory approval is generally based on the
results of:
o quality testing (chemistry, manufacturing and controls)
o non-clinical testing, and
o clinical testing.
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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 is 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
not 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.
(viii) 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 and other studies 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, the EMEA in the EU and the U.S. FDA) may require
additional studies, 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.
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.
(ix) 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 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 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.
24
(x) If we cannot obtain the necessary financing, we may not be able to fund our
expansion and repay our debts.
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 common shares and
ADS's.
(xi) 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, 2002, approximately 21% of our revenue was earned in
currencies other than U.S. dollars and approximately 47% of our expenses were in
currencies other than U.S. dollars.
(xii) Any decrease in the sales of ADDERALL XR, or ADDERALL could significantly
reduce our revenues.
In 2002, sales of ADDERALL XR and ADDERALL were $427.7 million, representing
approximately 41% 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 factors adversely impacting the production process at the DSM manufacturing
facility,
o development and marketing of competitive pharmaceuticals (including generic
versions -(see details above under "Treatments for central nervous system
disorders" and "Intellectual property"),
o technological advances (including the introduction of competing
non-scheduled ADHD treatments),
o loss of patent protection or ability of competitors to challenge,
circumvent or infringe our patents (see details above under "Intellectual
property" and below under "Legal proceedings"),
o changes in reimbursement policies of third-party payers,
o government action/intervention,
o marketing or pricing actions by our competitors,
o public opinion towards ADHD treatments,
o product liability claims, or
o changes in prescription writing practices.
(xiii) Any decrease in the sales of 3TC could significantly reduce our revenues
and earnings.
We receive a royalty on the worldwide sales of 3TC except for Canada where we
have established a partnership with GSK. In 2002 our royalty income for 3TC
sales was $132.5 million representing approximately 13% of our revenues. This
income stream generates a larger proportion of our net income as there are
minimal costs associated with this income.
Any factors that decrease sales or reduce the production of 3TC by GSK could
significantly reduce our revenues and earnings. These include:
o development and marketing of competitive pharmaceuticals,
o technological advances,
o loss of patent protection or ability of competitors to challenge or
circumvent patents,
o government action/intervention,
o marketing or pricing actions by our competitors to GSK,
o public opinion towards AIDS treatments, or
o product liability claims,
25
(xiv) 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 or laws providing
such rights may be changed or withdrawn. 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. See
detail above under "Intellectual property" and below under "Legal proceedings".
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.
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.
(xv) 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.
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
26
the products. 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.
The risk of product liability claims, product recalls, litigation and associated
adverse publicity is inherent in the testing, manufacturing, marketing and
selling of pharmaceutical products. The cost of defending against such claims is
expensive even when the claims are not merited. A successful product liability
claim against us could require us to pay a substantial monetary award. 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. Moreover, an
adverse judgment in a products liability suit, even if insured or eventually
overturned on appeal, could generate substantial negative publicity about our
products and business and inhibit or prevent commercialization of other
products.
Item 3 provides a summary of significant legal proceedings in which we are
currently involved.
(xvi) 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.
(f) Available information
Shire maintains a website on the World Wide Web at www.shire.com. Shire makes
available, free of charge, on its website its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after such reports are electronically filed with, or furnished to, the SEC.
Shire's reports filed with, or furnished to, the SEC are also available at the
SEC's website at www.sec.gov. The information on our website is not part of or
incorporated by reference in this Annual Report.
27
ITEM 2: Properties
We occupied the following principal premises as at December 31, 2002:
Approximate Owned or Leased
Location Use Square Footage
- --------------------- -------------------------- ---------------------- ---------------
Chineham, Hampshire, U.K. Office accommodation (Global Headquarters) 35,000 Owned
Rockville, Maryland, USA Office accommodation, laboratories and GCMP suite 59,000 Leased
(Shire Laboratories Inc.)
Rockville, Maryland, USA Office accommodation (Shire Pharmaceuticals 40,000 Leased
Development Inc.)
Northern Kentucky, USA Distribution facility(Shire US Inc.) 50,000 Leased
Newport, Kentucky, USA Office accommodation (Shire US Inc.) 87,700 Leased
Owings Mills, Maryland, USA Manufacturing facility 90,000 Leased
Columbia, Maryland, USA Manufacturing facility 15,000 Leased
Valley Stream, New York, USA Schedule II manufacturing facility and 9,500 Leased
laboratories
Buffalo Grove, Illinois, USA Distribution facility (Shire US Inc.) 70,000 Owned
Northborough, Massachusetts, Office accommodation, laboratories and GCMP suite 61,600 Owned
USA (Shire BioChem Inc.)
Laval, Quebec, Canada Office accommodation and laboratories (Shire 193,500 Owned
BioChem Inc.)
Laval, Quebec, Canada Vaccines production (Shire BioChem Inc.) 15,200 Leased
Sainte Foy, Quebec, Canada Office accommodation, manufacturing facility and 118,000 Owned
laboratories (Shire BioChem Inc.)
Paris, France Office accommodation 3,600 Leased
Cologne, Germany Office accommodation 3,000 Leased
Madrid, Spain Office accommodation 1,400 Leased
Firenze, Italy Office accommodation 2,700 Leased
We also have a representative office in Singapore and have other smaller
locations both in some of the countries listed above and in several other
countries around the world.
28
ITEM 3: Legal proceedings
(a) General
The risk of product liability claims, product recalls, litigation and associated
adverse publicity is inherent in the testing, manufacturing, marketing and
selling of pharmaceutical products. The cost of defending against such claims is
expensive even when the claims are not merited. A successful product liability
claim against us could require us to pay a substantial monetary award. 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. Moreover, an
adverse judgment in a products liability suit, even if insured or eventually
overturned on appeal, could generate substantial negative publicity about our
products and business and inhibit or prevent commercialization of other
products.
(b) Phentermine
Shire US Inc. (SUS) is a defendant in eleven lawsuits still pending 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 SUS and several other pharmaceutical companies. SUS, formerly known as Shire
Richwood Inc., 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. The lawsuits generally allege the
following claims: the defendants marketed phentermine and other products for the
treatment of obesity and misled users about the products and dangers associated
with them; the defendants failed adequately to test phentermine individually and
when taken in combination with the other drugs; and 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. SUS has been named as a defendant in a total of 3,804 such
phentermine lawsuits, in respect of which SUS has been dismissed as a defendant
in 3,756 cases. Shire is awaiting the furtherance of proceedings in the
remaining 37 law suits.
SUS became involved with phentermine through its acquisition of certain assets
of Rexar Pharmacal Corporation (Rexar) in January 1994. In addition to SUS
potentially incurring liability as a result of its own production of Oby-Cap, a
phentermine product, the plaintiffs may additionally seek to impose liability on
SUS as successor to Rexar. SUS intends vigorously to defend all the lawsuits and
pursue all available reasonable defenses. SUS denies liability on a number of
grounds including lack of scientific evidence that phentermine, properly
prescribed, causes the alleged side effects and that SUS did not promote
phentermine for long-term combined use as part of the "fen/phen" diet.
Accordingly, SUS intends to defend vigorously any and all claims made against
the Group in respect of phentermine. Legal expenses to date have been paid by
Eon, the supplier to SUS, or Eon's insurance carriers but such insurance is now
exhausted. Eon has agreed to defend and indemnify SUS in this litigation
pursuant to an agreement dated November 30, 2000 between Eon and SUS.
At the present stage of litigation, Shire is unable to estimate the level of
future legal costs after taking into account any available product liability
insurance and enforceable indemnities. To the extent that any legal costs are
not covered by insurance or available indemnities, these will be expensed as
incurred.
(c) ADDERALL
Shire's extended release "once daily" version of ADDERALL, ADDERALL XR is
covered by U.S. patent No. 6,322,819 (the '819 Patent). In January 2003 we
received a Paragraph IV notice from Barr alleging that this patent is invalid
and not infringed by Barr's extended release mixed amphetamine salt product
which is the subject of a Barr pending ANDA application. On February 24, 2003
Shire Laboratories Inc. filed suit against Barr in the U.S. District Court for
the Southern District of New York for infringement of the '819 Patent with
respect to this ANDA. The Hatch-Waxman Act provides for an automatic stay of up
to 30 months of FDA approval for Barr's ANDA to market its generic version of
ADDERALL XR to allow the Court to resolve the patent infringement lawsuit.
However, there can be no assurance that the Company will be successful in the
suit. In the event that the Company does not prevail, then Barr could be in a
position to market its extended release mixed amphetamine salt product upon FDA
final approval of its ANDA application. This may have a material adverse impact
on the Company's results and financial position . In the event that the Company
does not prevail in the suit, a generic version of ADDERALL XR could not be
launched before October 2004, the current expiry of the existing Hatch-Waxman
exclusivity.
29
For details relating to the Company's receipt of Paragraph IV notices relating
to ADDERALL, see section headed "Intellectual property " .
Shire filed a Complaint against Barr on April 30, 2002 in the District Court of
New Jersey. In the Complaint, Shire requested a preliminary and permanent
injunction to prevent Barr from marketing a mixed amphetamine salt product in a
trade dress similar to that of ADDERALL. Shire requested that Barr recall all
such products and also asked for damages. An order denying the preliminary
injunction was issued on August 26, 2002. Shire filed a Notice of Appeal to the
United States Court of Appeals for the Third Circuit on September 16, 2002
appealing the denial of Shire's motion for a preliminary injunction.
(d) Emory
Shire BioChem was involved in worldwide patent disputes with Emory University
(Emory) relating to lamivudine, wherein Shire BioChem opposed certain patents
and patent applications of Emory and wherein Emory opposed certain patents and
patent applications of Shire BioChem. Pursuant to a global Settlement Agreement,
finalized in May 2002, Emory has granted Shire and GSK an exclusive license
under Emory's patent rights for lamivudine. The Settlement Agreement provides
for the resolution of all worldwide patent disputes between the parties relating
to lamivudine and FTC, including pending opposition and revocation proceedings
in Europe, South Korea and Australia. The settlement involves a small royalty
payment on worldwide sales of lamivudine and a license under Shire's FTC patent
rights, in consideration for the settlement of all claims against Shire and GSK
relating to lamivudine.
Shire BioChem was also involved in worldwide patent disputes with Emory and the
University of Georgia Research Foundation (Georgia) relating to certain
dioxolane nucleoside analogs. Shire BioChem opposed certain patents and patent
applications of Emory and Georgia and Emory opposed a European patent of Shire
BioChem. Pursuant to a global Settlement and License Agreements finalized in
August 2002 by Shire BioChem, Shire, Georgia and Triangle Pharmaceuticals Inc.
(Triangle), Shire will grant an exclusive royalty bearing license to Emory, sub
licensable to Triangle, for certain dioxolane nucleoside analogues, including
diamino purine dioxolane (DAPD). Emory, Georgia and Triangle will grant an
exclusive royalty bearing license to Shire for certain dioxolane nucleosides,
including SPD 756. The compounds the subject of these licenses are in
development. A royalty will be payable by Shire upon commercialization of SPD
756. The Settlement and License Agreements provide for the resolution of all
worldwide patent disputes relating to the licensed patents.
(e) Other matters
In addition, the Company is involved in 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.
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 2002.
30
ITEM 4A: Executive officers of the registrant
Our directors and executive officers as of March 28, 2003 were as follows:
Name Age Position
Dr James Cavanaugh 66 Non-executive Chairman
Matthew Emmens 51 Chief Executive
Rolf Stahel 58 Former Chief Executive*
Angus Russell 46 Group Finance Director
Dr Wilson Totten 47 Group Research and Development Director
Dr Barry Price 59 Senior Non-executive Director
Ronald Nordmann 61 Non-executive Director
Dr Francesco Bellini 55 Non-executive Director
The Hon. James Andrews Grant 65 Non-executive Director
Gerard Veilleux 60 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 a General
Partner of HealthCare Ventures LLC. 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, D.C. He is Non-executive Chairman of Diversa Corporation
and Vicuron, Inc. and a Non-executive Director of MedImmune Inc. Dr Cavanaugh is
a member of the Remuneration Committee, the Audit Committee and the Nomination
Committee.
Matthew Emmens joined Shire Pharmaceuticals Group plc as Chief Executive and
member of the Board on March 12, 2003. Mr Emmens, 51, began his career in
international pharmaceuticals in 1974 when he joined Merck & Co. He held a wide
range of sales, marketing and training positions with Merck & Co before moving
to help establish Astra Merck, the joint venture with Astra Pharmaceuticals. He
later became its president and chief executive. Astra Merck Inc. became an
independent, top 20 U.S. pharmaceutical company with annualized sales in excess
of $4 billion and 4000 employees. In 1999 he joined Merck KGaA and established
EMD Pharmaceuticals, the company's U.S. prescription pharmaceutical business.
Until Mr Emmens joined Shire, he was based in Darmstadt, Germany as president of
Merck's global prescription pharmaceuticals business, which in the year 2002
achieved sales of U.S. $2 billion. Mr Emmens graduated from Fairleigh Dickenson
University in Rutherford, New Jersey, U.S., with a BS in Business
Administration. Mr Emmens is a member of the Executive Committee.
*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. Mr Stahel received the Chief Executive
Officer of the Year Award 2001 for the global pharmaceutical industry.
In March 2003, Mr Stahel stepped down as Chief Executive and as a director of
the Company.
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 accountant, having qualified with Coopers & Lybrand and is a fellow of
the Association of Corporate Treasurers. Mr Russell is a member of the Executive
Committee.
31
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. Dr Totten is a member of the Executive Committee.
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, and a member of both the Audit Committee and the Nomination
Committee.
Ronald Nordmann joined the Board of Shire on December 23, 1999 as a
Non-executive Director. He was formerly a 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., Neurochem, Inc.
and Pharmaceutical Resources, Inc. Mr Nordmann is acting Chairman of the Audit
Committee and a member of the Nomination Committee.
Dr Francesco Bellini joined the Board on May 14, 2001 as a Non-executive
Director. Dr Bellini is Chairman of Picchio International Inc. and Neurochem,
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. Mr Grant is a member of the
Nomination Committee.
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. Mr Veilleux is a
member of the Remuneration Committee.
32
PART II
ITEM 5: Market for the registrant's common equity and related stockholder
matters
(a) Common shares
Our common shares are traded on the London Stock Exchange (LSE). The following
table presents the per share closing mid-market quotation for our common shares
as quoted in the Daily Official List of the LSE for the periods indicated.
High(pound)per Low(pound)per
common share common share
------------- --------------
Year ended December 31, 2002
1st Quarter 8.86 4.84
2nd Quarter 6.61 4.83
3rd Quarter 6.61 4.52
4th Quarter 5.52 3.73
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
The total number of record holders of common shares as of March 24, 2003 was
10,637 of which 122 were registered as U.S. holders.
(b) American Depository Shares
American Depository Shares (ADSs) each represent three common shares. An ADS is
evidenced by an American Depository Receipt (ADR) issued by Morgan Guaranty
Trust Company of New York as depository, and are quoted on the NASDAQ National
Market. As of March 24, 2003, the proportion of common shares represented by
ADRs was 24% of the common shares outstanding.
The following table presents the high and low market quotations for ADSs quoted
on the NASDAQ National Market for the periods indicated.
High $ Low $
Per ADS Per ADS
------------- --------------
Year ended December 31, 2002
1st Quarter 38.50 20.36
2nd Quarter 29.63 21.20
3rd Quarter 31.06 20.90
4th Quarter 26.11 17.01
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
The number of record holders of ADSs in the U.S. as of March 24, 2003 was 420.
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.
33
(c) Dividend policy
Historically, we have not paid any dividends. We do however review the
appropriateness of paying a dividend from time to time. As a matter of English
law, we may pay dividends only out of our distributable profits, which are the
accumulated realized profits under U.K. GAAP of the parent company, Shire
Pharmaceuticals Group plc and not the consolidated group, 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, 2002, we had an accumulated deficit of
(pound)18.5 million (approximately $29.8 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.
(d) Approval of non-audit services
The Chairman of the Audit Committee of Shire pre-approves all non-audit
services, including tax advisory and compliance services, provided by the
Company's independent auditors, Deloitte and Touche. A process for pre-approval
has been in place since July 1, 2002 and has continued through to the end of the
period covered by this Annual Report.
34
ITEM 6: Selected financial data
The selected consolidated financial data presented below as of December 31, 2002
and 2001 and for each of the three years in the period ended December 31, 2002
were derived from the audited consolidated financial statements of Shire
Pharmaceutical Group plc ("Shire), included herein. The selected consolidated
financial data presented below as of December 31, 2000, 1999 and 1998 and for
the two years ended December 31, 1999 were derived from the audited consolidated
financial statements of Shire, which are not included herein.
We have restated our results for all periods, other than 2002 and 2001,
presented below to combine the results of BioChem, the merger with whom was
accounted for as a pooling of interests. We have also restated the results for
all periods, other than 2002, presented to reflect the disposal of our OTC
business, which has been accounted for as a discontinued operation. In addition,
we have restated the results of 1998 to combine the results of Roberts, the
merger with whom was accounted for as a pooling of interests. Certain amounts
reported in previous years have been reclassified to conform to the 2002
presentation.
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.
Year ended December 31, 2002 2001 2000 1999 1998
$'000 $'000 $'000 $'000 $'000
---------- ---------- ---------- ---------- ----------
Statement of Operations:
Revenues 1,037,298 852,956 647,654 515,447 410,969
Operating expenses (710,260) (709,848) (507,379) (559,911) (341,189)
---------- ---------- ---------- ---------- ----------
Operating income/(loss) 327,038 143,108 140,275 (44,464) 69,780
Interest and other, net 2,022 (41,581) 111,842 23,064 14,092
---------- ---------- ---------- ---------- ----------
Income/(loss) before income taxes,
extraordinary items and discontinued operations 329,060 101,527 252,117 (21,400) 83,872
Income taxes (88,350) (68,897) (43,564) (18,695) (4,682)
Equity method investees 1,668 1,985 (3,809) - -
---------- ---------- ---------- ---------- ----------
Income/(loss) from continuing operations and
before extraordinary items 242,378 34,615 204,744 (40,095) 79,190
Extraordinary items, net of tax - (2,604) - - -
---------- ---------- ---------- ---------- ----------
Income/(loss) from continuing operations 242,378 32,011 204,744 (40,095) 79,190
Income/(loss) from discontinued operations, net
of tax 6,108 6,748 6,983 (7,337) 2,850
Gain on disposition of discontinued operations,
net of tax 2,083 - - -
---------- ---------- ---------- ---------- ----------
Net income/(loss) 250,569 38,759 211,727 (47,432) 82,040
---------- ---------- ---------- ---------- ----------
35
ITEM 6: Selected financial data (continued)
Year ended December 31, 2002 2001 2000 1999 1998
$'000 $'000 $'000 $'000 $'000
---------- ---------- ---------- ---------- ----------
Earnings/(loss) per share - basic
Income from continuing operations before
extraordinary items 48.4c 7.0c 42.4c (8.3)c 15.0c
Income from discontinued operations 1.6c 1.4c 1.4c (1.5)c 2.1c
Extraordinary items, net of tax - (0.5)c - - -
---------- ---------- ---------- ---------- ----------
50.0c 7.9c 43.8c (9.8)c 17.1c
---------- ---------- ---------- ---------- ----------
Earnings/(loss) per share - diluted
Income from continuing operations before
extraordinary items 47.4c 6.9c 41.4c (8.3)c 14.6c
Income from discontinued operations 1.6c 1.3c 1.4c (1.5)c 2.0c
Extraordinary items, net of tax - (0.5)c - - -
---------- ---------- ---------- ---------- ----------
49.0c 7.7c 42.8c (9.8)c 16.6c
---------- ---------- ---------- ---------- ----------
Weighted average number of shares:
Basic 500,687,594 492,594,226 482,890,070 484,358,876 480,827,784
Diluted 522,418,246 504,875,587 494,691,805 484,358,876 494,149,715
---------- ---------- ---------- ---------- ----------
As a consequence of the adoption of SFAS No. 142 with effect from January 1,
2002, the amortization expense shown for 2002 in the selected consolidated
financial data presented below is not on a consistent basis of accounting with
earlier periods. The impact of this is shown in Note 12 of our consolidated
financial statements included herein.
December 31, 2002 2001 2000 1999 1998
$'000 $'000 $'000 $'000 $'000
---------- ---------- ---------- ---------- ----------
Balance Sheet:
Total current assets 1,467,096 1,140,555 695,853 520,023 445,972
Total assets 2,208,623 1,910,731 1,548,495 1,351,791 1,210,153
Total current liabilities 213,271 231,616 227,850 233,818 99,770
Total liabilities 635,457 647,742 374,109 471,905 236,921
Total shareholders' equity 1,573,166 1,262,989 1,174,386 879,886 973,232
---------- ---------- ---------- ---------- ----------
36
ITEM 7: Management's discussion and analysis of financial condition and results
of operations
We have restated our results for all periods, other than 2002 and 2001,
discussed below to combine the results of BioChem, the merger with whom was
accounted for as a pooling of interests. The results for all periods, other than
2002, disclosed below have also been restated to reflect the disposal of our OTC
business which has been accounted for as a discontinued operation.
The following discussion should be read in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this report.
(a) Results of operations for the years ended December 31, 2002 and 2001
(i) Overview
For the year ended December 31, 2002, our total revenues increased by 22% to
$1,037.3 million, compared to $853.0 million in fiscal 2001. Net income for the
year ended December 31, 2002 was $250.6 million compared to $38.8 million in
2001, an increase of 546%. However, as net income in the year ended December 31,
2001 included $121.2 million of other charges comprising asset impairment and
restructuring costs ($29.6 million), merger related transaction expenses ($83.5
million) and a loss from the sale of our manufacturing facility in Toronto,
Canada ($8.1 million), this growth rate appears much higher than that attributed
to our ongoing operating activities.
(ii) Total revenues
Our revenues are primarily derived from sales of our pharmaceutical products and
royalties earned on products we have out-licensed to third parties to market on
our behalf. The following table provides an analysis of our total revenues by
source:
Year ended December 31, 2002 2001 Change
$m $m %
-------- -------- --------
Product sales 859.4 699.4 + 23%
Licensing and development 3.1 5.5 - 44%
Royalties 174.8 145.2 + 20%
Other - 2.9 -
-------- -------- --------
Total 1,037.3 853.0 + 22%
-------- -------- --------
(iii) Product sales
For the year ended December 31, 2002, our product sales increased by 23% to
$859.4 million, compared to $699.4 million in the prior year. The following
table provides an analysis of our key product sales:
Year ended December 31, 2002 2001 Change
$m $m %
-------- -------- --------
ADDERALL XR 317.9 32.6 +874%
ADDERALL 109.8 317.7 -65%
AGRYLIN 119.2 85.5 +39%
PENTASA 87.2 75.5 +15%
PROAMATINE 50.9 38.0 +34%
CARBATROL 45.3 36.8 +23%
CALCICHEW range 23.2 20.9 +11%
Others 105.9 92.4 +15%
-------- -------- --------
Total 859.4 699.4 +23%
-------- -------- --------
37
The following discussion includes references to prescription and market share
data for our key products. The source of this data is IMS December 2002.
ADDERALL franchise
At the outset, 2002 was to be a challenging year for our ADDERALL franchise, as
we expected to face strong competition from generic products. In mid February
2002, Barr Laboratories Inc. announced FDA approval to market a generic version
of ADDERALL. We had launched a new patent protected, once daily, formulation of
ADDERALL, called ADDERALL XR, in the U.S. on November 5, 2001. Thus, our
challenge for 2002 was to continue converting patients from our twice/three
times daily ADDERALL product to the new patent protected formulation.
For the year ended December 31, 2002, sales of ADDERALL XR were $317.9 million
compared to $32.6 million in the last two months of 2001 (the year of launch).
Sales of ADDERALL for the year ended December 31, 2002 were $109.8 million
compared to $317.7 million in the comparative period. This decline in ADDERALL
sales is largely due to our success in converting patients to the new patent
protected, once daily formulation of the drug. In addition, we have lost some
ADDERALL sales to generic competitors who launched their competing products from
the middle of February 2002. According to IMS data, total dollar sales from
generic versions of ADDERALL were $127.2 million in 2002.
On a combined basis, product sales from the ADDERALL franchise in 2002 were up
$77.4 million, a 22% increase compared to the prior year. Over the same period,
the number of prescriptions written for the two products was marginally higher
than the prior year, up 0.6%. This demonstrates that although our share of the
U.S. ADHD prescription market in December 2002 was 28.8%, versus 34.4% in
December 2001, the total ADHD market is growing strongly in dollar terms, 32%
during 2002.
ADDERALL XR is sold at a higher price than ADDERALL, and this has had a
favorable impact on our sales revenue in 2002. In addition, a lower Medicaid
utilization and rebate payments on ADDERALL XR sales have also had a positive
effect on our 2002 net sales, which we estimate to be between $25 million and
$30 million.
$17.4 million of ADDERALL XR shipments were not recognized as revenue in 2001
as, following the guidelines of Staff Accounting Bulletin No. 101, we did not
consider these sales to be realized and earned in that fiscal accounting period
due to the extended credit terms we offered as an incentive to wholesalers on
the initial launch stock. These sales were recognized in the first quarter of
2002. There have been no such terms offered on any of our products within the
year ended December 31, 2002.
AGRYLIN
Total AGRYLIN sales for 2002 were $119.2 million, an increase of 39% compared to
the prior year (2001: $85.5 million). Underlying prescriptions for AGRYLIN in
the US, where it is the only product licensed for the treatment of essential
thrombocythaemia, increased by 22%, supported by a price increase in January
2002. Shire achieved 26.5% of the total US AGRYLIN, Hydrea and generic
hydroxyurea prescription market in December 2002, compared to 24.4% in December
2001.
PENTASA
For the year ended December 31, 2002 sales of PENTASA, a treatment for
ulcerative colitis, were up 15% at $87.2 million (2001: $75.5 million). Over the
same period, PENTASA benefited from modest prescription growth of 4%, which
reflects limited physician promotions during 2002. PENTASA sales benefited from
two factory price increases during 2002, a 9% rise in January 2002 and a further
7% increase in May 2002.
PENTASA had a prescription share of 17.6% of the U.S. oral mesalamine/olsalazine
market in December 2002, compared with 18.6% in December 2001.
PROAMATINE
Sales of PROAMATINE, for the treatment of orthostatic hypotension, were $50.9
million, 34% higher than 2001 sales of $38.0 million. Underlying prescriptions
grew by 15% during the year ended December 31, 2002. Approximately 11% of the
reported sales growth is attributable to price increases. PROAMATINE sales also
benefited from the launch of a new 10 mg strength during 2002.
PROAMATINE had a 25.3% share of the U.S. prescription market for PROAMATINE and
fludrocortisone acetate prescriptions in December 2002, an increase from 23.6%
in December 2001.
38
CARBATROL
Sales of CARBATROL, for the treatment of epilepsy, were $45.3 million in 2002,
an increase of 23% over prior year sales of $36.8 million. Over the same period,
underlying prescriptions grew by 7%. CARBATROL was launched in the U.S. in June
1998, and in the three years following launch the growth rate for this product
has typically been much higher than the 23% achieved in 2002. We have
experienced supply constraints throughout 2002 but these have now been
addressed.
The acquisition of the APS manufacturing facility will allow us to shift
production of CARBATROL in-house. We intend to promote CARBATROL more actively
during 2003. In fact, we re-launched CARBATROL in the U.S. during January 2003.
CARBATROL achieved 36.3% of the U.S. extended release carbamazepine prescription
market in December 2002, compared with 35.5% in December 2001.
The following table presents our product sales by operating segment:
Year ended December 31, 2002 2001 Change
$m $m %
-------- -------- --------
U.S. 714.7 587.5 + 22%
International 144.7 111.9 + 29%
-------- -------- --------
Total 859.4 699.4 + 23%
-------- -------- --------
Product sales in the U.S. continue to represent a significant percentage of our
worldwide sales, 83% in 2002 versus 84% in 2001. The growth in U.S. sales is 22%
for 2002, which is lower than the 50% seen for the previous year. The main
driver of this change was the slow down in growth within the U.S. ADDERALL
franchise which, as explained above, was affected by product launches by generic
competitors.
Sales growth in our International business was 29% in 2002, compared to 6% in
the prior year. There have been several new product launches in this sector
during 2002, including SOLARAZE and the continued roll-out of ADEPT. The
CALCICHEW range of products for the treatment of osteoporosis, continue to
perform well and delivered sales growth of 11% in 2002.
(iv) Licensing and development
Our licensing and development income decreased by $2.4 million to $3.1 million
for the year to December 31, 2002. This was mainly due to a decrease in Shire
Laboratories' drug delivery contract revenue and the fact that 2001 revenues
included license fee income of $1.0 million in respect of galantamine from
Johnson & Johnson.
Now that we have our own sales and marketing capabilities in seven of the major
world pharmaceutical markets, it is less likely that we will seek third parties
to market our own products on our behalf and thus, revenues from out-licensing
activities is minimal. We continue to carry out some contract development work
for third parties in the field of advanced drug delivery.
39
(v) Royalties
Royalty revenue increased 20% to $174.8 million for the year ended December 31,
2002 compared to $145.2 million in 2001. The following table provides an
analysis of our royalty income:
Year ended December 31, 2002 2001 Change
$m $m %
-------- -------- --------
3TC 132.5 120.1 +10%
ZEFFIX 21.2 16.9 +25%
Others 21.1 8.2 +160%
-------- -------- --------
Total 174.8 145.2 +20%
-------- -------- --------
For the products 3TC and ZEFFIX, we receive royalties from GSK on the worldwide
sales, with the exception of Canada, where a partnership with GSK has been
established.
In 2002, worldwide sales of 3TC amounted to $982.3 million, an increase of 9%
compared to sales of $902.0 million in 2001. 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 Ziagen.
Sales of ZEFFIX, our discovery for the treatment of chronic hepatitis B,
contributed to the increase in royalty revenue in 2002. Sales of ZEFFIX totaled
$185.6 million in 2002 compared to $149.0 million in 2001, an increase of 25%.
Other royalties are received in respect of REMINYL from Johnson & Johnson, and
in addition a number of hormone replacement therapy (HRT) products from various
licensees. The 160% growth rate shown above is largely due to REMINYL royalties.
(vi) Cost of product sales
For the year ended December 31, 2002 our cost of product sales amounted to 16%
of product sales, a ratio consistent with 2001. A slight favorable mix of the
higher margin products was mainly used to offset costs associated with enhancing
internal and external production facility capabilities.
The production of ADDERALL was relocated from our Valley Stream facility to DSM
Pharmaceuticals during 2002. We have a coordinated initiative to further upgrade
manufacturing capacity and to rationalize our non-strategic manufacturing
facilities within North America.
(vii) Research and development expenses
Research and development expenditure increased to $189.2 million in 2002 from
$171.0 million in 2001, representing an increase of 11%. Included within
research and development in 2001 is a warrant compensation charge of $4.5
million, relating to warrants issued to the Canadian government under the TPC
contract. Excluding the effect of this warrant compensation charge, research and
development expenditure increased by 14% and as a proportion of total revenues
represented 18% (2001:20%).
Generally, we aim to invest between 18% and 20% of our total revenues in
research and development projects, but the level of expenditure required each
year is largely dictated by the development phase of existing and newly
in-licensed projects. For example, the proportion of research and development
spend required on FOSRENOL was much higher in 2001 when clinical trials were
underway.
(viii) Selling, general and administrative expenses
Selling, general and administrative expenses increased from $303.5 million in
2001 to $386.0 million in 2002, an increase of 27%. As a percentage of product
sales, these expenses were 45% (2001: 43%).
Higher selling, general, and administrative expenses were primarily due to
increased selling and marketing expenses supporting higher field headcount and
promotional efforts for recent product launches, including but not limited to,
ADDERALL XR.
40
A component of selling, general and administrative expenses is depreciation and
amortization, which decreased from $45.8 million in 2001 to $36.4 million in
2002.
For 2002, amortization expense consists of a charge of $23.5 million for the
year in respect of intellectual property rights. In addition, there was a
write-down, totaling $18.8m, of certain intangible assets following a periodic
impairment review. The charge for the year has decreased because goodwill is no
longer amortized in accordance with SFAS No. 142.
The depreciation charge for 2002 was $12.9 million, a decrease of $1.5 million
compared to 2001. This reduction is primarily the result of the sale of our
Canadian manufacturing facility part way through 2001.
(ix) Other charges
Other charges to operations for the year ended December 31, 2002 were $1.4
million, which were in respect of losses on the disposition of assets, primarily
equipment disposed of during office relocations.
For the year ended December 31, 2001, other charges amounted to $123.3 million,
of which $121.2 million was in connection with the BioChem merger comprising
asset impairments and restructuring charges ($29.6 million), merger transaction
expenses ($83.5 million) and losses on disposal of assets ($8.1 million). In
addition, $56.0 million of the asset impairment charges were in respect of
investments, and are shown in other expenses within the statement of operations.
The Company also incurred a loss of $2.1 million on the disposition of
non-strategic products during 2001.
(x) Interest income and expense
In the year ended December 31, 2002, we received interest income of $19.5
million compared with $19.7 million in 2001. Interest expense increased from
$8.3 million in 2001 to $9.3 million in 2002. This increase reflects a full
twelve months of interest expense in relation to the $400 million convertible
notes, which we issued in August 2001. The notes bear interest at a fixed rate
of 2% per annum.
(xi) Other (expense)/income, net
For the year ended December 31, 2002, other (expense)/income, net totaled $8.3
million. The main components were a $2.3 million mark to market loss recorded on
the SERP fund, $8.7 million in respect of write-downs of non-current investments
due to other than temporary impairments and $3.3 million income from the
management of GeneChem funds.
(xii) Income taxes for continuing operations
For the year ended December 31, 2002 income taxes increased by 28% to $88.4
million (2001: $68.9 million). Our effective tax rate was 27% for the year ended
December 31, 2002 (2001: 25% before stock compensation and merger costs). As of
December 31, 2002 we had net deferred tax assets of $41.1 million (December 31,
2001: $39.7 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 26 to the consolidated financial statements for
expiry dates of these tax losses.
(xiii) Equity method investees
Income from equity method investees for the year ended December 31, 2002 was
$1.7 (2001: $2.0 million). We received $2.6 million representing our 50% share
of earnings from our commercialization partnership with GSK and we incurred a
loss of $0.9 million representing our 50% share of the losses of our
commercialization partnership with Qualia Computing Inc. Income from equity
method investees for the year ended December 31, 2001, related solely to our 50%
share of earnings from our commercialization partnership with GSK.
(xiv) Extraordinary items
There were no extraordinary items in respect of the year ended December 31,
2002. In the previous year we incurred a $2.6 million charge relating to the
write-off of deferred financial charges on a term loan repaid as a result of our
merger with BioChem.
(xv) Discontinued operations
Discontinued operations are in respect of our U.S. "Over-The-Counter" (OTC)
business which was sold in December 2002.
41
The OTC products were acquired as part of our merger with Roberts in 1999 and
consisted of non-prescription laxatives and dietary supplements. Our main
strategic focus is on innovative prescription pharmaceuticals prescribed by
specialty doctors.
Sales generated by the OTC products represented approximately 2.8% of our total
product sales in 2002 and 3.5% of our total sales in 2001.
Further details of this transaction are disclosed in note 5 to the consolidated
financial statements.
(b) Results of operations for the years ended December 31, 2001 and 2000
(i) Overview
For the year ended December 31, 2001, total revenue increased by 32% to $853.0
million, compared to $647.7 million in fiscal 2000. This increase was primarily
the result of an increase in product sales.
Net income for the year ended December 31, 2001 was $38.8 million compared to
$211.7 million in 2000. Following our merger with BioChem, the 2001 results
include $121.2 million of other charges comprising asset impairment and
restructuring costs ($29.6 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
income of $104.0 million related to a gain recognized on the disposal of our
non-strategic long-term investment in North American Vaccine, Inc. (NAVA).
(ii) Total revenues
The following table provides an analysis of our total revenues by source:
Year ended December 31, 2001 2000 Change
$m $m %
------- ------- -------
Product sales 699.4 496.8 + 41%
Licensing and development 5.5 14.1 - 61%
Royalties 145.2 135.5 + 7%
Other 2.9 1.3 + 123%
------- ------- -------
Total 853.0 647.7 + 32%
------- ------- -------
(iii) Product sales
For the year ended December 31, 2001, our product sales increased by 41% to
$699.4 million, compared to $496.8 million in the prior year. The following
table provides an analysis of our key product sales:
Year ended December 31, 2001 2000 Change
$m $m %
-------- -------- --------
ADDERALL XR 32.6 - N/a
ADDERALL 317.7 213.9 +48%
AGRYLIN 85.5 57.7 +48%
PENTASA 75.5 54.2 +39%
PROAMATINE 38.0 23.7 +60%
CARBATROL 36.8 25.6 +44%
CALCICHEW range 20.9 16.3 +28%
Others 92.4 105.4 -12%
-------- -------- --------
Total 699.4 496.8 +41%
-------- -------- --------
42
The following discussion includes references to prescription and market share
data for our key products. The source of this data is IMS December 2001.
ADDERALL franchise
We launched a new improved, patent protected, once daily formulation of
ADDERALL, called ADDERALL XR in the U.S. on November 5, 2001. ADDERALL XR on
February 21, 2002, just 16 weeks from launch date, had achieved a 14% share of
the U.S. ADHD prescription market. ADDERALL XR exceeded all previous records for
launching a new product in this therapeutic area. By February 21, 2002, the
total ADDERALL franchise had achieved a 37% market share, an increase of 5
percentage 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 delivered sales
growth of 64% and achieved a 34.4% share of the prescription market for ADHD in
the U.S. in December 2001 (December 2000: 33.0%).
AGRYLIN
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.
PENTASA
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.
PROAMATINE
Sales of PROAMATINE, for the treatment of orthostatic 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 year. Underlying prescriptions grew by 18% during the year ended December
31, 2001. The U.S. prescription market for PROAMATINE and Floudrocortisone
presciptions showed that PROAMATINE had a 23.6% share for the month of December
2001, an increase from 21.7% in December 2000.
CARBATROL
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.
The following table presents our net product sales by operating segment:
Year ended December 31, 2001 2000 Change
$m $m %
------- ------- -------
U.S. 587.5 391.2 + 50%
International 111.9 105.6 + 6%
------- ------- -------
Total product sales 699.4 496.8 + 41%
------- ------- -------
Product sales in the U.S. represented a significant percentage of our worldwide
sales, increasing to 84% in 2001 from 79% in 2000. The main driver of the 50%
growth in revenue for this operating segment was the ADDERALL franchise.
(iv) Licensing and development
As expected, following the launch by Janssen of REMINYL, Shire's Alzheimer's
drug, re-imbursement of associated research and development costs by Janssen
came to an end. Consequently, our licensing and development income decreased by
61% to $5.5 million (2000: $14.1 million).
43
(v) 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 Ziagen.
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.
(vi) Cost of product sales
For the year ended December 31, 2001 cost of product sales 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 (73%) compared to the prior year (66% of total sales). Improved pricing
in respect of our ADHD franchise has also benefited the gross margin.
(vii) Research and development expenses
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 20% (2000: 24%).
(viii) Selling, general and administrative expenses
Selling, general and administrative expenses increased from $230.2 million to
$303.5 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
45% to $301.2 million (2000: $208.3 million). As a percentage of product sales,
selling, general and administrative expenses (excluding stock option
compensation charges) were 43% (2000: 42%). The increase is in part due to the
increased 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.
(ix) Other charges
For the year ended December 31, 2001, other charges amounted to $123.3 million,
of which $121.2 million was in connection with the BioChem merger comprising
asset impairments and restructuring charges ($29.6 million), merger transaction
expenses ($83.5 million) and losses on disposal of assets ($8.1 million). In
addition, $56.0 million of the asset impairment charges were in respect of
investments, and are shown in other (expense)/income, net within the statement
of operations.
The Company also incurred a loss of $2.1 million on the disposition of
non-strategic products during 2001.
(x) 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 the
changes in our debt profile. We repaid an $80.0 million promissory note and a
$125 million 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, accrued at a comparatively lower fixed rate of 2%.
44
(xi) Other (expense)/income, net
Other income, net for the year ended December 31, 2001 was a charge of $52.9
million (2000: income of $109.0 million). Included in other income for the year
ended December 31, 2001 is income of $4.0 million in respect of investments in
two venture capital funds, the GeneChem Technologies Venture Fund L.P. and the
GeneChem Therapeutics Venture Fund L.P and a charge of $56.0 million in respect
of asset impairments.
The main components of other income in the year ended December 31, 2000 was a
$104.0 million gain resulting from the sale of long-term investments, primarily
in respect of North American Vaccine, Inc., a publicly traded biotechnology
company listed on the American Stock Exchange and $5.0 million in respect of
GeneChem investment income.
(xii) Income taxes
For the year ended December 31, 2001 income taxes increased $25.3 million to
$68.9 million from $43.6 million for the year ended December 31, 2000. Our
effective tax rate before the stock compensation charge and merger costs was 25%
for the year ended December 31, 2001 (2000: 17%). Net deferred tax assets at
December 31, 2001 were $39.7 million. Although realization of these assets is
not assured, we believe it is more likely than not that the deferred tax assets
will be realized.
(xiii) Equity method investees
For the year ended December 31, 2001 we received $2.0 million in respect of our
50% share of the profits from our commercialization partnership with GSK.
(xiv) Extraordinary items
In respect of the year ended December 31, 2001, we incurred a $2.6 million
charge relating to the write-off of deferred financial charges on a term loan
repaid as a result of our merger with BioChem.
There were no extraordinary items in respect of the year ended December 31,
2000.
(xv) Discontinued operations
There were no discontinued operations in respect of the years ended December 31,
2001 and 2000.
Discontinued operations reflect the impact of the sale of our OTC business in
December 2002. Sales generated by the OTC products represented 3.5% of our total
sales in 2001 and 4.7% of our total sales 2000.
Further details of this transaction are disclosed in note 5 to the consolidated
financial statements.
(c) Liquidity and capital resources
We have financed our activities since inception through private and public
offerings of equity securities, the issuance of loan notes and convertible loan
notes, cash generated from our operational activities and the proceeds of
disposals.
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 our marketing capabilities as our 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.
(i) Cash funds
As of December 31, 2002 we had cash, cash equivalents and marketable securities
of $1,213.8 million, an increase of $371.8 million from $842.0 million at
December 31, 2001. Our marketable securities consisted of money market fund
balances and investment grade securities.
(ii) Operating cash flow trends
Our operations generated cash of $356.5 million during the 2002 fiscal year.
This was as a result of net income of $250.6 million plus non-cash depreciation
and amortization of $36.4 million, write-downs of assets of $27.5 million and
other non-cash items totaling $0.7million, as well as an overall increase of
$41.3 million in working capital items due to changes in receivables,
inventories and payables. There has been a net inflow of $61.2 million in
respect of accounts receivable during the year ended December 31, 2002. Accounts
receivable were higher at the end of 2001 due to sales levels in the U.S. during
the last two months of 2001 and receivables relating to ADDERALL XR shipments.
45
During the year ended December 31, 2002, cash generated from operations was used
primarily to fund capital expenditures, including the purchase of the APS
manufacturing facility for $17.0 million, the purchase of SOLARAZE for $20.1
million and various capital expenditures on property, plant and equipment.
Excess cash funds of $779.7 million were invested in short-term money market
investments.
Our operations generated cash of $196.8 million during the 2001 fiscal year.
This was as a result of net income of $38.8 million plus non-cash depreciation
and amortization of $45.8 million, write-downs of assets of $87.0 million and
other non-cash items totaling $20.8 million as well as an overall increase of
$4.5 million in working capital items due to changes in receivables, inventories
and payables.
We invested $69.9 million in capital items, including long-term investments
($20.3 million), intangible assets ($36.0 million) and property, plant and
equipment ($13.6 million). We also received proceeds of $11.6 million from the
sale of capital items, including the sale of our manufacturing facility in
Toronto, Canada.
During the year ended December 31, 2001, we raised gross proceeds of $400.0
million through the issuance of convertible debt, which was reduced by $9.0
million of issuance costs, and also repaid existing loans totaling $207.8
million. We received $70.2 million of funding in respect of the exercise of
employee stock options. Any excess funds were invested in short-term money
market investments.
(iii) Debt
Our total borrowings as of December 31, 2002 were $408.2 million (December 31,
2001: $406.8 million). The main component of our borrowings is $400.0 million in
guaranteed convertible notes due 2011. These were issued in August 2001 by Shire
Finance Limited, a wholly owned subsidiary and bear interest at the rate of 2%.
We incurred issuance costs of approximately $9.0 million in respect of these
convertible notes.
Further details of the terms of these convertible notes is provided below and in
note 16 to the consolidated financial statements.
(d) Contractual obligations
As at December 31, 2002 our contractual obligations were as follows:
Payments due by period
----------------------------------------------------------------
Less than More than
Contractual obligations Total 1 year 1 - 3 years 3 - 5 years 5 years
$'000 $'000 $'000 $'000 $'000
- ------------------------- --------------- --------------- ------------- ------------- --------------
Long-term debt (note i) 401,880 626 401,254 - -
Capital lease obligations 6,311 262 507 526 5,016
Operating leases 40,885 7,215 13,742 7,123 12,805
Purchase obligations (note ii) 43,772 28,048 14,298 1,426 -
Other long-term liabilities reflected
on the Balance Sheet (note iii) 14,884 - 647 4,873 9,364
--------------- --------------- ------------- ------------- --------------
492,848 36,151 430,448 13,948 27,185
--------------- --------------- ------------- ------------- --------------
The above table does not include potential obligations that are only payable on
occurrence of certain future events, the timing and quantity of which are
uncertain.
(i) Long term debt
Our total long-term debt, excluding capital leases, as of December 31, 2002 was
$401.9 million (December 31, 2001: $406.8 million). The main component was $400
million in guaranteed convertible notes due 2011. These were issued in August
2001 by Shire Finance Limited (the Issuer), a wholly owned subsidiary.
The convertible notes are guaranteed by Shire and are convertible into
redeemable preference shares of the Issuer which upon issuance will be
immediately exchanged for either (i) Shire common shares or (ii) Shire ADSs, or
(iii) at the Issuer's option, a cash amount based upon the London Stock Exchange
volume-weighted average prices of common shares on the fourth through eighth
business days following conversion.
46
At the choice of investors, each $1000 of nominal value notes can be converted
into 49.62 Shire common shares (subject to adjustment) or 16.54 Shire ADSs
(subject to adjustment) at any time up to August 21, 2011. Alternatively,
investors can choose to receive repayment of the nominal principal in cash
either at the maturity date of August 21, 2011 or by exercising a put option on
any of the three put dates being August 21, 2004, August 21, 2006 and August 21,
2008. At the option of the Company, repayment can be made in the form of Shire
common shares or ADSs. The number of common shares that a note holder would
receive would be based on the notional principal of the notes divided by 95% of
the London Stock Exchange volume-weighted average price of common shares on the
five trading days after the Company gives notice of the exercise of its option.
Such notice will be on or before the tenth business day preceding the repayment
put date. On or after August 21, 2004, the Company may redeem, for cash, all or
part of the notes providing the Common Share price has exceeded $26.20 (Sterling
equivalent at the time) for 20 of the 30 consecutive dealing days in the period
prior to redemption.
The decision as to whether a note holder should exercise a put option will
depend on a number of factors particularly the price of Shire stock at the put
date and the likelihood of the Company's stock price exceeding the conversion
threshold price. The conversion threshold price is equivalent to $20.15 or
(pound)12.52 (at the closing exchange rate for 2002) for Shire common shares and
$60.46 for Shire ADSs. If the price of Shire common shares at the first put date
of August 21, 2004 remains at a level similar to the year end price of
(pound)3.97 ($18.89 for Shire ADSs) it is quite possible that note holders will
choose to exercise their put options. The Company currently has adequate
resources from which it could satisfy repayment of the entire convertible debt
principal of $400m.
The only other long-term debt outstanding at December 31, 2002 was in respect of
a Canadian federal and provincial government loan of $1.9 million (CAN$3.0
million). This facility is non-interest bearing and is repayable in annual
installments of $0.6 million (CAN$1.0 million).
(ii) Purchase obligations
Vaccines
We signed a ten-year contract with the Government of Canada in 2001 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. Subject to mutual agreement, the contract can be renewed for a
further period of between one and ten years from 2011.
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. We have started to expand our production capacity
in order to meet this objective within a five-year period. A performance bond
has been established in favor of Public Works and Government Services Canada in
respect of this contract, which would become payable if contracted penalty
clauses were triggered. This bond is for an amount equal to 10% of the minimum
estimated contract value in any year, which is estimated to be CAN$19.2 million
(approximately $12 million) for 2002/3003.
We are also committed to investing $18.5 million in the construction of a new
global vaccine research center in Laval, Canada. The completion of this project
is planned for mid-year 2004. Under the Technology Partnerships Canada (TPC)
agreement, we could be eligible for a government investment of approximately
$3.5 million.
GeneChem funds
We have made investments in two venture capital funds. The fund managers
distribute income to the partners of the funds in respect of dividends or
realized gains made on sale of investments.
In March 1997, we entered into an agreement to make an investment of CAN$30.0
million in the 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, 2002, we have invested CAN$27.0 million in the
GeneChem Technologies Venture Fund L.P. and we are, therefore, committed to
investing a further $1.9 million (CAN$3.0 million) into this Fund.
In September 2000, we entered into an agreement to invest CAN$15.0 million in
the GeneChem Therapeutics Venture Fund L.P., which invests in genomics companies
focusing on cancer and infectious diseases. As of December 31, 2002, we have
committed to invest a further $4.3 million (CAN$6.8 million) in the GeneChem
Therapeutics Venture Fund L.P.
47
EGS Healthcare fund
In November 2000, we entered into an agreement to invest up to $10.0 million in
various EGS healthcare funds. EGS is a private equity company that makes
investments in healthcare companies that focus mainly on biotechnology and
specialty pharmaceuticals. As of December 31, 2002, we have invested $5.1
million in EGS healthcare funds and we are, therefore, committed to invest a
further $4.9 million into these funds.
Berna Biotech
In October 2002, the Company entered into a commercial agreement with Berna
Biotech AG of Switzerland whereby Shire will manufacture and supply its
FLUVIRAL(R) influenza vaccine to Berna Biotech for sale in international
territories excluding Europe and North America. In return, Berna Biotech will
manufacture and supply its hepatitis B vaccines, Hepavax Gene and Bio-Hep B and
make them available for exclusive sale in Europe by Shire. The total commitment
of $1.7 million relates to the sharing of certain clinical costs until 2005.
Niro contingent consideration
In September 2002, the Company completed its acquisition of Atlantic
Pharmaceutical Services Inc. (APS) from Niro Inc. for cash consideration of
$17.3 million, including $0.3 million costs of acquisition. A further $1.0
million of contingent consideration is due on the satisfactory conclusion of
certain stocking issues.
(iii) Other long-term liabilities reflected on the Balance Sheet This balance
predominantly relates to:
SERP
Roberts, a company with whom the Company merged in December 1999, operated a
defined 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 Roberts merger, the SERP
was closed to new members and contributions 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 $12.1 million and $8.4
million respectively are shown on the balance sheet within the categories "Other
non-current assets" and "Other non-current liabilities".
(e) Capital expenditure on property, plant and equipment
Year ended December 31, 2002
Capital expenditure on property, plant and equipment in the year ended December
31, 2002 was $22.6 million. This expenditure included $5.7 million within APS
post acquisition, $4.8 million on leasehold improvements at Shire U.S. and IT
equipment spend of $4.0 million by Shire.
Year ended December 31, 2001
In the year ended December 31, 2001 capital expenditure on property, plant and
equipment was $13.6 million. This included $1.7 million of equipment related to
our new head office facility occupied from March 2001.
(f) Product acquisitions
Year ended December 31, 2002
During the year ended December 31, 2002, we acquired exclusive rights to
manufacture, distribute and sell SOLARAZE for the treatment of actinic keratosis
from SkyePharma plc. In May 2002, we paid $18.9 million ((pound)12.9 million) in
respect of certain European territories, followed in December 2002 by a further
$1.2 million ((pound)0.7 million) in respect of the rights for Australia, New
Zealand, South Africa and certain other countries in the Pacific Rim.
Year ended December 31, 2001
Significant additions during the year ended December 31, 2001 included the
products INDURGAN and MONOCID for which the purchase prices were $12.4 million
and $11.4 million respectively. We also 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,
48
which retains all rights to ADEPT for the rest of the world. During 2002, ADEPT
was launched in the U.K., Italy, Germany, France, Spain, Greece, Austria, Sweden
and the Republic of Ireland.
(g) Business combinations and divestitures
Year ended December 31, 2002
On September 27, 2002 we completed our acquisition of APS from Niro Inc. for
cash consideration of $17.3 million, including the costs of acquisition. This
transaction provided us with an in-house facility in which to manufacture
several key U.S. products. The acquisition was accounted for using the purchase
method and goodwill of $10.2 million was recorded. Further details of this
acquisition are provided in note 3 to the consolidated financial statements.
On December 27, 2002, we completed the divestment of a group of non-strategic
U.S. products, known collectively as the `Over-The-Counter' (OTC) products. We
received sale proceeds of $71.0 million and recorded a gain on disposal of $2.1
million. In addition, there are potential warranties of up to $7 million in
respect of the divestment, of which the Company has provided what it deems
necessary at this stage. Further details of this discontinued operation are
provided in note 5 to the consolidated financial statements.
Year ended December 31, 2001
Our merger with BioChem in May 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 $177.2 million, are discussed above.
(h) 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, Euro and Canadian dollar. The accumulated foreign currency
translation differences are reported within accumulated other comprehensive
income.
(i) Concentration of credit risk
Our revenues from product sales are mainly derived from agreements with major
pharmaceutical companies and relationships with pharmaceutical wholesale
distributors and retail pharmacy chains. Such clients typically have significant
cash resources, and thus any credit risk associated with these transactions is
considered minimal. We operate clearly defined credit evaluation procedures. For
the year ended December 31, 2002 there were three customers in the U.S. who
accounted for 55% of our total revenues.
Financial instruments that potentially expose us to concentrations of credit
risk consist primarily of short-term cash investments and trade accounts
receivable. 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.
(j) 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 our operations has been
minimal during the past three years.
(k) New accounting pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that 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 has assessed the
potential impact of the adoption of SFAS No. 143 and concluded that there is no
impact.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.4,
44 and 64, Amendment of FASB Statement No.13 and Technical Corrections. The
principal change is that gains or losses from extinguishment of debt which are
classified as extraordinary items by SFAS No. 4 will no longer be classified as
such. The provisions of SFAS
49
No. 145 are effective for fiscal years beginning after May 15, 2002 although
early application of the Statement related to the rescission of SFAS No. 4 is
encouraged. The Company plans to adopt SFAS No. 145 for its fiscal year ending
December 31, 2003. When adopted, prior extraordinary items related to the
extinguishment of debt will need to be reclassified.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting and processing for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred
in a Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal liability be recognized when the liability
is incurred. Under Issue 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. Under SFAS No. 146, fair
value is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. We do not expect the adoption of SFAS
No. 146 to have a material impact on our financial position, results of
operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual periods after December 15, 2002. The initial recognition and
initial measurement requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. We are assessing, but at
this point do not believe the adoption of the recognition and initial
measurement requirements of FIN 45 will have a material impact on our financial
position, cash flows or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of APB No. 51 (FIN 46). This
interpretation requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not currently
believe that it will be required to consolidate or disclose any SPE on adoption
of FIN 46.
(l) Critical accounting policies
The preparation of consolidated financial statements under generally accepted
accounting principles requires us to make certain estimates and judgments that
affect reported amounts of assets, liabilities, revenues, expenses and
disclosures in our financial statements. Critical accounting policies are those
that require the most significant, complex or subjective judgments, which are
often as a result of the need to make estimates on matters that are inherently
uncertain. Our critical accounting policies are those in relation to litigation,
valuation of intangible assets, valuation of fixed asset investments, sales
rebates and income taxes.
(i) Litigation
Shire accounts for litigation losses in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." Under SFAS
No. 5, loss contingency provisions are recorded for probable losses when
management is able to reasonably estimate the loss. Where the estimated loss
lies within a range and no particular amount within that range is a better
estimate than any other amount the minimum amount is recorded. In other cases
management's best estimate of the loss is recorded. These estimates are
developed substantially earlier than the ultimate loss is known, and the
estimates are refined each accounting period, in light of additional information
being known. In instances where Shire is unable to develop a best estimate of
loss, no litigation loss is recorded at that time. As information becomes known
a loss provision is set up when a best estimate can be made. The best estimates
are reviewed quarterly and the estimates are changed when expectations are
revised.
(ii) Valuation of Intangible Assets
Shire has acquired and continues to acquire significant intangible assets that
Shire records at acquisition cost. As at December 31, 2002 the carrying value of
such intangibles was $301.1 million. Those assets which do not yet have a
defined revenue stream and for which there are no alternative uses are expensed
upon acquisition as acquired in-process research and development, and those that
do have a defined revenue stream (namely commercial products or rights to
products awaiting final regulatory approval) are capitalized and amortized over
their estimated useful life.
50
Management's estimate of the useful life considers, interalia, the following
factors: the expected use of the asset by the entity; any legal, regulatory, or
contractual provisions that may limit the useful life and the effects of demand,
competition, and other economic factors (such as the stability of the industry,
known technological advances, legislative action that results in an uncertain or
changing regulatory environment, and expected changes in distribution channels).
There is a high occurrence of transactions involving the transfer of intangible
assets between companies in the health care field, and valuations are usually
based on a discounted cash flow analysis. Shire uses a discounted cash flow
model to value intangible assets acquired and for the assessment of impairment.
The discounted cash flow model requires assumptions about the timing and amount
of future cash inflows and outflows, risk, the cost of capital, and terminal
values. Each of these factors can significantly affect the value of the
intangible asset. Shire engages independent valuation experts who review Shire's
critical assumptions for significant acquisitions of intangibles. Shire reviews
intangible assets for impairment periodically using an undiscounted net cash
flows approach whenever events or circumstances suggest that the carrying value
of the intangible asset is not recoverable. If the undiscounted cash flows of an
intangible asset are less than its carrying value, the intangible asset is
written down to its estimated discounted cash flow value. Where cash flows
cannot be identified for an individual asset, the review is applied at the
lowest group level for which cash flows are identifiable.
Upon adoption of SFAS No. 142 on January 1, 2002, Shire assesses the
recoverability of the carrying value of its goodwill and other intangible assets
with indefinite useful lives at least annually or whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be fully
recoverable. Recoverability of goodwill is measured at the reporting unit level
based on a two-step approach. First, the carrying amount of the reporting unit
is compared to the fair value as estimated by the future net discounted cash
flows expected to be generated by the reporting unit. To the extent that the
carrying value of the reporting unit exceeds the fair value of the reporting
unit, a second step is performed, wherein the reporting unit's assets and
liabilities are fair valued. The implied fair value of goodwill is calculated as
the fair value of the reporting unit in excess of the fair value of all
non-goodwill assets and liabilities allocated to the reporting unit. To the
extent that the reporting unit's carrying value of goodwill exceeds its implied
fair value, impairment exists and must be recognized.
As of January 1, 2002, Shire had goodwill with a net carrying value of $175.3
million that was subject to the transition provision of SFAS No. 142. During the
first half of 2002, Shire performed the required impairment tests of goodwill as
of January 1, 2002 and determined that there was no impairment.
A prolonged general economic downturn and, specifically, competitive pricing
pressure, could create an imbalance of industry supply and demand, or otherwise
diminish volumes or profits. Such events, combined with changes in interest
rates, could adversely affect our estimates of future net cash flows to be
generated by our long-lived assets. Consequently, it is possible that our future
operating results could be materially and adversely affected by additional
impairment charges related to the recoverability of our long-lived assets.
(iii) Valuation of Fixed Asset Investments
The Company has certain investments in equity securities. All equity
investments, where Shire does not have the ability to exercise significant
influence and where the equity securities are not marketable, are accounted for
under the cost method. At December 31, 2002 the carrying value of investments
accounted for under the cost method was $72.0 million. Under the cost method,
investments in private companies are carried at cost, less provisions for other
than temporary impairment in value. For public companies, the Company classifies
its equity investments as available-for-sale and, accordingly, records these
investments at their fair values with unrealized gains and losses included in
"Accumulated other comprehensive loss", net of any related tax effect. Shire
periodically reviews its fixed asset investments for other than temporary
impairments whenever certain events or circumstances suggest that the carrying
value of an investment exceeds the fair market value of the investment.
Indicators of other than temporary impairments include:
o the market value of a quoted investment being below the carrying value of
the investment for an extended period;
o adverse news flow for private company investments in relation to the
progress of scientific technology/development of compounds; and
o recent stock issuances at a price below the investment price.
If the fair value appears to be below the carrying value we consider all
available evidence in assessing whether there is an other than temporary
impairment. This evidence would include:
o positive progress in the issuer's scientific technology/ development of
compounds;
o ongoing activity in collaborations with the issuer;
o a lack of other substantial company-specific adverse events causing a
decline in value;
51
o analysis and valuation of comparable companies; and
o the overall financial condition of the issuer.
In instances where our review indicates that there is an other than temporary
permanent impairment, Shire writes down the investment to the then fair value of
the investment, recording an impairment charge in the consolidated statement of
operations. The determination of the fair value of private company investments
together with the determination of whether an unrealised loss is permanent
requires significant judgment and can have a material impact on the reported
results.
(iv) Sales Rebates
Sales deductions primarily consist of statutory rebates to state Medicaid
agencies, contractual rebates with health-maintenance organizations (HMOs),
product returns, and trade discounts. Provision for rebates are recorded as
reductions to revenue in the same period as the related sales with estimates of
future utilization derived from historical trends. Provisions for product
returns and trade discounts to customers are recorded as reductions to revenue
in the same period as the related sales with estimates based upon past activity
levels and duration of time in the processing of deductions. The actual
experience and the level of rebate may deviate from the estimate. Shire revises
its estimates every period and may be required to adjust the estimate in a
subsequent period.
(v) Income Taxes
Shire operates in numerous countries where its income tax returns are subject to
audits and adjustments. Because Shire operates globally, the nature of the audit
items are often very complex, and the objectives of the government auditors can
result in a tax on the same income in more than one country. The Company employs
internal and external tax professionals to minimize audit adjustment amounts
where possible.
The Company also has significant deferred assets due to net operating losses
(NOL's) in the United States, Canada and other countries. The realization of
these assets is not assured and is dependent on the generation of sufficient
taxable income in the future. Management has exercised judgment in determining
the extent of the realization of these losses based upon estimates of future
taxable income in the various jurisdictions in which these NOL's exist. Where
there is an expectation that on the balance of probabilities there will not be
sufficient taxable profits to utilize these NOL's a valuation allowance has been
made against these deferred tax assets. If actual events differ from
management's estimates, or to the extent that these estimates are adjusted in
the future, any changes to the valuation allowance could materially impact our
financial position and results of operations. At December 31, 2002 the Company
had gross deferred tax assets of $208.6 million and had recorded a valuation
allowance of $139.5 million against this amount.
52
ITEM 7A: Quantitative and qualitative disclosures about market risk
(a) Treasury policies and organization
Our treasury activities are coordinated by our treasury function, based in
the U.K. All treasury operations are conducted within a framework of policies
and procedures approved by the 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 in the following areas:
(b) Interest rate risk
Due to the high proportion of fixed rate debt, the Company's interest charge has
limited exposure to interest rate movements.
The convertible notes bear interest of 2% per annum, payable semi-annually. This
interest rate is fixed over the period of the debt, thus reducing any cash flow
risk associated with movements in interest rates.
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.
In the year ended December 31, 2002, the average interest rate received on cash
and liquid investments was approximately 1.8% per annum. The largest proportion
of investments was in U.S. dollar deposits.
(c) Foreign exchange risk
The Company is exposed to movements in foreign exchange rates against U.S.
dollars for trading transactions and the translation of net assets and earnings
of non U.S. subsidiaries. The main trading currencies of the Company are the
U.S. dollar, the Canadian dollar, pounds sterling and the euro. The financial
statements of foreign entities are translated using the accounting policies
described in note 2 to the consolidated financial statements.
We have a small proportion of debt denominated in foreign currencies. As at
December 31, 2002, a total of $1.9 million was outstanding (December 31, 2001:
$5.4 million) in respect of loans denominated in Canadian dollars.
The exposure to foreign exchange risk is managed and monitored by our treasury
function, using forecasts provided by the operating units. The Company has not
undertaken any foreign currency hedges through the use of forward foreign
exchange contracts during the year to December 31, 2002. Instead, exposures have
been managed through natural hedging via the currency denomination of cash
balances.
(d) Market risk of investments
As at December 31, 2002, the Company has $72.0 million of investments comprising
equity investments funds, private companies and publicly quoted equities. These
investments are exposed to market risk. No financial instruments or derivatives
have been employed to hedge this risk.
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
On July 31, 2002, Arthur Andersen informed Shire Pharmaceuticals Group plc (the
"Registrant") that it would no longer be able to serve as the Registrant's
independent auditors, and submitted its letter of resignation to the Registrant
which was accepted by the Registrant. The Board of Directors of the Registrant,
upon the recommendation of its Audit Committee, subsequently engaged the
services of Deloitte & Touche as the Registrant's new independent auditors. The
change in auditors became effective July 31, 2002.
The audit reports of Arthur Andersen on the consolidated financial statements of
the Registrant as of and for the fiscal years ended December 31, 2001 and 2000
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Registrant's two fiscal years ended December 31, 2001, and through
July 31, 2002, there were no disagreements between the Registrant and Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
Arthur Andersen's satisfaction, would have caused Arthur Andersen to make
reference to the subject matter of the disagreement in connection with its
reports on the Registrant's consolidated financial statements for such years.
None of the reportable events described under Item 304(a)(1)(v) of Regulation
S-K occurred during the Registrant's two most recent fiscal years ended December
31, 2001, or through July 31, 2002.
During the Registrant's two fiscal years ended December 31, 2001, and through
July 31, 2002, the Registrant did not consult Deloitte & Touche with respect to
any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K.
54
PART III
ITEM 10: Directors and executive officers of the registrant
Certain information relating to our directors and 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 2002, 2001 and 2000, the compensation of the
Executive Officers of the Company.
(a) Summary compensation table
Long term
Annual Compensation Compensation Awards
------------------------------ ---------------------------
Value of Number of Securities All Other
Name and Position Year Salary Bonus Securities Underlying options Compensation
Underlying options
---- ------------ ---------- ------------- -------------- ------------
Rolf Stahel (1, 2) 2002 $840,000 $840,000 $1,486,000 123,964 $364,000
Former Chief Executive 2001 $693,000 $323,000 $1,157,000 89,096 $96,000
2000 $575,000 $316,000 $809,000 68,015 $80,000
Angus Russell (3) 2002 $436,000 $192,000 $544,000 44,838 $123,000
Group Finance Director 2001 $377,000 $162,000 $364,000 25,760 $63,000
2000 $272,000 $136,000 $174,000 14,225 $48,000
Dr Wilson Totten (4) 2002 $466,000 $212,000 $826,000 67,860 $114,000
Group Research and 2001 $414,000 $158,000 $633,000 47,466 $72,000
Development Director 2000 $303,000 $151,000 $430,000 35,136 $33,000
(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,
2002.
55
(b) Option grants in 2002
Percentage of Potential Realizable Value at
Number of Total Options Assumed Rates of Stock Price
Securities Granted to Exercise Appreciation for
Underlying Options Employees in Price per Option Term (1)
Granted Fiscal 2002 Share $ Expiration Date 5% 10%
--------------- ----------- ---------- -------------- --------- ----------
Rolf Stahel(2) 209,211 3% $7.19 03.03.12 237,138 497,971
Angus Russell(2) 114,474 2% $7.19 03.03.12 129,755 272,475
(3) 1,882 * $7.80 31.05.06 8,091 19,929
Dr Wilson Totten(2) 122,368 2% $7.19 03.03.12 138,702 291,264
(3) 1,882 * $7.80 31.05.06 8,091 19,929
* 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, 2002,
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 exercise price was (pound)5.065 per share and has been translated at
the rate of exchange at the date of grant of $1.419 : (pound)1.00. The
vesting date for these options is March 4, 2005.
(3) Options were granted under the Sharesave Scheme. The vesting date for these
options is December 1, 2005. The exercise price was (pound)5.02 per share
and has been translated at the rate of exchange at the date of grant of
$1.553 : (pound)1.00.
56
(c) Aggregated option/SAR exercises in last fiscal year and fiscal year end
option/SAR values
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, 2002
Number of Securities Underlying
Shares Unexercised Options Value of Unexercised In-the-Money
Acquired on Value Options
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------- ----------- ----------- ------------ ----------- ------------
Rolf Stahel 869,095 6,092,117 95,679 425,284 117,575 -
Angus Russell - - - 241,991 - -
Dr Wilson Totten - - 150,000 303,473 142,476 -
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, 2002, has
been deducted from the unexercised value.
(d) Employment agreements
Following a review of all executive employment contracts in 2002, various
changes were approved by the remuneration committee in the summer and early
autumn of 2002.
The Company entered into a new employment contract with Mr Stahel on February
23, 2003 which is terminable by either party on the giving of 12 months' notice.
In connection with this agreement Mr Stahel was paid a salary of $840,000 for
the year ended December 31, 2002 and is entitled to a performance related
"target" bonus of up to 55% of salary. The remuneration committee also has the
discretion to make further awards under the bonus plan, for exceptional
achievement beyond the targets set out at the beginning of the year, with a
maximum annual bonus capped at 100% of salary.
The Company entered into a new employment contract with Mr Russell on November
29, 2002 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 $436,000 for
the year ended December 31, 2002 and is entitled to a performance related
"target" bonus of up to 50% of salary. The remuneration committee also has the
discretion to make further awards under the bonus plan, for exceptional
achievement beyond the targets set out at the beginning of the year, with a
maximum annual bonus capped at 75% of salary.
The Company entered into a new employment contract with Dr Totten on December
17, 2002 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 $466,000 for
the year ended December 31, 2002 and is entitled to a performance related
"target" bonus of up to 50% of salary. The remuneration committee also has the
discretion to make further awards under the bonus plan, for exceptional
achievement beyond the targets set out at the beginning of the year, with a
maximum annual bonus capped at 75% of salary.
In addition to basic salary and bonus, the executive directors receive certain
benefits-in-kind, principally a car or car allowance, participation in the Shire
defined contribution pension plan and private medical insurance.
(e) 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, 2002
our non-executive Directors received fees totaling $347,000.
57
ITEM 12: Security ownership of certain beneficial owners and management
Set forth in the following table is the beneficial ownership of common shares as
of March 24, 2003 for (i) each person (or group of affiliated persons) known to
the Company to be the beneficial owner of more than 5% of common 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 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 common
shares beneficially Percent of
owned as of March outstanding
24, 2003 shares
Name
- ------------------------------------------------------------------------ ----------------- ----------------
Franklin Resources, Inc. (including its affiliates) (2)
One Franklin Parkway, San Mateo, CA 94403-1906, U.S. 67,819,145 14.01
FMR Corp. (including its affiliates) (3)
82 Devonshire Street, Boston, MA 02109-3614, U.S. 50,436,464 10.41
Dr James Cavanaugh (4) 8,806,368 1.81
Rolf Stahel (5) 751,647 *
Angus Russell (6) 56,422 *
Dr Wilson Totten (7) 198,056 *
Dr Barry Price 31,350 *
Ronald Nordmann 46,968 *
Dr Francesco Bellini (8) 10,000,258 2.06
Hon James Grant (9) 158,154 *
Gerard Veilleux (10) 10,003 *
All Directors and Officers as a Group (9 persons) 20,059,226 4.14
* 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 Franklin Resources,
Inc. (including its affiliates) on December 12, 2002.
(3) Based solely on information provided to the Company by FMR Corp. and
Fidelity International Limited on January 31, 2003.
(4) Dr Cavanaugh is a General Partner of HealthCare Ventures LLC, which is the
management company for a number of limited partnerships which have
interests in 8,690,090 common 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 136,107 common shares issuable upon exercise of options.
(6) All of Mr Russell's shares are issuable on exercise of options.
(7) Includes 191,995 common shares issuable upon exercise of options.
58
(8) Includes 3,413,550 common shares issuable upon exercise of options.
(9) Includes 153,603 cmmon shares issuable upon exercise of options.
(10) All of Mr Veilleux's shares are issuable on exercise of options.
Set forth in the following table are the details, for the year ended December
31, 2002, in respect of compensation plans (including individual compensation
arrangements) under which equity securities of the registrant are authorized for
issuance.
Number of
securities
Number of remaining
securities to be Weighted- available for
issued upon average future issuance
exercise of price of under equity
outstanding outstanding compensation
Plan category options options plans
___________ ___________ ___________
Equity compensation plans approved by
security holders 20,051,297 11.55 17,342,342
___________ ___________ ___________
Equity compensation plans not approved by
security holders - - -
___________ ___________ ___________
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:
o 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;
o 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
o 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 allowance, $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.
The amount owed to Mr Spitznagel at December 31, 2002 was $0.5 million (at
December 31, 2001 it was $1.4 million).
The Company incurred professional fees with law firms, in which the Hon James
Grant is a partner, totaling $1,239 for the year ended December 31, 2002 ($1.9
million for the year ended December 31, 2001 and $0.4 million for the year ended
December 31, 2000).
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
ITEM 14: Controls and procedures
Within the 90-day period prior to the date of this report, an evaluation was
carried out, under the supervision and with the participation of our management,
including our Chief Executive and our Group Finance Director, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based
upon that evaluation, the Chief Executive and the Group Finance Director
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There have been no significant changes to the Company's internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
60
PART IV
ITEM 15: Exhibits, financial statement schedules and reports on Form 8-K
(a) (i) Financial statements
Reference is made to the Index to the consolidated financial statements
and consolidated financial statement schedules hereinafter contained
(see F-1).
(ii) 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, 2002, 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 3, 2002, with
respect to the issue of a press release announcing holdings by The
Capital Group Companies Inc. and its affiliates in the ordinary share
capital of Shire.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported October 7, 2002, with
respect to the issue of a press release announcing holdings by FMR
Corp, Fidelity International Limited and their subsidiaries in the
ordinary share capital of Shire.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported October 15, 2002, with
respect to the issue of a press release announcing the acquisition by
the Company of a new project for Ulcerative Colitis.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported October 28, 2002, with
respect to the issue of a press release announcing a vaccines alliance
with Berna Biotech AG of Switzerland.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported October 29, 2002, with
respect to the issue of a press release announcing the results of head
to head study of REMINYL(R) and Donepezil.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported October 29, 2002, with
respect to the issue of a press release announcing that Chief Executive
Rolf Stahel will leave Shire and its board when a successor is found.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 4, 2002, with
respect to the issue of a press release announcing the details of
research into the effect of FOSRENOL(R) in end stage renal disease.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 6, 2002, with
respect to the issue of a press release announcing holdings by FMR
Corp, Fidelity International Limited and their subsidiaries in the
ordinary share capital of the Company.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 6, 2002, with
respect to the issue of a press release announcing invitation to third
quarter results presentation.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 6, 2002, with
respect to the issue of a press release announcing the Company's
results for the third quarter of 2002.
61
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 14, 2002, with
respect to the issue of a press release announcing holdings by Franklin
Resources and its affiliates in the ordinary share capital of the
Company.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 19, 2002, with
respect to the issue of a press release announcing an application for
listing of shares issued upon exchange of Shire Acquisition Inc.
exchangeable shares.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 22, 2002, with
respect to the issue of a press release announcing holdings by The
Capital Group Companies Inc. and its affiliates in the ordinary share
capital of the Company.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 26, 2002, with
respect to the issue of a press release announcing an application for
listing of shares upon the exercise of warrants pursuant to an
agreement between Shire BioChem Inc. and the Government of Canada.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported November 27, 2002, with
respect to the issue of a press release announcing holdings by FMR
Corp, Fidelity International Limited and their subsidiaries in the
ordinary share capital of the Company.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 2, 2002, with
respect to the issue of a press release announcing that the Company
would invest in a vaccine research center in Canada.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 4, 2002, with
respect to the issue of a press release announcing an application for
listing of shares issued upon exchange of Shire Acquisition Inc.
exchangeable shares.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 6, 2002, with
respect to the issue of a press release announcing holdings by Franklin
Resources and its affiliates in the ordinary share capital of the
Company.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 12, 2002, with
respect to the issue of a press release announcing holdings by Franklin
Resources and its affiliates in the ordinary share capital of the
Company.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 19, 2002, with
respect to the issue of a press release announcing the filing of a
supplemental New Drug Application for adult Attention Deficit
Hyperactivity Disorder.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 23, 2002, with
respect to the issue of a press release announcing the exercise of
share options and the sale of shares by Chief Executive Rolf Stahel.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
exhibits), date of earliest event reported December 30, 2002, with
respect to the issue of a press release announcing the sale of the
Company's over-the-counter products portfolio to Purdue Pharma L.P.
62
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-4
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2002, 2001 and 2000 F-8
Consolidated Statements of Comprehensive Income/(Losses) for the years
ended December 31, 2002, 2001 and 2000 F-10
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-11
Notes to the Consolidated Financial Statements F-14
F-1
Report of Independent 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, 2002 and 2001,
and the related consolidated statements of operations, comprehensive income,
changes in shareholders equity, and cash flows for each of the three years in
the period ended December 31, 2002. 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. The consolidated
financial statements give retroactive effect to the merger of Shire
Pharmaceuticals Group plc and BioChem Pharma, Inc., which has been accounted for
as a pooling of interests, as described in Note 3 to the consolidated financial
statements.
We did not audit the balance sheet of BioChem Pharma, Inc., a company acquired
in 2001 in a transaction accounted for as a pooling of interests, as of December
31, 2000, or the related statements of income, shareholders' equity and cash
flows of BioChem Pharma, Inc. for the year then ended, which statements reflect
total assets of $578.1 million and total revenues of $517.6 million. Those
statements 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 year ended December 31, 2000 is based solely upon the report of
such other auditors.
We also audited the accounting policy alignments described in Note 4 that were
applied to the 2000 audited financial statements of BioChem Pharma, Inc. In our
opinion, such adjustments are appropriate and have been properly applied.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As explained in note 12, effective January 1, 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets".
Deloitte & Touche
Reading, England
February 26, 2003
F-2
Report of Independent Auditors
To the shareholders of BioChem Pharma Inc.
We have audited the consolidated balance sheets 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, except share data)
Notes December 31, December 31,
2002 2001
$'000 $'000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents 897,718 118,040
Marketable securities (6) 316,126 723,911
Accounts receivable, net (7) 138,397 193,913
Inventories (8) 49,216 44,911
Deferred tax asset 34,849 19,430
Prepaid expenses and other current assets (9) 30,790 38,571
---------- ----------
Total current assets from continuing operations 1,467,096 1,138,776
Current assets from discontinued operations (5) - 1,779
---------- ----------
Total current assets 1,467,096 1,140,555
Investments (10) 71,962 68,743
Property, plant and equipment, net (11) 135,234 113,347
Goodwill, net (12) 203,767 175,341
Other intangible assets, net (12) 301,084 308,355
Deferred tax asset 6,216 20,274
Other non-current assets (13) 23,264 26,168
---------- ----------
Total long-term assets from continuing operations 741,527 712,228
Long-term assets from discontinued operations (5) - 57,948
---------- ----------
Total assets 2,208,623 1,910,731
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (16) 888 4,325
Accounts payable and accrued expenses (14) 184,107 167,152
Unearned income - 17,409
Other current liabilities (15) 15,492 42,730
---------- ----------
Total current liabilities from continuing operations 200,487 231,616
Current liabilities from discontinued operations (5) 12,784 -
---------- ----------
Total current liabilities 213,271 231,616
Long-term debt, excluding current installments (16) 407,302 402,481
Other non-current liabilities (17) 14,884 13,645
---------- ----------
Total liabilities 635,457 647,742
---------- ----------
F-4
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of U.S. dollars)
Notes December 31, December 31,
2002 2001
$'000 $'000
---------- ----------
Shareholders' equity:
Common stock, 5p par value; 800,000,000 shares authorized; and 484,344,412
(2001: 481,817,487) shares issued and outstanding 40,051 39,861
Exchangeable shares: 5,874,112 (2001: 5,978,902) shares issued and outstanding 272,523 277,386
Additional paid-in capital 1,027,499 1,014,796
Accumulated other comprehensive losses (41,431) (93,009)
Retained earnings 274,524 23,955
---------- ----------
Total shareholders' equity 1,573,166 1,262,989
---------- ----------
Total liabilities and shareholders' equity 2,208,623 1,910,731
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except share and per share data)
Year ended December 31, Notes 2002 2001 2000
$'000 $'000 $'000
---------- ---------- ----------
Revenues:
Product sales 859,388 699,351 496,775
Licensing and development 3,064 5,498 14,147
Royalties 174,812 145,155 135,470
Other revenues 34 2,952 1,262
---------- ---------- ----------
Total revenues (22) 1,037,298 852,956 647,654
Costs and expenses:
Cost of product sales 133,682 112,006 95,071
Research and development (inclusive of stock option
compensation charge on warrants of $4,502 for 2001) 189,179 171,029 155,145
Selling, general and administrative (inclusive of stock option
compensation (credit)/charge of ($166), $2,278 and $21,914 for
2002, 2001 and 2000 respectively) 386,023 303,480 230,216
Other charges: (23)
In process research and development - - 26,947
Asset impairments and restructuring charges - 29,699 -
Merger transaction expenses - 83,470 -
Loss on disposition of assets 1,376 10,164 -
---------- ---------- ----------
Total operating expenses 710,260 709,848 507,379
---------- ---------- ----------
Operating income (22) 327,038 143,108 140,275
Interest income 19,536 19,667 19,232
Interest expense (9,252) (8,315) (16,413)
Other (expense)/income, net (24) (8,262) (52,933) 109,023
---------- ---------- ----------
Total other income/(expense), net 2,022 (41,581) 111,842
---------- ---------- ----------
Income from continuing operations before income taxes, equity
in earnings of equity method investees and extraordinary items 329,060 101,527 252,117
Income taxes (26) (88,350) (68,897) (43,564)
Equity in earnings of equity method investees (27) 1,668 1,985 (3,809)
---------- ---------- ----------
Income from continuing operations before extraordinary item 242,378 34,615 204,744
Income from discontinued operations (net of income tax expense (5)
of $3,588, $3,963 and $4,100 respectively) 6,108 6,748 6,983
Gain on disposition of discontinued operations (net of income (5)
tax expense of $1,224) 2,083 - -
Extraordinary item, net of income tax - (2,604) -
---------- ---------- ----------
Net income 250,569 38,759 211,727
---------- ---------- ----------
F-6
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(In thousands of U.S. dollars, except share and per share data)
Year ended December 31, Notes 2002 2001 2000
$'000 $'000 $'000
---------- ---------- ----------
Earnings per share - basic (21)
Income from continuing operations before extraordinary item 48.4c 7.0c 42.4c
Income from discontinued operations 1.6c 1.4c 1.4c
Extraordinary item, net of tax - (0.5)c -
---------- ---------- ----------
50.0c 7.9c 43.8c
---------- ---------- ----------
Earnings per share - diluted (21)
Income from continuing operations before extraordinary item 47.4c 6.9c 41.4c
Income from discontinued operations 1.6c 1.3c 1.4c
Extraordinary item, net of tax - (0.5)c -
---------- ---------- ----------
49.0c 7.7c 42.8c
---------- ---------- ----------
Weighted average number of shares:
Basic 500,687,594 492,594,226 482,890,070
Diluted 522,418,246 504,875,587 494,691,805
---------- ---------- ----------
The results for the year ended December 31, 2000 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 Accounting Principles Board Opinion No.
16 "Accounting for Business Combinations" (APB 16).
The results for the years ended December 31, 2001 and 2000 have been restated to
reflect the disposal of the "Over-The-Counter" (OTC) business which has been
accounted for as a discontinued operation.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars except share data)
Exchange- Accumulated Accumulated
Common Exchange- able (deficit)/ other Total
Common stock able shares Additional retained comprehensive share-
stock no. shares shares number paid-in earnings losses holders'
amount amount shares capital equity
$'000 000's $'000 000's $'000 $'000 $'000 $'000
--------- -------- --------- --------- --------- -------- ---------- ---------
At December 31, 1999
39,241 474,400 - - 1,097,567 (226,531) (30,391) 879,886
Net income - - - - - 211,727 - 211,727
Foreign currency
translation - - - - - - (31,467) (31,467)
Issue of common stock 137 1,843 - - 11,720 - - 11,857
Issue costs - - - - (3,385) - - (3,385)
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
Reclassification of
realized loss included
in net income - - - - - - 1,356 1,356
Unrealized holding loss
on available for sale
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) - - -
Issue of common stock
for conversion of loan 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 warrants
- - - - 6,780 - - 6,780
Tax benefit associated
with exercise of stock
options
- - - - 3,805 - - 3,805
Unrealized holding loss
on available for sale
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
F-8
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
(In thousands of U.S. dollars except share data)
At December 31, 2001 39,861 481,817 277,386 5,979 1,014,796 23,955 (93,009) 1,262,989
Net income - - - - - 250,569 - 250,569
Foreign currency
translation - - - - - - 50,314 50,314
Issue of common stock
for conversion of loan
note 21 268 - - 1,479 - - 1,500
Exchange of exchangeable
shares 22 315 (4,863) (105) 4,841 - - -
Options exercised 147 1,944 - - 5,861 - - 6,008
Stock option
compensation - - - - (166) - - (166)
Tax benefit associated
with exercise of stock
options - - - - 688 - - 688
Unrealized holding gain
on available for sale
investments - - - - - - 1,264 1,264
-------- -------- --------- --------- --------- -------- --------- ----------
-
At December 31, 2002 40,051 484,344 272,523 5,874 1,027,499 274,524 (41,431) 1,573,166
-------- -------- --------- --------- --------- -------- ---------- ----------
The results for the year ended December 31, 2000 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 16.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSSES)
(In thousands of U.S. dollars)
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Net income 250,569 38,759 211,727
Other comprehensive income/(loss):
Foreign currency translation adjustments 50,314 (32,507) (31,467)
Reclassification of realized loss included in net income - - 1,356
Unrealized holding gains/(losses) on available for sale securities 1,264 48 (48)
----------- ----------- -----------
Comprehensive income 302,147 6,300 181,568
----------- ----------- -----------
The components of accumulated other comprehensive losses as at December 31, 2002
and 2001 are as follows:
December31, December 31,
2002 2001
$'000 $'000
----------- -----------
Foreign currency translation adjustments (42,695) (93,009)
Unrealized holding gains on non-current investments 1,264 -
----------- -----------
Accumulated other comprehensive losses (41,431) (93,009)
----------- -----------
There are no material tax effects related to the items included above.
The results for the year ended December 31, 2000 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 16.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 250,569 38,759 211,727
Adjustments to reconcile net income to net cash provided by operating
activities:
Acquired in-process research and development - - 26,947
Depreciation and amortization 36,434 45,809 37,987
Stock option compensation - options (166) 2,278 21,914
Stock option compensation - warrants - 4,502 -
Tax benefit of stock option compensation, credited directly to equity 688 3,805 30,782
(Increase)/decrease in deferred tax asset (8,761) 1,229 3,782
Non-cash exchange gains and losses 12,495 (1,017) (1,676)
Gain on sale of long-term investments - - (98,627)
Loss on sale of property, plant and equipment 1,376 8,112 -
Loss on sale of intangible assets - 2,052 1,514
Gain on sale of a business (3,307) - -
Write-down of long-term investments 8,732 61,596 -
Write-down of intangible assets 18,777 25,393 -
Equity in (earnings)/losses of equity method investees (1,668) (1,985) 3,809
Other elements - 1,788 1,102
Changes in operating assets and liabilities, net of acquisitions:
Decrease/(increase) in accounts receivable 61,159 (52,033) (52,570)
(Increase)/decrease in inventory (5,327) 2,922 (7,916)
Decrease/(increase) in prepayments and other current assets 8,662 (26,109) 1,215
Decrease in other assets 2,905 823 -
(Decrease)/increase in accounts payable and other liabilities (8,642) 61,504 37,727
(Decrease)/increase in unearned income (17,409) 17,409 -
Reserve for restructuring charges - - (83,608)
----------- ----------- -----------
Net cash provided by operating activities 356,517 196,837 134,109
----------- ----------- -----------
F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands of U.S. dollars)
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of/(investment in) marketable securities 407,653 (367,206) (186,019)
Purchase of subsidiary undertakings (17,000) - -
Expenses of acquisition (350) - (1,461)
Net cash acquired with subsidiary undertakings 50 - -
Additional investment in existing subsidiary - - (32,302)
Purchase of long-term investments (5,933) (20,351) (16,995)
Purchase of intangible assets (24,032) (35,986) (38,379)
Purchase of property, plant and equipment (22,647) (13,604) (44,243)
Purchase of other assets - - (6,658)
Proceeds from sale of long-term investments 4,108 - 123,327
Proceeds from sale of property, plant and equipment 721 7,081 12,007
Proceeds from sale of intangible assets - 4,556 -
Proceeds from sale of a business 71,000 - -
Collection on notes receivable - - 766
Other investing activities - - (1,427)
----------- ----------- -----------
Net cash provided by/(used in) investing activities 413,570 (425,510) (191,384)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTVITIES:
Proceeds from issue of long-term debt - 400,000 -
Payment of debt issuance costs - (9,000) -
Changes in long-term debt, capital leases and notes (3,381) (207,762) (8,514)
Proceeds from issue of common stock, net - 1,526 14,589
Proceeds from exercise of options 6,008 70,192 45,647
----------- ----------- -----------
Net cash provided by financing activities 2,627 254,956 51,722
----------- ----------- -----------
Effect of foreign exchange rate changes on cash and cash equivalents 6,964 (1,509) (1,975)
----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 779,678 24,774 (7,528)
Cash flows used in discontinued operations - - (1,708)
----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 779,678 24,774 (9,236)
Cash and cash equivalents at beginning of period 118,040 93,266 102,502
----------- ----------- -----------
Cash and cash equivalents at end of period 897,718 118,040 93,266
----------- ----------- -----------
F-12
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands of U.S. dollars)
Supplemental information associated with continuing operations:
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Interest paid 8,101 11,122 12,264
Income taxes paid 101,779 65,773 14,095
Non cash activities:
Common stock issued for product acquisitions - - 3,085
Common stock issued on conversion of zero-coupon note 1,500 1,544 8,772
Capital leases assumed on acquisition of subsidiaries 6,266 - -
The results for the year ended December 31, 2000 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 16.
Supplemental disclosures for non-cash transactions: see note 29.
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except where indicated)
(1) Description of operations
Shire Pharmaceuticals Group plc (Shire), and subsidiaries (collectively, the
Company) is an emerging global international pharmaceutical company with a
strategic focus on four therapeutic areas: central nervous system disorders,
gastro intestinal, oncology and anti-infectives. The Company's strategy is
further supported by three technology platforms: advanced drug delivery, lead
optimization for small molecules, and biologics.
Shire 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 Shire's own sales and marketing operations,
royalties (where Shire has out-licenced to third parties) and licensing and
development fees.
The Company has a particular interest in innovative therapies that are
prescribed by specialist doctors as opposed to primary care physicians. The
Company follows two main approaches: firstly to start projects in-house through
research and advanced drug delivery, and secondly to in-license projects and
products on reasonable commercial terms, and then to develop them and launch
them.
To complete its geographic coverage of the key world pharmaceutical markets,
Shire intends to build a presence in Japan in the future.
The Company's principal products include:
o in the U.S., ADDERALL XR(R) and ADDERALL(R) for the treatment of Attention
Deficit Hyperactivity Disorder (ADHD); AGRYLIN(R) for the treatment of
elevated blood platelets; PENTASA(R) for the treatment of ulcerative
colitis; CARBATROL(R) for the treatment of epilepsy; and PROAMATINE(R) for
the treatment of orthostatic 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 GlaxoSmithKline (GSK):
o in the U.K. and the Republic of Ireland, the CALCICHEW(R)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:
o in Canada, 3TC** for the treatment of HIV/AIDS, COMBIVIR and HEPTOVIR**
(all marketed in partnership with GSK); AMATINE(R) and FLUVIRAL S/F(R), a
vaccine for the prevention of influenza, and
o in the Rest of the World, royalties on the sales of ZEFFIX** for the
treatment of hepatitis B, marketed by GSK, and royalties on sales of
REMINYL marketed by Johnson & Johnson.
In addition, the Company has a number of products in late stage development
including FOSRENOL(R) for the treatment of high blood phosphate levels
associated with kidney failure and TROXATYL(R) for the treatment of leukemia and
pancreatic cancer. The Company submitted the first regulatory submission for
FOSRENOL under the European Mutual Recognition procedure on March 13, 2001 and a
New Drug Application with the U.S. FDA on April 30, 2002.
* Registered trademark of Johnson & Johnson
** Registered trademark of GlaxoSmithKline
(R) Unless otherwise indicated, all product names set out in this document are
trademarks of Shire or companies within the Shire Group, many of which are
the subject of trademark registrations in certain territories.
F-14
(2) Summary of significant accounting policies
(a) Basis of preparation
The accompanying consolidated financial statements include the accounts of Shire
and all of 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 U.S. generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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 upon shipment to customers.
Provisions for certain rebates, product returns and discounts to customers are
provided for as reductions to revenue in the same period as the related sales
are recorded. Approximately $17.0 million of ADDERALL XR product launch
shipments made in the last quarter of 2001 were not recognized as product
revenue until the first quarter of 2002, in accordance with Staff Accounting
Bulletin 101, as these sales had 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.
(iii) Royalty income
Royalty income relating to licensed technology is recognized when earned. 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.
F-15
(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.
(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 operations
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 statement of operations as they
become payable. Details relating to these contributions and the Supplemental
Executive Retirement Plan (SERP) operated by the Group are given in note 25.
(g) Finance costs of debt
Finance costs of debt are recorded as a deferred asset and then amortized to the
statement of operations over the term of the debt, using the effective interest
method. Deferred financing costs relating to debt extinguishments are written
off to the statement of operations in that period.
(h) Income taxes
The Company provides for income taxes in accordance with Statement of Accounting
Standards (SFAS) No.109, "Accounting for Income Taxes" (SFAS No. 109). Deferred
tax assets and liabilities are provided for differences between the carrying
amounts in the financial statements 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) Earnings per share
Earnings per share (EPS) is computed in accordance with SFAS No. 128, "Earnings
per Share" (SFAS No. 128). Basic EPS is computed by dividing consolidated net
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed by dividing
consolidated net income available to common shareholders by the sum of the
weighted average number of shares outstanding and the weighted average number of
all potentially dilutive common shares. Such potentially dilutive common shares
are excluded when the effect would be to increase earnings per share or reduce a
loss per share.
(j) Advertising expense
The Company expenses the cost of advertising as incurred. Advertising costs
amounted to $45.6 million, $21.8 million and $6.6 million for the years ended
December 31, 2002, 2001 and 2000 respectively.
F-16
(k) Foreign currency
The functional currency of each of Shire's subsidiaries is the local currency.
Monetary assets and liabilities in foreign currencies are translated into the
relevant functional currency at the rate of exchange ruling at the balance sheet
date. Transactions in foreign currencies are translated into the relevant
functional currency at the rate of exchange ruling at the date of the
transaction. Transaction gains and losses are recognized in arriving at
operating income.
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.
Foreign currency exchange transaction gains and losses on an after-tax basis
included in consolidated net income in the years ended December 31, 2002, 2001,
and 2000, pursuant to SFAS No. 52, "Foreign Currency Translation" (SFAS No. 52),
amounted to a $0.3 million loss, $0.5 million loss and $2.1 million gain,
respectively.
(l) Employee stock plans
SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123)
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock options. As allowed by SFAS No. 123, Shire has
chosen to continue to account for stock based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations. Accordingly, compensation cost of stock options is measured as
the excess, if any, of the quoted market price of Shire's stock at the
measurement date over the option exercise price and is charged to operations
over the vesting period. For fixed plans, the measurement date is the grant
date. For plans where the measurement date occurs after the grant date, referred
to as variable plans, the compensation cost is re-measured on the basis of the
current market value of the company's stock at the end of each reporting period.
Shire recognizes compensation expense for variable plans with performance
conditions if achievement of those conditions becomes probable.
The Company's basis for electing accounting treatment under APB No. 25 is
principally due to the satisfactory incorporation of the dilutive effect of
these shares in the reported earnings per share calculation and the presence of
pro forma supplemental disclosure of the estimated fair value methodology
prescribed by SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure".
At December 31, 2002, the Company has nine stock-based employee compensation
plan, which are described more fully in Note 28 to the consolidated financial
statements. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Net income
As reported 250,569 38,759 211,727
Pro forma 226,319 8,791 227,018
----------- ----------- -----------
Income per share
As reported - basic 50.0c 7.9c 43.8c
As reported - diluted 49.0c 7.7c 42.8c
Pro forma - basic 45.2c 1.8c 47.0c
Pro forma - diluted 44.4c 1.7c 45.9c
----------- ----------- -----------
(m) Cash and cash equivalents
Cash and cash equivalents are defined as short-term highly liquid investments
with original maturities of ninety days or less.
(n) Marketable securities
F-17
Marketable securities consist of commercial paper and institutional and managed
cash funds. In accordance with SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities (SFAS No. 115), and based on the Company's
intentions regarding these instruments, the Company has classified all
marketable securities as held-to-maturity and has accounted for these
investments at amortized cost.
Institutional and managed cash funds are short-term money market instruments,
including bank and building society term deposits from a variety of companies
with strong credit ratings.
(o) 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.
(p) Investments
The Company has certain investments in equity securities.
Investments are accounted for using the equity method of accounting if the
investment gives the Company the ability to exercise significant influence, but
not control over, the investee. Significant influence is generally deemed to
exist if the Company has an ownership interest in the voting stock of the
investee between 20% and 50%, although other factors, such as representation on
the investee's Board of Directors and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is
appropriate.
Under the equity method of accounting, the Company records its investments in
equity-method investees on the consolidated balance sheet as "Investments" and
its share of the investees' earnings or losses together with other-than
temporary impairments in value as "Equity in earnings of equity method
investees" on the consolidated statement of operations.
All other equity investments, which consist of investments for which the Company
does not have the ability to exercise significant influence, are accounted for
under the cost method or at fair value. Investments in private companies are
carried at cost, less provisions for other than temporary impairment in value.
For public companies that have readily determinable fair values, the Company
classifies its equity investments as available-for-sale and, accordingly,
records these investments at their fair values with unrealized gains and losses
included in "Accumulated other comprehensive loss", net of any related tax
effect. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in other
(expense)/income, net (see note 24). The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included as interest income.
(q) Goodwill and other intangible assets
(i) Goodwill
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.
Periods ending on or before December 31, 2001
For periods ending on or before December 31, 2001 goodwill recognized in respect
of each significant business combination was amortized over a period of 5 to 30
years (weighted average 19 years) on a straight line basis depending on the
nature of the goodwill, and was evaluated for impairment when events or changes
in circumstance indicate, in management's judgment, that the carrying value of
such assets may not be recoverable.
Impairments of goodwill were recognized if expected undiscounted cash flows were
not sufficient to recover the goodwill. If a material impairment was identified,
goodwill was written down to its estimated fair value. Fair value was 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.
F-18
Periods commencing January 1, 2002
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142).
The statement directs that goodwill and intangible assets that have indefinite
lives will not be amortized but rather will be tested at least annually for
impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives, but without the constraint of an arbitrary
ceiling. Going forward, the Company will carry out an annual impairment review
of goodwill as of September 30th date unless any events occur which trigger the
need for an earlier impairment review.
(ii) Other intangible assets
Other intangible assets, which comprise intellectual property including
trademarks for products with an immediate defined revenue stream and acquired
for valued consideration, are 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 (weighted average 23 years). Intellectual property with no
defined revenue stream, where the related product has not yet completed the
necessary approval process, is written off to operations on acquisition.
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, and
o actions of competitors, suppliers, regulatory agencies or others that may
eliminate current competitive advantages
(r) Property, plant and equipment
Property, plant and equipment is shown at cost, less accumulated depreciation
and any provision for impairment. Cost of significant assets includes
capitalized interest incurred during the construction period. 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:
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 operations as incurred.
The 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. The profit or loss on such disposition is reflected in
operating income.
(s) Impairment of long-lived assets other than goodwill and investments
The Company periodically evaluates the recoverability of long-lived assets other
than goodwill and investments in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). Whenever events
or changes in circumstances indicate that the carrying amounts of those assets
may not be recoverable, the Company compares undiscounted net cash estimated to
be generated by those assets to the carrying amounts of those assets. When these
undiscounted cash flows are less than the carrying amount of the assets, the
Company records impairment losses to write the asset down to its estimated fair
market value. This is usually calculated by reference to discounted estimated
cash flows.
F-19
(t) Concentration of 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.
A significant proportion of revenue is derived from the sale of ADDERALL XR and
ADDERALL. During 2002 and 2001, sales of these products were $427.7 million and
$350.3 million respectively, representing 41% of total revenues in both years.
As a result, factors affecting the sale or production of ADDERALL XR and
ADDERALL would have a material adverse effect on our financial condition and
results of operation.
(u) Reclassifications
Certain amounts reported in previous years have been reclassified to conform to
the 2002 presentation.
(v) New accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143
requires that 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 has assessed the potential impact of the adoption of SFAS
No. 143 and concluded that there is no impact.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No.4, 44 and 64, Amendment of FASB Statement No.13 and Technical Corrections"
(SFAS No. 145). The principal change is that gains or losses from extinguishment
of debt which are classified as extraordinary items by SFAS No. 4 will no longer
be classified as such. The provisions of SFAS No. 145 are effective for fiscal
years beginning after May 15, 2002 although early application of the Statement
related to the rescission of SFAS No. 4 is encouraged. The Company plans to
adopt SFAS No. 145 for its fiscal year ending December 31, 2003. When adopted,
prior extraordinary items related to the extinguishment of debt will need to be
reclassified. The potential impact of the adoption of SFAS No. 145 will be to
reclassify $2.6 million from extraordinary items to income expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS No. 146), which addresses accounting and
processing for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (including
Certain Costs Incurred in a Restructuring)" (Issue 94-3). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal liability be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost was recognized at the date of an entity's commitment to an exit plan.
Under SFAS No. 146, fair value is the objective for initial measurement of the
liability. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We do no
expect the adoption of SFAS No. 146 to have a material impact on our financial
position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
interim and annual periods after December 15, 2002. The initial recognition and
initial measurement requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. We are assessing, but at
this point do not believe the adoption of the recognition and initial
measurement requirements of FIN 45 will have a material impact on our financial
position, cash flows or results of operations.
F-20
(v) New accounting pronouncements (continued)
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of APB No. 51" (FIN 46). This interpretation
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company is currently evaluating the effect
that the adoption of FIN 46 will have on its results of operations and financial
condition.
(w) Statutory accounts
The consolidated financial statements as of December 31, 2002 and 2001 and for
each of the three years in the period ended December 31, 2002 do not comprise
statutory accounts within the meaning of Section 240 of the UK Companies Act
1985.
Statutory accounts prepared in accordance with generally accepted accounting
principles in the United Kingdom for the years ended December 31, 2001 and 2000
have been delivered to the Registrar of Companies for England and Wales. The
auditors' report on those accounts was unqualified.
(3) Business combinations and reorganizations
Year ended December 31, 2002
(a) Atlantic Pharmaceutical Services Inc acquisition
On September 27, 2002, the Company completed its acquisition of Atlantic
Pharmaceutical Services Inc. (APS) from Niro Inc. for cash consideration of
$17.3 million, including $0.3 million costs of acquisition. This transaction
provided the Company with an in-house facility in which to manufacture several
key U.S. products. The acquisition was accounted for using the purchase method
and goodwill of $10.2 million was recorded. The results of operations of APS
have been included in the consolidated results of the Company since the date of
acquisition.
The purchase price of $17.3 million was allocated as follows:
Fair value
$'000
---------
Total current assets 3,188
Property, plant and equipment, net 11,620
Current installments of long-term debt (216)
Accounts payable (1,367)
Long-term debt, excluding current installments (6,050)
---------
Net assets acquired 7,175
Goodwill 10,175
---------
17,350
---------
Represented by:
Purchase consideration 17,000
Acquisition fees 350
---------
17,350
---------
F-21
(3) Business combinations and reorganizations (continued)
Year ended December 31, 2002 (continued)
The pro forma effect in 2002 and 2001 of the APS acquisition if acquired on
January 1, 2002 and January 1, 2001 respectively would have resulted in
revenues, income before extraordinary items, net income and earnings per share
data as follows:
Year ended December 31, 2002 2001
$'000 $'000
---------- ----------
Revenues 1,042,748 861,660
Income before extraordinary items 248,983 41,428
Net income 248,983 38,824
---------- ----------
Earnings per share - basic 49.7 7.9
Earnings per share - diluted 48.7 7.7
---------- ----------
(b) Divestment of OTC products division
On December 27, 2002, the Company completed its divestment of a group of
non-strategic U.S. products, known collectively as the `Over-The-Counter' (OTC)
products. The Company received sale proceeds of $71.0 million and recorded a
gain on disposal of $2.1 million. In addition, there are potential warranties of
up to $7 million in respect of the divestment, of which the Company has provided
what it deems necessary at this stage. Further details of this discontinued
operation are provided in note 5 below.
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. Shire issued 179,447,629
common shares and 17,292,149 exchangeable shares in order to effect the business
combination. Each exchangeable share is equivalent to 3 common shares and is
exchangeable into common shares or ADSs at a rate of one exchangeable share for
three common shares or one exchangeable share for one ADS, at any time at the
request of the holder. Holders of exchangeable shares are entitled to the
dividend and other rights that are economically equivalent to those of common
shares. Through a voting trust and by means of special voting shares in Shire
held by the trustee, holders of exchangeable shares are entitled to vote at
shareholder meetings of the Company. Exchangeable shares are included in
deriving the Company's weighted average number of shares for both basic and
diluted earnings per share (see note 20) because they will become and are
equivalent to common shares.
This transaction was accounted for by the pooling of interests method in
accordance with APB No. 16. 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:
$'000
---------
Revenue 51,592
Net income 23,003
---------
Other changes in shareholders' equity:
Issue of common shares on exercise of stock options 2,170
---------
F-22
Year ended December 31, 2001 (continued)
(a) BioChem merger (continued)
The revenues and earnings previously reported by the Company for the year ended
December 31, 2000 can be reconciled to the combined amounts presented herein as
follows:
Revenue Net Income
$'000 $'000
---------- ----------
As previously reported 517,608 76,171
BioChem pooled results 198,478 174,346
Accounting policy alignment (see note 4) (44,976) (38,790)
---------- ----------
As restated for BioChem 671,110 211,727
Discontinued operations (see note 5) (23,456) -
---------- ----------
As reported 647,654 211,727
---------- ----------
(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 were 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 $2.1 million was recorded in operations.
(4) Accounting policy alignment
In 1998, BioChem spun-off its investments in CliniChem to its shareholders. 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 by $38.8 million.
On December 15, 2000 BioChem reacquired CliniChem. This acquisition has been
reflected in the accompanying financial statements using purchase accounting.
(5) Discontinued operations
In December 1999 the Company acquired a group of products, collectively referred
to as the OTC portfolio, through its merger with Roberts Pharmaceutical
Corporation (Roberts). The OTC portfolio consisted of non-prescription laxatives
and dietary supplements sold by the Company's U.S. operating segment. As a
specialty pharmaceuticals company that focuses on prescription only products,
this part of the business was not considered to be a core part of Shire's
long-term strategy and hence the decision was made to divest the OTC portfolio
in December 2002. On December 27, 2002, the Company completed its divestment of
the OTC business. The Company received sale proceeds of $71.0 million and
recorded a gain on disposal of $2.1 million. In addition, there are potential
warranties of up to $7 million in respect of the divestment, of which the
Company has provided what it deems necessary at this stage.
The historical consolidated financial statements have been restated to reflect
the OTC business as a discontinued operation for all periods presented.
Operating results of the discontinued operations are summarized below.
F-23
(5) Discontinued operations (continued)
The amounts include income tax provisions based on the stand alone results of
the OTC business. There have been no allocations of general and administrative
corporate costs or interest expense related to corporate credit facilities to
the discontinued operation. As the OTC business functioned within Shire US,
which itself essentially functions as an independent entity, no corporate costs
were eliminated upon discontinuance of the operation. Within Shire US, the OTC
business had few dedicated resources. All of the products were manufactured and
packaged by third party contract manufacturers. The products were distributed
through a shared warehouse facility and sold through a small sales team.
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Product sales 24,010 24,613 23,456
Cost of product sales (5,764) (6,279) (6,300)
----------- ----------- -----------
Gross profit 18,246 18,334 17,156
----------- ----------- -----------
Operating expenses:
Selling, general and administrative (8,550) (7,623) (6,073)
----------- ----------- -----------
Operating income 9,696 10,711 11,083
Income taxes (3,588) (3,963) (4,100)
----------- ----------- -----------
Income from discontinued operations 6,108 6,748 6,983
Gain on sale (net of tax) 2,083 - -
----------- ----------- -----------
8,191 6,748 6,983
----------- ----------- -----------
The assets and liabilities of the discontinued operation are summarized below.
December 31 December 31 December 31
2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Current assets:
Inventories - 1,779 4,135
----------- ----------- -----------
Long term assets:
Goodwill and other intangible assets, net - 65,348 67,340
Deferred tax liability - (7,400) (6,354)
----------- ----------- -----------
Total long term assets - 57,948 60,986
----------- ----------- -----------
Current liabilities:
Other current liabilities (12,784) - -
----------- ----------- -----------
Total current liabilities (12,784) - -
----------- ----------- -----------
Net (liabilities)/assets (12,784) 59,727 65,121
----------- ----------- -----------
Included in the 2002 other current liabilities are amounts for ongoing
liabilities that were not transferred to the purchaser.
F-24
(6) Marketable securities
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Commercial paper 87,843 246,174
Institutional and managed cash funds 228,283 477,737
------------ -----------
316,126 723,911
------------ -----------
December 31, December 31,
2002 2001
Maturity profile of commercial paper $'000 $'000
------------ -----------
Less than one month 7,297 168,678
1-3 months 12,981 -
3-6 months 67,565 77,496
------------ -----------
87,843 246,174
Maturity profile of institutional
and managed cash funds $'000 $'000
------------ -----------
Less than one month 63,600 477,737
1-3 months 20,373 -
3-6 months 45,090 -
6-12 months 25,192 -
More than one year 74,028 -
------------ -----------
228,283 477,737
------------ -----------
(7) Accounts receivable, net
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Trade receivables 130,210 187,694
Research and development contracts 5,184 3,998
Other receivables 3,003 2,221
------------ -----------
138,397 193,913
------------ -----------
Trade receivables included above are stated net of a provision for doubtful
debts of $0.8 million (December 31, 2001: $1.1 million).
Included within trade receivables as at December 31, 2002 is $nil in respect of
unearned income relating to ADDERALL XR product sales (December 31, 2001: $17.0
million).
Included within research and development contracts receivable are amounts due in
respect of an agreement with the Canadian government, Technology Partnerships
Canada (TPC), under which a contribution is made towards certain eligible
research and development costs incurred by Shire's Canadian subsidiary, Shire
BioChem Inc. This was $1.0 million at December 31, 2002.
F-25
(8) Inventories
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Finished goods 27,672 18,101
Work-in-process 13,716 18,262
Raw materials 7,828 8,548
------------ -----------
49,216 44,911
------------ -----------
(9) Prepaid expenses and other current assets
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Prepaid expenses 14,558 18,780
Deferred financing costs 1,208 1,077
Income tax receivable 12 7,712
Valued added taxes receivable 2,730 5,407
Other current assets 12,282 5,595
------------ -----------
30,790 38,571
------------ -----------
The deferred financing costs relate to the $400 million convertible loan note
(see note 16). These costs are being amortized over 10 years using the effective
interest rate method.
(10) Investments
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Investments in private companies 47,255 51,549
Investments in public companies 14,129 13,855
Equity method investments 10,578 3,339
------------ -----------
71,962 68,743
------------ -----------
(a) Investments in private companies
(i) GeneChem funds
We have made investments in two venture capital funds. The fund managers
distribute income to the partners of the funds in respect of dividends or
realized gains made on sale of investments.
In March 1997, we entered into an agreement to make an investment of CAN$30.0
million in the 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, 2002, we have invested CAN$27.0 million in the
GeneChem Technologies Venture Fund L.P. and we are, therefore, committed to
investing a further $1.9 million (CAN$3.0 million) into this Fund.
F-26
(10) Investments (continued)
(a) Investments in private companies (continued)
(i) GeneChem funds (continued)
In September 2000, we entered into an agreement to invest CAN$15.0 million in
the GeneChem Therapeutics Venture Fund L.P., which invests in genomics companies
focusing on cancer and infectious diseases. As of December 31, 2002, we have
committed to invest a further $4.3 million (CAN$6.8 million) in the GeneChem
Therapeutics Venture Fund L.P.
The manager and general partners of these funds are fully owned subsidiaries of
the Company. These funds have not been consolidated because the operational
substance of the funds are such that the other partners have the ability to veto
investment decisions.
(ii) EGS Healthcare fund
In November 2000, we entered into an agreement to invest up to $10.0 million in
various EGS healthcare funds. EGS is a private equity company that makes
investments in healthcare companies that focus mainly on biotechnology and
specialty pharmaceuticals. As of December 31, 2002, we have invested $5.1
million in EGS healthcare funds and we are, therefore, committed to invest a
further $4.9 million into these funds.
(b) Investments in public companies
During the year ended December 31, 2002, there were no new investments made in
public companies. In July 2002, the Company's $11.1 million preference share
investment in Immunogen Inc. was converted in to a common stock holding.
During the year, the Company wrote down the cost of investments in public
companies by $1.4 million due to other than temporary impairments. This expense
is included within non-operating other (expense)/income, net (see note 24).
(c) Equity method investments
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. The Company's share of the partnership is included
within "Equity in earnings of equity method investees" and the related equity
investment of $2.9 million is included above.
In September 2002, the Company sold the net assets of its CADx group of
companies, to Qualia Computing Inc, in exchange for shares in a newly formed
joint venture. The common stock of the joint venture, Qualia Computing Inc., is
50% owned by Shire. The initial value of the investment was equal to the book
value of assets sold, therefore, no gain or loss was recognized.
The Company has applied the equity method of accounting as the Company owns, but
does not exercise control over its 50% share of the joint venture. As a result,
the Company's investment is valued at cost, adjusted for its share of the
earnings or losses of the joint venture.
The Company's share of the partnership is included within "Equity in earnings of
equity method investees" and the related equity investment of $7.7 million is
included above. There is no significant difference between the amount at which
the investment is carried and the amount of the underlying equity in net assets
of the joint venture.
F-27
(11) Property, plant and equipment, net
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Land and buildings 111,164 95,921
Office furniture, fittings and equipment 31,210 12,659
Warehouse, laboratory and manufacturing equipment 46,706 46,613
------------ -----------
189,080 155,193
Less: Accumulated depreciation (53,846) (41,846)
------------ -----------
135,234 113,347
------------ -----------
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
$12.9 million, $14.4 million and $10.7 million respectively.
(12) Goodwill and other intangible assets, net
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Goodwill arising on businesses acquired 254,207 220,890
Less: accumulated amortization (50,440) (45,549)
------------ -----------
203,767 175,341
------------ -----------
Other intangible assets acquired 397,807 379,986
Less: accumulated amortization (96,723) (71,631)
------------ -----------
301,084 308,355
------------ -----------
Total 504,851 483,696
------------ -----------
The increase/(decrease) in the net book value of goodwill and other intangible
assets for the year ended December 31, 2002 is shown in the table below:
Other
intangible
Year ended December 31, 2002 Goodwill assets
$'000 $'000
------------ -----------
As at January 1, 2002 175,341 308,355
Acquisitions 10,175 23,467
Amortization charged - (23,493)
Asset impairments - (18,777)
Foreign currency translation 18,251 11,532
------------ -----------
As at December 31, 2002 203,767 301,084
------------ -----------
The acquisition of goodwill is in respect of APS (see note 3). Acquisitions of
other intangible assets primarily related to SOLARAZE. The Company acquired the
exclusive rights to manufacture, distribute and sell SOLARAZE for the treatment
of actinic keratosis from SkyePharma plc. In May 2002, the Company paid $18.9
million ((pound)12.9 million) in respect of certain European territories,
followed in December 2002 by a further $1.2 million ((pound)0.7 million) in
respect of the rights for Australia, New Zealand, South Africa and certain other
countries in the Pacific Rim.
F-28
(12) Goodwill and other intangible assets, net (continued)
Amortization charged for the years ended December 31, 2002, 2001 and 2000 was
$23.5 million, $31.4 million and $27.3 million respectively. Goodwill was no
longer amortized with effect from January 1, 2002 following the implementation
of SFAS No. 142 (see below).
Adoption of SFAS No. 142
As described in note 2, the Company adopted SFAS No. 142 as of January 1, 2002.
A transitional assessment of goodwill impairment as of January 1, 2002 was
completed by June 30, 2002. Management concluded that the fair value of the
Company's individual reporting units exceeded the carrying value of the net
assets including goodwill, and hence this process did not result in any
impairment to be recorded on adoption of SFAS No. 142.
The Company completed a second goodwill impairment review as of September 30,
2002 and found that no adjusting entries were necessary.
A reconciliation table is provided below to exclude the effect of goodwill
amortization in accordance with the transitional disclosures relating to SFAS
No. 142. Results for the year ended December 31, 2002 have been prepared in
accordance with SFAS No. 142.
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Income from continuing operations before extraordinary items as reported
242,378 34,615 204,744
Add back of goodwill amortization charge - 10,763 11,324
----------- ----------- -----------
Adjusted income from continuing operations before extraordinary items
242,378 45,378 216,068
----------- ----------- -----------
Net income as reported 250,569 38,759 211,727
Add back of goodwill amortization charge - 10,763 11,324
----------- ----------- -----------
Adjusted net income for basic earnings per share 250,569 49,522 223,051
Interest charged on convertible debt, net of tax 5,585 - -
----------- ----------- -----------
Adjusted net income for diluted earnings per share 256,154 49,522 223,051
----------- ----------- -----------
Basic earnings per share (in $):
Net income as reported 50.0 7.9 43.8
Add back goodwill amortization charge - 2.2 2.3
----------- ----------- -----------
Adjusted net income 50.0 10.1 46.1
----------- ----------- -----------
Diluted earnings per share (in $):
Net income as reported 49.0 7.7 42.8
Add back goodwill amortization charge - 2.1 2.3
Interest charged on convertible debt, net of tax 0.1 - -
----------- ----------- -----------
Adjusted net income 49.1 9.8 45.1
----------- ----------- -----------
Weighted average number of shares: No. of shares No. of shares No. of shares
----------- ----------- -----------
Basic 500,687,594 492,594,226 482,890,070
Diluted 522,418,246 504,875,587 494,691,805
F-29
Adoption of SFAS No. 142
There is no tax effect related to the goodwill amortization disclosed above.
The useful economic lives of all intangible assets that continue to be amortized
under SFAS No. 142 have been assessed. Management estimates that the annual
amortization charges in respect of intangible fixed assets held at December 31,
2002 will be approximately $13.2 million for each of the five years to December
31, 2007. Estimated amortization expense can be affected by various factors
including future acquisitions and disposals of product rights.
The net book value of goodwill by operating segment is as follows:
December 31, U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- --------
2002 174,617 29,150 - 203,767
2001 148,660 26,681 - 175,341
------------ ------------- ------------- --------
During the year ended December 31, 2002, the Company acquired exclusive rights
to manufacture, distribute and sell SOLARAZE in certain countries. The purchase
cost was $20.1 million. The amortization period in respect of this product is 10
years.
(13) Other non-current assets
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Deferred financing costs 7,915 8,617
SERP investment 12,070 14,367
Other assets 3,279 3,184
------------ -----------
23,264 26,168
------------ -----------
The deferred financing costs at December 31, 2002 and 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 within prepaid expenses
and other current assets (note 9).
Further details of the Supplemental Executive Retirement Plan (SERP) investment
are provided in note 25. The amount shown above is the cash surrender value of
life insurance policies which is backed by marketable securities. A liability of
$8.4 million is included within note 17 (2001: $11.3 million).
(14) Accounts payable and accrued expenses
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Trade accounts payable 46,912 51,952
Accrued rebates and charge-backs 45,919 41,086
Accrued expenses 91,276 74,114
------------ -----------
184,107 167,152
------------ -----------
F-30
(15) Other current liabilities
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Income taxes payable 5,440 25,604
Payable for termination of license agreement - 738
Interest on long-term debt 2,893 2,928
Social security liabilities 1,934 7,237
Value added taxes 1,957 1,148
Other accrued liabilities 3,268 5,075
------------ -----------
15,492 42,730
------------ -----------
(16) Long-term debt
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Total obligations 408,190 406,806
Current maturities of long-term obligations (888) (4,325)
------------ -----------
Total long-term debt 407,302 402,481
------------ -----------
An analysis of total obligations by loan type is presented below:
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Convertible notes due 2011 400,000 400,000
Unsecured convertible zero coupon loan notes - 1,450
Canadian provincial and federal government loan 1,880 3,100
Bank term loans - 2,256
Capital leases 6,310 -
------------ -----------
408,190 406,806
------------ -----------
Principal payments in each of the next five years and thereafter on total
obligations outstanding at December 31, 2002 amount to:
December 31,
2002
$'000
-----------
2003 888
2004 400,897
2005 863
2006 254
2007 272
Thereafter 5,016
-----------
408,190
-----------
F-31
(16) Long-term debt (continued)
The principal payments presented above have been calculated on the basis that
the $400 million convertible notes due 2011 convert to common shares or will be
paid as cash at the earliest opportunity, which is August 21, 2004. Further
details in respect of the convertible notes are presented below.
(i) Convertible notes due 2011
The $400 million of guaranteed convertible notes due 2011, were issued in August
2001 by Shire Finance Limited (the Issuer), a wholly owned subsidiary.
The convertible notes are guaranteed by Shire and are convertible into
redeemable preference shares of the Issuer which upon issuance will be
immediately exchanged for either (i) Shire common shares or (ii) Shire ADSs, or
(iii) at the Issuer's option, a cash amount based upon the London Stock Exchange
volume-weighted average prices of common shares on the fourth through eighth
business days following conversion.
At the choice of investors, each $1000 of nominal value notes can be converted
into 49.62 Shire common shares (subject to adjustment) or 16.54 Shire ADSs
(subject to adjustment) at any time up to August 21, 2011. Alternatively,
investors can choose to receive repayment of the nominal principal in cash
either at the maturity date of August 21, 2011 or by exercising a put option on
any of the three put dates being August 21, 2004, August 21, 2006 and August 21,
2008. At the option of the Company, repayment can be made in the form of Shire
common shares or ADSs. The number of common shares that a note holder would
receive would be based on the notional principal of the notes divided by 95% of
the London Stock Exchange volume-weighted average price of common shares on the
five trading days after the Company gives notice of the exercise of its option.
Such notice will be on or before the tenth business day preceding the repayment
put date. On or after August 21, 2004, the Company may redeem, for cash, all or
part of the notes providing the Ordinary Share price has exceeded $26.20
(Sterling equivalent at the time) for 20 of the 30 consecutive dealing days in
the period prior to redemption.
The decision as to whether a note holder should exercise a put option will
depend on a number of factors particularly the price of Shire stock at the put
date and the likelihood of the Company's stock price exceeding the conversion
threshold price. The conversion threshold price is equivalent to $20.15 or
(pound)12.52 (at the closing exchange rate for 2002) for Shire common shares and
$60.46 for Shire ADSs. If the price of Shire common shares at the first put date
of August 21, 2004 remains at a level similar to the year end price of
(pound)3.97 ($18.89 for Shire ADSs) it is quite possible that note holders will
choose to exercise their put options. The Company currently has adequate
resources from which it could satisfy repayment of the entire convertible debt
principal of $400m.
The interest expense recorded in the year ended December 31, 2002 was $8.0
million (2001: $2.9 million).
(ii) Unsecured convertible zero coupon loan notes
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 were in the name
of the parent company, Shire. The agreement provided 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) were not so
cancelled, for their conversion into common shares. The number of common shares
was calculated by dividing the amount not cancelled by the lower of (pound)3.565
(approximately $5.75) and the midweek closing price of the common shares on the
London Stock Exchange on the relevant date. Translation from pounds sterling to
U.S. dollars was made using the exchange rate on the relevant date.
The Company has issued common shares to Arenol Corporation (or its nominee
broker), as set out in the table below, in consideration of the conversion of
each of the Loan Notes. As at December 31, 2002 there is no liability remaining.
F-32
(ii) Unsecured convertible zero coupon loan notes (continued)
No. of common
Date of conversion shares issued $'000
------------ -----------
March 13, 2000 533,279 3,000
August 3, 2000 560,076 2,800
November 6, 2000 541,478 3,000
July 30, 2001 295,061 1,500
August 6, 2002 267,572 1,500
----------- -----------
2,197,466 11,800
----------- -----------
(iii) Canadian federal and provincial government loan
The Company has a Canadian federal and provincial government loan outstanding of
$1.9 million (CAN$3.0 million). This facility is non-interest bearing and is
repayable in annual installments of $0.6 million (CAN$1.0 million).
(iv) Bank term loans
The Company had a bank term loan at December 31, 2001 bearing interest at the
lender's prime rate, which was secured by a charge on land and buildings. The
final payment in respect of this loan was made in May 2002.
(v) Capital leases
December 31, December 31,
Obligations under capital leases 2002 2001
$'000 $'000
------------ -----------
Current 261 -
Non-current 6,049 -
------------ -----------
6,310 -
------------ -----------
The following is an analysis of the leased property under capital leases by
major asset classes:
December 31, December 31,
Classes of property 2002 2001
$'000 $'000
------------ -----------
Land and buildings 6,259 -
Office furniture, fittings and equipment 160 -
------------ -----------
6,419 -
Less: accumulated depreciation (126) -
------------ -----------
6,293
------------ -----------
F-33
(16) Long-term debt (continued)
(v) Capital leases(continued)
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 2002.
December 31,
2002
$'000
-----------
2003 261
2004 270
2005 237
2006 254
2007 272
Thereafter 5,016
-----------
6,310
-----------
(17) Other non-current liabilities
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
SERP (note 25) 8,364 11,348
Other accrued liabilities 6,520 2,297
------------ -----------
14,884 13,645
------------ -----------
(18) Financial instruments
The estimated fair value of the Company's financial instruments at December 31,
is summarized below. Certain estimates and judgments were required to develop
the fair value amounts. The fair value amounts shown below are not necessarily
indicative of the amounts that the Company would realize upon disposition nor do
they indicate the Company's intent or ability to dispose of the financial
instrument.
The following methods and assumptions were used to estimate the fair value of
each material class of financial instrument:
o Marketable securities - the carrying value of marketable securities
approximates fair value because of the short-term nature of these
investments.
o Investments - non-current investments with readily determinable market
values are marked to market.
o 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.
F-34
(18) Financial instruments (continued)
The carrying amounts and corresponding fair values of financial instruments at
December 31, 2002 and 2001 were as follows:
December 31, 2002 Carrying Amount
Fair Value
$'000 $'000
------------ -----------
Financial assets:
Commercial paper 87,843 87,843
Institutional and managed cash funds 228,283 228,283
Investments 14,129 14,129
Financial liabilities:
Long-term debt 408,190 376,883
------------ -----------
December 31, 2001 Carrying Amount
Fair Value
$'000 $'000
------------ -----------
Financial assets:
Commercial paper 246,174 246,174
Institutional and managed cash funds 477,737 477,737
Investments 13,855 13,855
Financial liabilities:
Long-term debt 406,806 394,206
------------ -----------
(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,
2002 are as follows:
December 31,
2002
$'000
-----------
2003 7,215
2004 7,887
2005 5,855
2006 4,085
2007 3,038
Thereafter 12,805
-----------
40,885
-----------
Lease and rental expense included in selling, general and administrative
expenses in the accompanying statements of operations amounted to $6.7 million,
$6.1 million and $4.3 million for the fiscal years ended December 31, 2002, 2001
and 2000 respectively.
F-35
19) Leases and other commitments
(b) Contingent liabilities
(i) Commitments
The Company has undertaken to subscribe to interests in companies and
partnerships for amounts totaling $38.1 million (December 31, 2001: $37.7
million). As at December 31, 2002 an amount of $20.3 million (December 31, 2001:
$20.1 million) has been subscribed.
(ii) FLUVIRAL
The Company signed a ten-year contract with the Government of Canada in 2001 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. Subject to mutual agreement, the contract
can be renewed for a further period of between one and ten years from 2011.
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 has therefore begun to expand its
production capacity in order to meet this objective within a five-year period.
Shire Biologics is committed to CAN$18 million (approximately $11.3 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 2002/2003 will be
CAN$19.2 million (approximately $12 million), would become payable to the
Government of Canada if contracted penalty clauses were triggered.
(c) Legal proceedings
(i) General
Shire accounts for litigation losses in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." Under SFAS
No. 5, loss contingency provisions are recorded for probable losses when
management is able to reasonably estimate the loss. Where the estimated loss
lies within in a range and no particular amount within that range is a better
estimate than any other amount the minimum amount is recorded. In other cases
management's best estimate of the loss is recorded. These estimates are
developed substantially earlier than the ultimate loss is known, and the
estimates are refined each accounting period, in light of additional information
being known. In instances where Shire is unable to develop a best estimate of
loss, no litigation loss is recorded at that time. As information becomes known
a loss provision is set up when a best estimate can be made. The best estimates
are reviewed quarterly and the estimates are changed when expectations are
revised.
(ii) Phentermine
Shire US Inc. (SUS) is a defendant in eleven lawsuits still pending 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 SUS and several other pharmaceutical companies. SUS, formerly known as Shire
Richwood Inc., 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. The lawsuits generally allege the
following claims: the defendants marketed phentermine and other products for the
treatment of obesity and misled users about the products and dangers associated
with them; the defendants failed adequately to test phentermine individually and
when taken in combination with the other drugs; and 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. SUS has been named as a defendant in a total of 3,804 such
phentermine lawsuits, in respect of which SUS has been dismissed as a defendant
in 3,756 cases. Shire is awaiting the furtherance of proceedings in the
remaining 37 law suits.
SUS became involved with phentermine through its acquisition of certain assets
of Rexar Pharmacal Corporation (Rexar) in January 1994. In addition to SUS
potentially incurring liability as a result of its own production of Oby-Cap, a
phentermine product, the plaintiffs may additionally seek to impose liability on
SUS as successor to Rexar. SUS intends vigorously to defend all the lawsuits and
pursue all available reasonable defenses. SUS denies liability on a number of
grounds including lack of scientific evidence that phentermine, properly
prescribed, causes the alleged side effects and that SUS did not promote
phentermine for long-term combined use as part of the "fen/phen" diet.
Accordingly, SUS intends to defend vigorously any and all claims made against
the Group in respect of phentermine and believes that
F-36
19) Leases and other commitments (continued)
(c) Legal proceedings (continued)
(ii) Phentermine (continued)
liability is neither probable nor quantifiable at this stage of litigation.
Legal expenses have been paid by Eon Labs Manufacturing Inc. (Eon), the supplier
to SUS, or Eon's insurance carriers but such insurance is now exhausted. Eon has
agreed to defend and indemnify SUS in this litigation pursuant to an agreement
dated November 30, 2000 between Eon and SUS.
At the present stage of litigation, Shire is unable to estimate the level of
future legal costs after taking into account any available product liability
insurance and enforceable indemnities. To the extent that any legal costs are
not covered by insurance or available indemnities, these will be expensed as
incurred.
(iii) ADDERALL
Shire's extended release "once daily" version of ADDERALL, ADDERALL XR is
covered by US patent No. 6,322,819 ("the '819 Patent"). In January 2003 we
received a Paragraph IV notice from Barr alleging that this patent is invalid
and not infringed by Barr's extended release mixed amphetamine salt product
which is the subject of a Barr pending ANDA application. On February 24, 2003
Shire Laboratories Inc. filed suit against Barr in the US District Court for the
Southern District of New York for infringement of the '819 Patent with respect
to this ANDA. The Hatch-Waxman Act provides for an automatic stay of up to 30
months of FDA approval for Barr's ANDA to market its generic version of Adderall
XR to allow the Court to resolve the patent infringement lawsuit. However, there
can be no assurance that the Company will be successful in the suit. In the
event that the Company does not prevail, then Barr could be in a position to
market its extended release mixed amphetamine salt product upon FDA final
approval of its ANDA application. This may have a material adverse impact on the
Company's results and financial position . In the event that the Company does
not prevail in the suit, a generic version of Adderall XR could not be launched
before October 2004, the current expiry of the existing Hatch-Waxman
exclusivity.
Shire filed a Complaint against Barr on April 30, 2002 in the District Court of
New Jersey. In the Complaint, Shire requested a preliminary and permanent
injunction to prevent Barr from marketing a mixed amphetamine salt product in a
trade dress similar to that of ADDERALL. Shire requested that Barr recall all
such products and also asked for damages. An order denying the preliminary
injunction was issued on August 26, 2002. Shire filed a Notice of Appeal to the
United States Court of Appeals for the Third Circuit on September 16, 2002
appealing the denial of Shire's motion for a preliminary injunction.
(iv) Emory
Shire BioChem was involved in worldwide patent disputes with Emory University
(Emory) relating to lamivudine wherein Shire BioChem opposed certain patents and
patent applications of Emory and wherein Emory opposed certain patents and
patent applications of Shire BioChem. Pursuant to a global Settlement Agreement,
finalized in May 2002, Emory has granted Shire and GSK an exclusive license
under Emory's patent rights for lamivudine. The Settlement Agreement provides
for the resolution of all worldwide patent disputes between the parties relating
to lamivudine and FTC, including pending opposition and revocation proceedings
in Europe, South Korea and Australia. The settlement involves a small royalty
payment on worldwide sales of lamivudine and a license under Shire's FTC patent
rights, in consideration for the settlement of all claims against Shire and GSK
relating to lamivudine.
Shire BioChem was also involved in worldwide patent disputes with Emory and the
University of Georgia Research Foundation (Georgia) relating to certain
dioxolane nucleoside analogs wherein Shire BioChem opposed certain patents and
patent applications of Emory and Georgia and wherein Emory opposed a European
patent of Shire BioChem. Pursuant to global Settlement and License Agreements
finalized in August 2002 by Shire BioChem, Shire, Georgia and Triangle
Pharmaceuticals Inc. (Triangle), Shire will grant an exclusive royalty bearing
license to Emory, sub licensable to Triangle, for certain dioxolane nucleoside
analogs, including diamino purine dioxolane (DAPD). Emory, Georgia and Triangle
will grant an exclusive royalty bearing license to Shire for certain dioxolane
nucleosides, including SPD 756. The compounds the subject of these licenses are
in development. A low royalty will be payable by Shire upon commercialization of
SPD 756. The Settlement and License Agreements provide for the resolution of all
worldwide patent disputes relating to the licensed patents.
(v) Other matters
In addition, the Company is involved in 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.
F-37
(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:
o 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;
o 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
o 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 allowance, $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.
The amount owed to Mr Spitznagel at December 31, 2002 was $0.5 million (at
December 31, 2001 it was $1.4 million).
(b) Professional fees
The Company incurred professional fees with law firms, in which the Hon James
Grant, a director of the Company, is a partner, totaling $1,239 for the year
ended December 31, 2002 ($1.9 million for the year ended December 31, 2001 and
$0.4 million for the year ended December 31, 2000).
No amounts were due to/from the law firms in which the Hon James Grant is a
partner at December 31, 2002, or at December 31, 2001.
(c) 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) Earnings per share
The following table reconciles income from continuing operations before
extraordinary items and the weighted average common shares outstanding for basic
and diluted EPS for the periods presented:
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Income from continuing operations before extraordinary items 242,378 34,615 204,744
----------- ----------- -----------
Income from discontinued operations, net of tax 8,191 6,748 6,983
Extraordinary item, net of tax - (2,604) -
----------- ----------- -----------
Net income 250,569 38,759 211,727
----------- ----------- -----------
Effect of dilutive securities:
Interest charged on convertible debt, net of tax 5,585 - -
----------- ----------- -----------
F-38
(21) Earnings per share (continued)
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Weighted average number of shares outstanding No. of shares No. of shares No. of shares
----------- ----------- -----------
Earnings per share - basic 500,687,594 492,594,226 482,890,070
Effect of dilutive securities:
Share options 1,883,475 11,362,332 11,801,735
Convertible debt 19,847,177 - -
Warrants - 919,029 -
----------- ----------- -----------
21,730,652 12,281,361 11,801,735
----------- ----------- -----------
Earnings per share - diluted 522,418,246 504,875,587 494,691,805
----------- ----------- -----------
Earnings per share - basic
Income from continuing operations before extraordinary items 48.4c 7.0c 42.4c
Income from discontinued operations, net of tax 1.6c 1.4c 1.4c
Extraordinary item, net of tax - (0.5c) -
----------- ----------- -----------
50.0c 7.9c 43.8c
----------- ----------- -----------
Earnings per share - diluted
Income from continuing operations before extraordinary items 47.4c 6.9c 41.4c
Income from discontinued operations, net of tax 1.6c 1.3c 1.4c
Extraordinary item, net of tax - (0.5c) -
----------- ----------- -----------
Earnings per share - diluted 49.0c 7.7c 42.8c
----------- ----------- -----------
The computation of weighted average number of shares for diluted EPS for the
years ended December 31, 2001 and 2000 does not include convertible debt
because, after eliminating interest charged to operations from the numerator,
the inclusion would be anti-dilutive.
The warrants are issuable in respect of a research and development agreement. A
charge of $4.5 million has been made in the results for the year ended December
31, 2001.
The warrants and share options not included within the calculation of the
diluted weighted average number of shares, because the exercise prices exceeded
the Company's average share price during the calculation period, are shown
below.
Year ended December 31, 2002 2001 2000
No. of shares No. of shares No. of shares
----------- ----------- -----------
Share options 17,492,575 10,384,600 -
Warrants 1,346,407 - -
----------- ----------- -----------
18,838,982 10,384,600 -
----------- ----------- -----------
F-39
(22) Analysis of revenues, operating income/(loss) and assets by 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. The accounting policies of each reportable segment are consistent
with those of the Company.
Operating income/(loss)
Year ended December 31, 2002 U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- -------------
External revenues:
Product sales 714,655 144,733 - 859,388
Licensing and development 2,661 403 - 3,064
Royalties 215 174,597 - 174,812
Other revenues - 34 - 34
Intersegment revenues 21,169 - 127,823 148,992
------------ ------------------------ ------------- -------------
738,700 319,767 127,823 1,186,290
Elimination of intersegment sales (21,169) - (127,823) (148,992)
------------ ------------------------ ------------- -------------
Total revenues 717,531 319,767 - 1,037,298
Cost of revenues 63,356 70,326 - 133,682
Research and development - - 189,179 189,179
Selling, general and administrative 238,810 147,213 - 386,023
Loss on disposition of assets 1,221 155 - 1,376
------------ ------------------------ ------------- -------------
Total operating expenses 303,387 217,694 189,179 710,260
------------ ------------------------ ------------- -------------
Operating income/(loss) 414,144 102,073 (189,179) 327,038
------------ ------------------------ ------------- -------------
December 31, 2002 U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- -------------
Total assets 818,383 1,340,116 50,124 2,208,623
Long lived assets 260,751 451,435 29,341 741,527
Capital expenditure on long lived assets 8,188 38,940 7,152 54,280
------------ ------------- ------------- -------------
F-40
(22) Analysis of revenues, operating income/(loss) and assets by reportable
segments (continued)
Operating income/(loss) (continued)
Year ended December 31, 2001 U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- -------------
Product sales 587,449 111,902 - 699,351
Licensing and development 4,507 991 - 5,498
Royalties 264 144,891 - 145,155
Other revenues - 2,952 - 2,952
Intersegment revenues 19,319 - 36,705 56,024
------------ ------------------------ ------------- -------------
611,539 260,736 36,705 908,980
Elimination of intersegment sales (19,319) - (36,705) (56,024)
------------ ------------------------ ------------- -------------
Total revenues 592,220 260,736 - 852,956
Cost of revenues 58,655 53,351 - 112,006
Research and development - - 171,029 171,029
Selling, general and administrative 195,438 108,042 - 303,480
Asset impairments and restructuring charges - 29,699 - 29,699
Merger transaction expenses - 83,470 - 83,470
Loss on disposition of assets 2,052 8,112 - 10,164
------------ ------------------------ ------------- -------------
Total operating expenses 256,145 282,674 171,029 709,848
------------ ------------------------ ------------- -------------
Operating income/(loss) 336,075 (21,938) (171,029) 143,108
------------ ------------------------ ------------- -------------
December 31, 2001 U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- -------------
Total assets 658,031 1,223,604 29,096 1,910,731
Long lived assets 327,289 419,601 23,286 770,176
Capital expenditure on long lived assets 3,880 65,558 2,488 71,926
------------ ------------- ------------- -------------
F-41
(22) Analysis of revenues, operating income/(loss) and assets by reportable
segments (continued)
Operating income/(loss) (continued)
Year ended December 31, 2000 U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- -------------
Product sales 391,168 105,607 - 496,775
Licensing and development 1,326 12,821 - 14,147
Royalties 266 135,204 - 135,470
Other revenues 20 1,242 - 1,262
Intersegment revenues 18,408 - 51,666 70,074
------------ ------------------------ ------------- -------------
411,188 254,874 51,666 717,728
Elimination of intersegment sales (18,408) - (51,666) (70,074)
------------ ------------------------ ------------- -------------
Total revenues 392,780 254,874 - 647,654
Cost of revenues 47,093 47,978 - 95,071
Research and development - - 155,145 155,145
Selling, general and administrative 116,761 113,455 - 230,216
Asset impairments and restructuring charges - 26,947 - 26,947
------------ ------------------------ ------------- -------------
Total operating expenses 163,854 188,380 155,145 507,379
------------ ------------------------ ------------- -------------
Operating income/(loss) 228,926 66,494 (155,145) 140,275
------------ ------------------------ ------------- -------------
December 31, 2000 U.S. International R&D Total
$'000 $'000 $'000 $'000
------------ ------------- ------------- -------------
Total assets 560,864 943,687 43,944 1,548,495
Long lived assets 353,656 475,361 23,625 852,642
Capital expenditure on long lived assets 27,945 50,435 21,237 99,617
------------ ------------- ------------- -------------
Material customers
In the periods set out below, certain customers accounted for greater than 10%
of Shire's total revenues:
Year ended December 31, 2002 2002 2001 2001 2000 2000
$'000 % revenue $'000 % revenue $'000 % revenue
----------- --------- ----------- --------- ----------- ---------
Customer A 231,270 22% 176,941 21% 132,913 21%
Customer B 197,184 19% 123,350 14% 80,293 12%
Customer C 149,613 14% - - - -
--------- --------- --------- ----------- ----------- -----------
Amounts outstanding at December 31, in respect of these material customers were
as follows:
December 31, 2002 2001
$'000 $'000
----------- ---------
Customer A 4,354 34,882
Customer B 9,189 39,094
Customer C 9,738 20,937
----------- -----------
F-42
(23) Other charges
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
-------- -------- --------
In process research and development - - 26,947
Asset impairments and restructuring charges - 29,699 -
Merger transaction expenses - 83,470 -
Losses on disposition of assets 1,376 10,164 -
-------- -------- --------
Year ended December 31, 2001
(a) BioChem merger
The asset impairments and restructuring charges, merger transaction expenses and
most of the losses on disposal of assets in 2001 related to the BioChem merger
on May 11, 2001.
The asset impairments and restructuring charges 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 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.
There was also a total of $8.8 million recorded in respect of employee related
costs, as a result of 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.
The Company incurred a loss on the sale of a duplicated facility in Toronto,
Canada of $8.1 million.
(b) Product disposals
During the third quarter of 2001, Shire disposed of certain non strategic
products for net proceeds of approximately $4.5 million, recording a loss on
disposition of $2.1 million.
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.
(24) Other (expense)/income, net
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
SERP valuation adjustment (2,301) (2,018) (607)
Gain on sale of long-term investments - - 104,000
Write-down of long-term investments due to impairment (8,680) (55,748) -
GeneChem funds income 3,333 3,995 6,773
Other (614) 838 (1,143)
----------- ----------- -----------
(8,262) (52,933) 109,023
----------- ----------- -----------
F-43
(24) Other (expense)/income, net (continued)
In 2001, the $55.7 million write down of investments related to the BioChem
merger and comprised 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.
The main components of other income in the year ended December 31, 2000 was a
$104.0 million gain resulting from the sale of long-term investments, primarily
in respect of North American Vaccine, Inc., a publicly traded biotechnology
company listed on the American Stock Exchange.
(25) Retirement benefits
(a) Personal defined contribution pension plans
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
$6.8 million, $4.9 million and $2.6 million for the years ended December 31,
2002, 2001 and 2000 respectively, and were charged to operations as they became
payable.
(b) Defined benefit pension plan
Roberts, a company with whom the Company merged in December 1999, operated a
defined 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 Roberts merger, the SERP
was closed to new members and contributions 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 $12.1 million and $8.4
million respectively are shown on the balance sheet within the categories "Other
non-current assets" and "Other non-current liabilities". See notes 13 and 17
above.
(26) Income taxes
The components of income before income taxes and equity in net income of
associates for the years ended December 31 are as follows:
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
U.K. (50,520) (101,756) (37,577)
U.S. 218,139 190,068 70,700
Other jurisdictions 161,441 13,215 218,994
----------- ----------- -----------
Income before income taxes, equity in net income of associates and
extraordinary items attributable to continuing operations 329,060 101,527 252,117
----------- ----------- -----------
Income before income taxes attributable to discontinued operations 9,696 10,711 11,083
----------- ----------- -----------
Total income before income taxes and equity in net income of associates and
extraordinary items 338,756 112,238 263,200
----------- ----------- -----------
F-44
(26) Income taxes (continued)
The provision for income taxes by location of the taxing jurisdiction for the
years ended December 31, consisted of the following:
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Current income taxes:
U.K. corporation tax - - -
U.S. federal tax (67,686) (40,818) (22,434)
U.S. state and local taxes (9,561) (8,988) (2,744)
Other jurisdictions (19,864) (17,862) (14,604)
----------- ----------- -----------
Total current taxes (97,111) (67,668) (39,782)
----------- ----------- -----------
Deferred taxes
U.K. corporation tax - - -
U.S. federal tax (1,136) (20,586) (4,268)
U.S. state and local taxes (34) (618) (128)
Other jurisdictions 9,931 19,975 614
----------- ----------- -----------
Total deferred taxes 8,761 (1,229) (3,782)
----------- ----------- -----------
Total income taxes attributable to continuing operations (88,350) (68,897) (43,564)
----------- ----------- -----------
Total incomes taxes attributable to discontinued operations (4,812) (3,963) (4,100)
----------- ----------- -----------
Total income taxes (93,162) (72,860) (47,664)
----------- ----------- -----------
The reconciliation of income before income taxes, equity in net income of
associates and extraordinary items attributing to continuing operations to
provision for income taxes is shown in the table below.
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
Income before income taxes, equity in net income of associates and
extraordinary items attributing to continuing operations 329,060 101,527 252,117
----------- ----------- -----------
Corporation tax rate 30% 30% 30%
----------- ----------- -----------
Income tax expense at corporation tax rate (98,718) (30,458) (75,635)
Adjustments to derive effective rate:
Non deductible items:
Goodwill amortization - (3,309) (3,783)
Permanent differences (4,280) (32,268) (963)
Other items:
Change in valuation allowance (13,948) (27,395) 8,238
Difference in taxation rates 36,450 27,662 33,181
Prior year adjustment (2,317) 2,958 (1,950)
Other (5,537) (6,087) (2,652)
----------- ----------- -----------
Provision for income taxes on continuing operations (88,350) (68,897) (43,564)
Provision for income taxes on discontinued operations (4,812) (3,963) (4,100)
----------- ----------- -----------
Provision for income taxes (93,162) (72,860) (47,664)
----------- ----------- -----------
The corporation tax rate of 30% is the tax rate of the parent company.
F-45
(26) Income taxes (continued)
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications, as of December 31, are as follows:
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Deferred tax assets:
Accrued expenses not currently deductible 7,847 6,238
Losses carried forward 188,937 170,512
Provisions 5,347 7,874
Other 6,517 6,267
------------ -----------
Gross deferred tax assets 208,648 190,891
Less: valuation allowance (139,513) (125,565)
------------ -----------
69,135 65,326
Excess of tax value over book value of assets (28,070) (33,022)
------------ -----------
Net deferred tax assets 41,065 32,304
------------ -----------
Balance sheet classifications:
Continuing operations
Deferred tax assets - current 34,849 19,430
Deferred tax assets - non-current 6,216 20,274
------------ -----------
41,065 39,704
Discontinued operations
Deferred tax liability - non-current - (7,400)
------------ -----------
Net deferred tax assets 41,065 32,304
------------ -----------
The approximate net operating loss carry-forwards as at December 31, are as
follows:
December 31, December 31,
2002 2001
$'000 $'000
------------ -----------
Approximate net operating loss carry-forwards against future U.S. federal tax
liabilities 33,386 55,803
------------ -----------
Approximate net operating loss carry-forwards against future U.S. state and foreign
tax liabilities 639,756 470,177
------------ -----------
Total 673,142 525,980
------------ -----------
F-46
(26) Income taxes (continued)
The tax losses shown above have the following expiration dates:
December 31,
2002
$'000
-----------
2003 -
2004 2,527
2005 30,362
2006 38,001
2007 20,731
2008 34,411
2009 27,245
Available indefinitely 519,865
-----------
673,142
-----------
As of December 31, 2002, the Company had a valuation allowance of $139.5 million
to reduce its deferred tax assets to estimated realizable value. The valuation
allowance relates to the deferred tax assets arising from overseas tax operating
loss carryforwards and capital loss carryforwards, which have no expiration
date. The utilization of operating loss carryforwards is, however, restricted to
the taxable income of the subsidiary generating the losses. In addition, capital
loss carryforwards can only be offset against capital gains. As of December 31,
2002, based upon the level of historical taxable income and projections for
future taxable income over the periods in which the temporary differences are
anticipated to reverse, and prudent and feasible tax-planning strategies,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the valuation allowances.
However, the amount of the deferred tax asset considered realizable could be
adjusted in the future if estimates of taxable income are revised.
The Company recognizes a deferred tax liability related to the undistributed
earnings of subsidiaries when the Company expects that it will recover those
undistributed earnings in a taxable manner, such as through receipt of dividends
or sale of the investments. The Company does not, however, provide for income
taxes on the unremitted earnings of certain other subsidiaries located outside
the UK, where, in management's opinion, such earnings have been indefinitely
reinvested in these operations, will be remitted in a tax free liquidation, or
will be remitted as dividends with taxes substantially offset by foreign tax
credits.
(27) Equity method investees
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
GSK 2,592 1,985 -
CADx/Qualia (924) - -
North American Vaccine, Inc - - (3,809)
----------- ----------- -----------
1,668 1,985 (3,809)
----------- ----------- -----------
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. The Company owns, but does not exercise control
over, a 50% share of the partnership.
In September 2002, the Company sold the net assets of its CADx group of
companies, to Qualia Computing Inc, in exchange for shares in a newly formed
joint venture. The Company has applied the equity method of accounting as the
Company owns, but does not exercise control over, a 50% share of the new joint
venture.
F-47
(28) Stock incentive plans
The Company has adopted the disclosure only provisions of SFAS No. 123., but
applies APB No. 25 and related interpretations in accounting for its plans. In
the years ended December 31, 2002, 2001 and 2000 the Company recognized a
(credit)/charge under APB No. 25 of $(0.2) million, $2.3 million and $21.9
million respectively. Had compensation for stock options awarded under the plans
been determined in accordance with SFAS No. 123, the Company's net income and
per share data would have been changed to the pro forma amounts indicated below:
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Net income
As reported 250,569 38,759 211,727
Pro forma 226,319 8,791 227,018
----------- ----------- -----------
Income per share
As reported - basic 50.0c 7.9c 43.8c
As reported - diluted 49.0c 7.7c 42.8c
Pro forma - basic 45.2c 1.8c 47.0c
Pro forma - diluted 44.4c 1.7c 45.9c
----------- ----------- -----------
The fair value of stock options used to compute pro forma net income 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:
Year ended December 31, 2002 2001 2000
$'000 $'000 $'000
----------- ----------- -----------
Risk free interest rate 1.90 - 5.33% 3.43 - 5.22% 5.68 - 6.58%
Expected dividend yield 0% 0% 0%
Expected life 5 years 5 years 5 years
Expected volatility 55.2% 59.5% 64.2%
Directors and employees have been granted options over common shares under the
following nine stock option plans:
(i) Shire Holdings Limited Share Options Scheme (SHL Scheme)
Options issued under the SHL Scheme were originally granted over shares in Shire
Holdings Limited, a previous holding company of the Group. Exercise of these
options results in the option holder receiving common shares in Shire.
It is intended that no further options will be granted under the SHL Plan.
(ii) Shire Pharmaceuticals Executive Share Option Scheme - Parts A and B
(Executive Scheme) Options granted under the Executive Scheme are subject to
performance criteria and cannot be exercised in full, unless the Company's share
price increases at a compound rate of at least 20.5% per annum over a minimum
three-year measurement period. If the Company's share price increases at a
compound rate of 14.5% per annum over a minimum three-year measurement period,
60% of the options may be exercised. If these conditions are not met after the
initial three years, they are thereafter tested quarterly by reference to share
price growth over the extended period. If the share price does not meet these
conditions at any time, none of the options will become exercisable.
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. It is intended that no further options will be
granted under the Executive Scheme.
F-48
(28) Stock incentive plans (continued)
(iii) Shire Pharmaceuticals Group plc 2000 Executive Share Option Scheme (2000
Executive Scheme) Options granted under the 2000 Executive Scheme are subject to
performance criteria and cannot be exercised in full unless the Company's share
price increases at a compound rate of at least 20.5% per annum over a minimum
three-year period. If the Company's share price increases at a compound rate of
at least 14.5% per annum over a minimum three-year measurement period, 60% of
the options will be exercisable. If these conditions are not met after the
initial three-year measurement period, they will thereafter be tested quarterly
by reference to compound annual share price growth over an extended period. If
the share price does not meet these conditions at any time, none of these
options will become exercisable.
During 2002, the performance criteria was again reviewed to ensure the criteria
reflected the market in which the Company operates. Given the Company's
development it was felt appropriate that an earnings per share based measure
should be adopted in place of share price growth targets. Therefore, the
performance criteria was amended so that options will only become exercisable in
full if the Company's EPS growth exceeds the U.K. Retail Prices Index (RPI) over
at least a three-year period for the following tranches of grants:
Options with a grant value of up to 100% of salary RPI plus 3% per annum
Between 101% and 200% of salary RPI plus 5% per annum
Between 201% and 300% of salary RPI plus 7% per annum
The adoption of the new criteria applies to all options granted from August 2002
onwards.
(iv) Shire Pharmaceuticals Sharesave Scheme (Sharesave Scheme)
Options granted under the Sharesave Scheme are granted with an exercise price
equal to 80% of the mid-market price on the day before invitations are issued to
employees. Employees may enter into three or five-year savings contracts.
(v) Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (Stock Purchase
Plan)
Under the Stock Purchase Plan, options are granted with an exercise price equal
to 85% of the fair market value of a share on the enrolment date (the first day
of the offering period) or the exercise date (the last day of the offering
period), whichever is the lower. The offering period is for 27 months.
(vi) Pharmavene 1991 Stock Option Plan (SLI Plan)
Options issued under the SLI Plan were originally granted over shares in SLI,
formerly Pharmavene Inc., a company acquired by the Company on March 23, 1997.
Exercise of these options results in the option holder receiving common shares
in Shire. As a result of the acquisition of SLI, and in accordance with the
terms of the original share option plan, all options granted under that plan
became immediately capable of exercise. It is intended that no further options
will be granted under the SLI Plan.
(vii) Roberts Stock Option Plans (Roberts Plan)
Options issued under the Roberts Plan were originally granted over shares in
Roberts, a company acquired by the Company on December 23, 1999. Exercise of
these options results in the option holder receiving common shares in Shire. As
a result of the acquisition of Roberts, and in accordance with the terms of the
original Roberts share option plan, all options granted under that plan became
immediately capable of exercise. It is intended that no further options will be
granted under the Roberts Plan.
(viii) BioChem Stock Option Plan (BioChem Plan)
Following the acquisition of BioChem Pharma, Inc. on May 11, 2001, the BioChem
Stock Option Plan was amended such that options over BioChem's common stock
became options over ordinary shares of Shire. All BioChem options, which were
not already exercisable, vested and became exercisable as a result of the
acquisition. It is intended that no further options will be granted under the
BioChem Stock Option Plan.
(ix) Richwood (SRI) Plan
All options granted over shares in SRI, formerly Richwood Pharmaceutical Company
Inc., a company acquired by the Group on 22 August 1997, have been exercised.
Exercise of these options resulted in the optionholder receiving ordinary shares
in the Company. As a result of the acquisition of SRI, and in accordance with
the terms of the original share option plan, all options granted under the plan
became immediately capable of exercise. It is intended that no further options
will be granted under the SRI Plan.
F-49
(28) Stock incentive plans (continued)
In a period of ten years, not more than 10% of the issued share capital of Shire
may be placed under option under any employee share scheme.
In addition, the following terms apply to options that may be granted under the
various plans:
o 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.
o Stock Purchase Plan: up to 2,000,000 common shares.
Options outstanding at December 31, 2002 under the various plans are as follows:
Expiry period from
Scheme Number of options date of issue Vesting period
- ------------------------- ------------------ ---------------------- ----------------------
Executive Scheme 4,432,303 10 years 3 years, subject to
performance criteria
2000 Executive Scheme 8,104,356 10 years 3 years, subject to
performance criteria
Sharesave Scheme 253,862 6 months after vesting 3 or 5 years
Stock Purchase Plan 1,553,302 * 27 months
SLI Plan 40,084 10 years Immediate on acquisition by
Shire
Roberts Plan 567,399 6 years Immediate on acquisition by
Shire
BioChem Plan 5,099,991 10 years Immediate on acquisition by
Shire
------------------
Total 20,051,297
------------------
* Options expire on the last day of the offering period.
A summary of the status of the Company's stock option plans as of December 31,
2002, 2001 and 2000 and the related transactions during the periods then ended
is presented below:
Year ended December 31, 2002 Weighted average
exercise price Number of
$ shares
--------------- -----------
Outstanding at beginning of period 10.80 16,249,844
Granted 8.49 6,179,894
Exercised 3.52 (1,940,546)
Forfeited 11.07 (437,895)
--------------- -----------
Outstanding at end of period 11.55 20,051,297
--------------- -----------
Exercisable at end of period 9.24 8,491,051
--------------- -----------
4,539,529 options were granted under the 2000 Executive Scheme. These 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.
F-50
(28) Stock incentive plans (continued)
186,052 options were granted under the Sharesave Scheme at a price of
(pound)5.02 (approximately $8.08). 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.
18,342 and 1,435,971 options were granted under the Stock Purchase Plan at a
price of (pound)3.19 and (pound)5.44 (approximately $5.14 and $8.76)
respectively. These options were granted with an exercise price equal to 85% 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, 2002 is
$8.91.
Year ended December 31, 2001 Weighted average
exercise price Number of
$ shares
--------------- -----------
Outstanding at beginning of period 7.83 24,790,322
Granted 17.24 4,405,089
Exercised 6.29 (11,443,831)
Forfeited 13.86 (1,501,736)
--------------- -----------
Outstanding at end of period 10.80 16,249,844
--------------- -----------
Exercisable at end of period 7.50 9,054,150
--------------- -----------
All options granted under the Executive Scheme, 2000 Executive Scheme and
BioChem Plan 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.
301,656, 120,819 and 6,551 options were granted under the Stock Purchase Plan at
a price of (pound)8.06, (pound)9.10 and (pound)9.74 (approximately $11.73,
$13.24 and $14.18) respectively. These options were granted with an exercise
price equal to 85% 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
$17.51.
Year ended December 31, 2000 Weighted average
exercise price Number of
$ shares
--------------- -----------
Outstanding at beginning of period 5.99 32,540,132
Granted 14.53 4,386,258
Exercised 4.30 (11,491,088)
Forfeited 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 Scheme, 2000 Executive Scheme and
BioChem Plan were issued with exercise prices equivalent to the fair market
value of Shire's common stock on the date of grant as these options were granted
at market prices.
F-51
(28) Stock incentive plans (continued)
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.
Options outstanding at December 31, 2002 have the following characteristics:
Weighted Weighted Weighted average
Number of options average average exercise Number of options exercise price of
outstanding Exercise prices remaining price of options exercisable options exercisable
$ life outstanding
------------ -------------- ---------- --------------- ------------- -------------
40,084 1.01 - 2.00 3.4 1.5 40,084 1.5
88,754 2.01 - 3.00 1.5 2.6 88,754 2.6
298,304 3.01 - 4.00 1.1 3.4 298,304 3.4
339,954 4.01 - 5.00 1.8 4.3 339,954 4.3
1,402,197 5.01 - 6.00 2.4 5.6 1,383,855 5.6
280,081 6.01 - 7.00 2.7 6.3 280,081 6.3
1,012,500 7.01 - 8.00 3.3 7.6 1,012,500 7.6
6,117,210 8.01 - 9.00 7.3 8.5 41,390 8.5
263,644 9.01 - 10.00 6.0 9.6 185,644 9.6
184,686 10.01 - 11.00 4.0 10.1 184,686 10.1
4,068,918 11.01 - 12.00 4.2 11.4 4,068,918 11.4
123,521 12.01 - 13.00 1.7 12.9 24,532 12.9
239,384 13.01 - 14.00 5.3 13.2 183,177 13.2
359,172 14.01 - 15.00 7.1 14.6 359,172 14.6
388,949 15.01 - 16.00 8.9 16.0 - -
1,513,829 16.01 - 17.00 4.5 16.5 - -
160,000 19.01 - 20.00 7.7 20.0 - -
3,166,110 20.01 - 21.00 8.2 20.3 - -
4,000 21.01 - 22.00 7.9 21.3 - -
---------- ---------
20,051,297 8,491,051
---------- ---------
(29) Supplemental disclosure for non-cash transactions
Immunogen share exchange
In July 2002, the Company's $11.1 million preference share investment in
Immunogen Inc. was converted in to a common stock holding. This continues to be
included within investments (Note 10).
Arenol loan note conversion
In 1999 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 unsecured convertible zero coupon loan notes. On 6 August 2002, the Company
issued the final instalment of 267,572 ordinary shares to Arenol Corporation in
consideration of the conversion of the Loan Notes in the Company.
Qualia Computing Inc. joint venture
In September 2002, the Company sold the net assets of its CADx group of
companies, to Qualia Computing Inc, in exchange for 50% of the common stock in
the joint venture. The value of the assets in the CADx group of companies at the
time of transfer was $9.3 million.
F-52
Quarterly results of operations (unaudited)
The following table presents summarized unaudited quarterly results for the
years ended December 31, 2002 and 2001. The unaudited quarterly results for 2001
have been restated to reflect the merger with BioChem.
The results for all quarterly periods presented have been restated to reflect
the OTC divestment which has been accounted for as a discontinued operation.
2002 First Quarter Second Quarter Third Quarter Fourth Quarter
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Total revenues 236,982 248,084 249,720 302,512
Operating income 70,293 75,109 80,990 100,646
Net income 56,802 59,307 63,585 70,875
Earnings per share - basic 11.3c 11.8c 12.6c 14.1c
---------- ---------- ---------- ----------
Earnings per share - diluted 10.9c 11.4c 12.1c 13.8c
---------- ---------- ---------- ----------
2001 First Quarter Second Quarter Third Quarter Fourth Quarter
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Total revenues 180,397 202,486 209,752 260,321
Operating income 48,940 (56,398) 71,108 79,458
Net income/(loss) 41,465 (124,191) 58,111 63,374
Earnings per share - basic 8.4c (25.2)c 11.6c 12.7c
---------- ---------- ---------- ----------
Earnings per share - diluted 8.2c (24.6)c 11.3c 12.4c
---------- ---------- ---------- ----------
F-53
EXHIBIT INDEX
Exhibit Description
number
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)
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 1996.(3)
10.6 Executive Scheme 2000.
10.7 Sharesave Scheme.(3)
10.8 Employee Stock Purchase Plan.(3)
E-1
EXHIBIT INDEX (continued)
Exhibit Description
number
10.9 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)
10.10 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)
10.11 Service Agreement between Shire Pharmaceuticals Group plc and Mr Angus
Russell, dated November 29, 2002.
10.12 Service Agreement between Shire Pharmaceuticals Group plc and Dr Wilson
Totten, dated December 17, 2002.
16 Letter from Arthur Andersen regarding change in certifying accountant.(7)
21 List of Subsidiaries.
23.1 Consent of Deloitte & Touche
23.2 Consent of Raymond Chabot Grant Thornton.
- --------------------------------------------------------------------------------
(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).
(6) Incorporated by reference to the exhibits to BioChem's Form 20-F filed on
June 9, 2000.
(7) Incorporated by reference to the exhibit to Shire's Form 8-K filed on
July 31, 2002.
E-2
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, 2003
By: /s/ Matthew Emmens
Matthew Emmens, 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, 2003
-------------------------
JAMES HENRY CAVANAUGH
/s/ Matthew Emmens Chief Executive March 28, 2003
------------------
MATTHEW EMMENS
/s/ Angus Charles Russell Group Finance Director March 28, 2003
-------------------------
ANGUS CHARLES RUSSELL
/s/ Joseph Wilson Totten Group Research and Development Director March 28, 2003
------------------------
JOSEPH WILSON TOTTEN
/s/ Barry John Price Senior Non-executive Director March 28, 2003
--------------------
BARRY JOHN PRICE
/s/ Ronald Maurice Nordmann Non-executive Director March 28, 2003
---------------------------
RONALD MAURICE NORDMANN
Non-executive Director
---------------------
FRANCESCO BELLINI
/s/ James Andrew Grant Non-executive Director March 28, 2003
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JAMES ANDREW GRANT
/s/ Gerard Veilleux Non-executive Director March 28, 2003
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GERARD VEILLEUX
/s/ David Mackney Group Financial Controller March 28, 2003
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DAVID MACKNEY
S-1
CERTIFICATION OF MATTHEW EMMENS PURSUANT TO
RULE 13a-14 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2002 OF
Shire Pharmaceuticals Group PLC
I, Matthew Emmens, certify that:
1. I have reviewed this annual report on Form 10-K of Shire Pharmaceuticals
Group plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Matthew Emmens
----------------------------
Matthew Emmens
Chief Executive
CERTIFICATION OF ANGUS RUSSELL PURSUANT TO
RULE 13a-14 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2002 OF
Shire Pharmaceuticals Group PLC
I, Angus Russell certify that:
1. I have reviewed this annual report on Form 10-K of Shire Pharmaceuticals
Group plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/ Angus Russell
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Angus Russell
Group Finance Director