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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2010
 
Commission File Number: 0-29630

 
SHIRE PLC
(Exact name of registrant as specified in its charter)
 
 
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization)
98-0601486
(I.R.S. Employer Identification No.)
 
5 Riverwalk, Citywest Business Campus, Dublin 24,
Republic of Ireland
 (Address of principal executive offices and zip code)
 
+353 1 429 7700
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [X]
No [  ]
   
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [  ]
No [X]
   
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  [X]
No [ ]
   
 
As at April 28, 2010 the number of outstanding ordinary shares of the Registrant was 562,110,523.
 
 

 
THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, the Company’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, risks associated with: the inherent uncertainty of research, development, approval, reimbursement, manufacturing and commercialization of the Company’s Specialty Pharmaceutical and Human Genetic Therapies products, as well as the ability to secure new products for commercialization and/or development; government regulation of the Company’s products; the Company’s ability to manufacture its products in sufficient quantities to meet demand; the impact of competitive therapies on the Company’s products; the Company’s ability to register, maintain and enforce patents and other intellectual property rights relating to its products; the Company’s ability to obtain and maintain government and other third-party reimbursement for its products; and other risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
 
The following are trademarks either owned or licensed by Shire plc or its subsidiaries, which are the subject of trademark registrations in certain territories, or which are owned by third parties as indicated and referred to in this Form 10-Q:
 
ADDERALL XR® (mixed salts of a single entity amphetamine)
CALCICHEW® range (calcium carbonate with or without vitamin D3)
CARBATROL® (carbamazepine extended-release capsules)
DAYTRANA® (methylphenidate transdermal system)
ELAPRASE® (idursulfase)
EQUASYM® IR (methylphenidate hydrochloride)
EQUASYM® XL (methylphenidate hydrochloride)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
INTUNIV™ (guanfacine extended release)
JUVISTA®
LIALDA® (mesalamine)
MEZAVANT® (mesalazine)
PENTASA® (trademark of Ferring A/S Corp (“Ferring”))
RAZADYNE® (trademark of Johnson & Johnson (“J&J”))
RAZADYNE® ER (trademark of J & J)
REMINYL® (galantamine hydrobromide) (United Kingdom ("UK”) and Republic of Ireland) (trademark of J & J, excluding UK and Republic of Ireland)
REMINYL XL™ (galantamine hydrobromide) (UK and Republic of Ireland) (trademark of J & J, excluding UK and Republic of Ireland)
REPLAGAL® (agalsidase alfa)
SEASONIQUE® (trademark of Barr Laboratories, Inc. (“Barr”))
VYVANSE® (lisdexamfetamine dimesylate)
VPRIVTM (velaglucerase alfa)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GlaxoSmithKline (“GSK”))
3TC® (trademark of GSK)
 
2

 
SHIRE PLC
Form 10-Q for the three months to March 31, 2010

Table of contents

   
 Page
PART I     FINANCIAL INFORMATION
   
ITEM 1.    FINANCIAL STATEMENTS
   
Unaudited Consolidated Balance Sheets at March 31, 2010 and December 31, 2009
 
4
Unaudited Consolidated Statements of Income for the three months to March 31, 2010 and March 31, 2009
 
6
Unaudited Consolidated Statements of Changes in Equity for the three months to March 31, 2010
 
8
Unaudited Consolidated Statements of Comprehensive Income for the three months to March 31, 2010 and March 31, 2009
 
9
Unaudited Consolidated Statements of Cash Flows for the three months to March 31, 2010 and March 31, 2009
 
10
Notes to the Unaudited Consolidated Financial Statements
 
12
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
29
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
40
ITEM 4.    CONTROLS AND PROCEDURES
 
40
     
PART II    OTHER INFORMATION
 
40
ITEM 1.    LEGAL PROCEEDINGS
 
40
ITEM 1A.  RISK FACTORS
 
40
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
40
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
 
40
ITEM 4.    OTHER INFORMATION
 
40
ITEM 5.    EXHIBITS
 
41
 
 
3

 
 
ITEM 1. FINANCIAL STATEMENTS
 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In millions of US dollars, except share data)
         
March 31,
   
December 31,
 
         
2010
   
2009
 
   
Notes
      $’M       $’M  
ASSETS
                     
Current assets:
                     
Cash and cash equivalents
          657.5       498.9  
Restricted cash
          26.8       33.1  
Accounts receivable, net
   
5
      620.7       597.5  
Inventories
   
6
      215.6       189.7  
Deferred tax asset
   
 
      114.1       135.8  
Prepaid expenses and other current assets
   
7
      131.0       115.2  
Total current assets
            1,765.7       1,570.2  
                         
Non-current assets:
                       
Investments
   
8
      109.6       105.7  
Property, plant and equipment, net
            668.5       676.8  
Goodwill
            373.2       384.7  
Other intangible assets, net
   
9
      1,729.6       1,790.7  
Deferred tax asset
            80.9       79.0  
Other non-current assets
            11.2       10.4  
Total assets
            4,738.7       4,617.5  
                         
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Accounts payable and accrued expenses
   
10
      929.2       929.1  
Deferred tax liability
            3.3       2.9  
Other current liabilities
   
11
      36.5       88.0  
Total current liabilities
            969.0       1,020.0  
                         
Non-current liabilities
                       
Convertible bonds
            1,100.0       1,100.0  
Other long-term debt
            43.7       43.6  
Deferred tax liability
            321.3       294.3  
Other non-current liabilities
   
12
      247.7       247.1  
Total liabilities
            2,681.7       2,705.0  
Commitments and contingencies
   
13
                 
 
 
4


 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
(In millions of US dollars, except share data)
 
                     
           
March 31,
   
December 31,
 
           
2010
   
2009
 
     
Notes
      $’M       $’M  
                         
Equity:
                       
Common stock of 5p par value; 1,000 million shares authorized; and 562.1 million shares issued and outstanding (2009: 1,000 million shares authorized; and 561.5 million shares issued and outstanding)
            55.6       55.6  
Additional paid-in capital
            2,697.9       2,677.6  
Treasury stock: 15.7 million shares (2009: 17.8 million shares)
            (311.8 )     (347.4 )
Accumulated other comprehensive income
            107.3       149.1  
Accumulated deficit
            (492.0 )     (622.4 )
Total equity
            2,057.0       1,912.5  
Total liabilities and equity
            4,738.7       4,617.5  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
5

 
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In millions of US dollars, except share and per share data)
 

3 months to March 31,
       
2010
   
2009
 
   
Notes
      $’M       $’M  
Revenues:
                     
  Product sales
          718.2       756.0  
  Royalties
          95.3       50.6  
  Other revenues
          2.7       11.2  
Total revenues
          816.2       817.8  
Costs and expenses:
                     
  Cost of product sales (1)
          101.9       83.6  
  Research and development
          131.0       185.9  
  Selling, general and administrative (1)
          359.9       318.9  
  Reorganization costs
   
4
      5.0       2.2  
  Integration and acquisition costs
            0.6       1.4  
Total operating expenses
            598.4       592.0  
                         
Operating income
            217.8       225.8  
                         
Interest income
            0.4       0.6  
Interest expense
            (9.0 )     (11.0 )
Other income, net
            10.8       50.3  
Total other income, net
            2.2       39.9  
Income from continuing operations before income taxes and equity in losses of equity method investees
            220.0       265.7  
Income taxes
            (53.6 )     (49.5 )
Equity in losses of equity method investees, net of taxes
            (0.5 )     (0.1 )
Income from continuing operations, net of taxes
            165.9       216.1  
                         
Loss from discontinued operations (net of income tax expense of $nil and $nil respectively)
            -       (2.6 )
Net income
            165.9       213.5  
                         
Add: Net loss attributable to the noncontrolling interest in subsidiaries
            -       0.1  
Net income attributable to Shire plc
            165.9       213.6  

Cost of product sales includes amortization of intangible assets relating to favorable manufacturing contracts of $0.4 million for three months to March 31, 2010 (2009: $0.4 million). Selling, general and administrative costs includes amortization of intangible assets relating to intellectual property rights acquired of $34.6 million for the three months to March 31, 2010 (2009: $32.5 million).
 
 
6


 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (continued)
(In millions of US dollars, except share and per share data)

 
3 months to March 31,
Notes
 
2010
   
2009
 
Earning per ordinary share - basic
             
               
Earnings from continuing operations attributable to Shire plc shareholders
      30.5 c     40.1 c
                   
Loss from discontinued operations attributable to Shire plc shareholders
      -       (0.5c )
                   
Earnings per ordinary share attributable to Shire plc shareholders - basic
      30.5 c     39.6 c
                   
Earnings per ordinary share - diluted
                 
                   
Earnings from continuing operations attributable to Shire plc shareholders
      29.7 c     38.9 c
                   
Loss from discontinued operations attributable to Shire plc shareholders
      -       (0.4c )
Earnings per ordinary share attributable to Shire plc shareholders - diluted
      29.7 c     38.5 c
                   
Weighted average number of shares (millions):
                 
Basic
16
    543.9       539.2  
Diluted
16
    586.1       577.2  


3 months to March 31,
 
2010
   
2009
 
      $’M       $’M  
Amounts attributable to Shire plc
               
                 
Income from continuing operations, net of taxes
    165.9       216.2  
Loss from discontinued operations, net of taxes
    -       (2.6 )
Net income attributable to Shire plc
    165.9       213.6  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
7

 
SHIRE PLC
 UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In millions of US dollars except share data)
 
   
Shire plc shareholders equity
       
   
Common stock
$'M
   
Common stock
Number of shares
M's
   
Additional paid-in capital
$M
   
Treasury stock
$'M
   
Accumulated other comprehensive income
$'M
   
Accumulated deficit
$'M
   
Total equity
$'M
 
As at January 1, 2010
    55.6       561.5       2,677.6       (347.4 )     149.1       (622.4 )     1,912.5  
Net income
    -       -       -       -       -       165.9       165.9  
Foreign currency translation
    -       -       -       -       (35.1 )     -       (35.1 )
Options exercised
    -       0.6       1.4       -       -       -       1.4  
Share-based compensation
    -       -       14.1       -       -       -       14.1  
                                                         
Excess tax benefit associated with exercise of stock options
    -       -       4.8       -       -       -       4.8  
                                                         
Shares released by Employee Share Ownership Trust ("ESOT") to satisfy exercise of stock options
    -       -       -       35.6       -       (35.5 )     0.1  
                                                         
Unrealized holding loss on available-for-sale securities, net of taxes
    -       -       -       -       (6.7 )     -       (6.7 )
As at March 31, 2010
    55.6       562.1       2,697.9       (311.8 )     107.3       (492.0 )     2,057.0  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
8

 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions of US dollars)
 


3 months to March 31,
 
2010
   
2009
 
   
$'M
   
$'M
 
             
Net income
    165.9       213.5  
Other comprehensive income:
               
Foreign currency translation adjustments
    (35.1 )     13.8  
Unrealized holding (loss)/gain on available-for-sale securities (net of taxes of $1.6 million and $nil)
    (6.7 )     0.6  
Comprehensive income
    124.1       227.9  
Add: net loss attributable to the noncontrolling interest in subsidiaries
    -       0.1  
Comprehensive income attributable to Shire plc
    124.1       228.0  

The components of accumulated other comprehensive income as at March 31, 2010 and December 31, 2009 are as follows:
 

   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Foreign currency translation adjustments
    101.6       136.7  
Unrealized holding gain on available-for-sale securities, net of taxes
    5.7       12.4  
Accumulated other comprehensive income
    107.3       149.1  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
9

 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of US dollars)
 


3 months to March 31,
 
2010
   
2009
 
      $’M       $’M  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
    165.9       213.5  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Loss from discontinued operations
    -       2.6  
Depreciation and amortization
    64.3       55.3  
Share based compensation
    14.1       15.8  
Gain on sale of non-current investments
    (11.1 )     (55.2 )
Other
    5.2       3.3  
Movement in deferred taxes
    52.2       33.7  
Equity in losses of equity method investees
    0.5       0.1  
                 
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (10.8 )     (151.0 )
Increase in sales deduction accrual
    64.9       121.9  
Increase in inventory
    (24.2 )     (9.5 )
Increase in prepayments and other current assets
    (18.1 )     (12.3 )
(Increase)/decrease in other assets
    (0.6 )     3.4  
Decrease in accounts and notes payable and other liabilities
    (116.1 )     (39.8 )
Returns on investment from joint venture
    -       4.9  
Cash flows used in discontinued operations
    -       (2.6 )
Net cash provided by operating activities (A)
    186.2       184.1  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Movements in restricted cash
    6.3       (6.9 )
Purchases of subsidiary undertakings and businesses, net of cash acquired
    -       (74.1 )
Purchases of property, plant and equipment
    (43.6 )     (42.0 )
Purchases of intangible assets
    -       (6.0 )
Proceeds from disposal of non-current investments
    2.0       19.2  
Proceeds from disposal of property, plant and equipment
    0.1       0.4  
Returns from equity investments
    -       0.2  
Net cash used in investing activities (B)
    (35.2 )     (109.2 )
 
 
10


 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions of US dollars)
 


3 months to March 31,
 
2010
   
2009
 
      $’M       $’M  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment under building financing obligation
    (0.7 )     (0.7 )
Excess tax benefit associated with exercise of stock options
    4.8       -  
Proceeds from exercise of options
    1.5       0.1  
Net cash provided by/(used in) financing activities(C)
    5.6       (0.6 )
Effect of foreign exchange rate changes on cash
               
and cash equivalents (D)
    2.0       (1.4 )
Net increase in cash and cash equivalents (A+B+C+D)
    158.6       72.9  
Cash and cash equivalents at beginning of period
    498.9       218.2  
Cash and cash equivalents at end of period
    657.5       291.1  

Supplemental information associated with continuing
           
operations:
           
             
3 months to March 31,
 
2010
   
2009
 
      $’M       $’M  
                 
Interest paid
    (0.7 )     (1.7 )
Income taxes paid
    (89.7 )     (50.4 )
                 
Non cash activities:
               
Equity in Vertex Pharmaceuticals, Inc. (“Vertex”) received as part
consideration for disposal of non-current investment
    9.1       50.8  
Building financing obligation
    -       8.5  

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
11

 
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In millions of US dollars, except where indicated)


1.    Summary of Significant Accounting Policies

(a)   Basis of preparation
 
These interim financial statements of Shire plc and its subsidiaries (collectively “Shire” or “the Company”) and other financial information included in this Form 10-Q, are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and US Securities and Exchange Commission (“SEC”) regulations for interim reporting.
 
The December 31, 2009 balance sheet was derived from audited financial statements but does not include all disclosures required by US GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading.
 
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year to December 31, 2009.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period. Interim results are not necessarily indicative of results to be expected for the full year.

(b)   Use of estimates in interim financial statements

The preparation of interim financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, the valuation of equity investments, sales deductions, income taxes and provisions for litigation and legal proceedings.

(c)   New accounting pronouncements

Adopted during the period

Amendments to the Accounting and Disclosure Requirements for the Consolidation of Variable Interest Entities

On January 1, 2010 the Company adopted new guidance issued by the Financial Accounting Standard Board (“FASB”) on the consolidation of variable interest entities. This guidance changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to such involvement. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.

The effective date of these amendments has been deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies.

Accounting for Transfers of Financial Assets

On January 1, 2010 the Company adopted new guidance issued by the FASB on the accounting for transfers of financial assets. This guidance requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires
 
12

 
 
additional disclosures. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.

Improving Disclosures about Fair Value Measurements
On January 1, 2010 the Company adopted new guidance issued by the FASB requiring new disclosures for amounts transferred in and out of Levels 1 and 2 and for activity in Level 3 of the hierarchy for fair value measurements.  The guidance also clarifies existing fair value measurement disclosures in respect of the level of disaggregation and disclosures about inputs and valuation techniques.  This guidance is effective for Shire from January 1, 2010, except for the additional disclosures about activity in Level 3 of the hierarchy for fair value measurements, which is effective from January 1, 2011 and for interim periods within that year.  The adoption of the guidance did not impact the Company’s disclosure on fair value measurement.

To be adopted in future periods

Revenue Recognition in Multiple Deliverable Revenue Arrangements

In September 2009, the FASB issued guidance on revenue recognition in multiple deliverable revenue arrangements. This amends the existing guidance on allocating consideration received between the elements in a multiple-deliverable arrangement and establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE or third party evidence is available. It replaces the term fair value in the revenue allocation with selling price to clarify that the allocation of revenue is based on entity specific assumptions rather then the assumptions of a market place participant. The guidance will eliminate the residual method of allocation and requires that arrangement consideration be allocated using the relative selling price method. It will also significantly expand the disclosures related to a vendor’s multiple-deliverable revenue arrangements. It will be effective prospectively for revenue arrangements entered into or materially modified for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact of adopting this guidance.

Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades

In April 2010, the FASB issued guidance on the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity security trades.  This guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.  The guidance will be effective for fiscal years beginning on or after December 15, 2010.  The Company is currently evaluating the impact of adopting this guidance.

Milestone Method of Revenue Recognition

In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This guidance clarifies that: consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive; milestones should be considered substantive in their entirety and may not be bifurcated; an arrangement may contain both substantive and nonsubstantive milestones; and each milestone should be evaluated individually to determine if it is substantive. The guidance will be effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

2.    Business combinations

On March 31, 2009 the Company acquired the worldwide rights (excluding the US, Canada and Barbados) to EQUASYM IR and XL for the treatment of attention deficit and hyperactivity disorder (“ADHD”) from UCB Pharma Limited (“UCB”) for cash consideration of $72.8 million. Included within the recognized purchase price for the acquisition is further consideration of $18.2 million, which may become payable in 2010 and 2011 if certain sales targets are met. This acquisition broadened the scope of Shire’s ADHD portfolio and facilitated immediate access to the European ADHD market as well as providing Shire the opportunity to enter additional markets around the world.
 
 
13


 
The acquisition of EQUASYM IR and XL was accounted for as a business combination. The purchase price was allocated to the currently marketed products acquired ($73.0 million), IPR&D ($5.5 million), other liabilities ($0.7 million) and goodwill ($13.2 million).

3.    Termination of Duramed Pharmaceuticals, Inc. (“Duramed”) collaboration agreement

In August 2006, Shire and Duramed, a subsidiary of Teva Pharmaceutical Industries Ltd, (“Teva”) entered into an agreement related to SEASONIQUE, a number of products using Duramed’s transvaginal ring technology and other oral products (the “Collaboration Products”).

On February 24, 2009 Shire and Duramed amended this agreement such that it terminated on December 31, 2009. Pursuant to this amendment, Shire returned to Duramed its rights under the agreement effective February 24, 2009 and charged contract termination costs totaling $65.0 million to research and development in the three months to March 31, 2009.  All contract termination costs have been paid by March 31, 2010.
 
   
Opening liability at 
January 1, 2010
   
Amount paid
   
Closing liability at
March 31, 2010
 
      $’M       $’M       $’M  
                         
Contract termination costs
    10.0       (10.0 )     -  

4.    Reorganization costs

Establishment of Swiss Commercial Hub

In the three months to March 31, 2010, the Company initiated plans to relocate certain commercial and R&D operations to Switzerland over the next two years, and incurred reorganization costs totaling $1.6 million during the period.

Owings Mills

In March 2009 the Company initiated plans to phase out operations and close the Company’s Specialty Pharmaceuticals manufacturing facility at Owings Mills, Maryland. Between 2009 and 2011, all products manufactured by Shire at this site will transition to DSM Pharmaceutical Products, and operations and employee numbers at the site will wind down over this period. During the three months to March 31, 2010 the Company incurred reorganization costs of $3.4 million which relate to employee involuntary termination benefits and other costs. The total reorganization costs incurred since March 2009 are $16.1 million.

As a result of the decision to transfer manufacturing from the Owings Mills site the Company revised the useful life of property, plant and equipment in the facility, and in the three months to March 31, 2010 incurred accelerated depreciation of $6.1 million, which has been charged to Cost of product sales. Consequently, the Company estimates an annual accelerated depreciation charge, over the level which would have been charged absent the wind down of operations, of $16.9 million in 2010. The reorganization costs and accelerated depreciation have been recorded within the Specialty Pharmaceuticals reportable segment.

Jerini non-core operations

In the second quarter of 2009 the operations of Jerini Ophthalmic, Inc, (“JOI”) and certain other non-core pre-clinical operations acquired through the acquisition of Jerini AG (“Jerini”) were closed down, and the Company recorded a closure costs liability of $9.1 million, relating to employee involuntary termination benefits and other closure costs. At March 31, 2010 a liability of $1.6 million remained for these closure costs.

The liability for reorganization costs arising on the establishment of the Swiss commercial hub, transfer of manufacturing from Owings Mills and the Jerini closure at March 31, 2010 is as follows:

14


                         
   
Opening liability
   
Amount
         
Closing
 
   
at January 1,
   
charged to re-
         
liability at
 
   
2010
   
organization
   
Paid/Utilized
   
March 31, 2010
 
   
$'M
   
$'M
   
$'M
   
$'M
 
                         
Involuntary termination benefits
    4.1       2.1       (0.5 )     5.7  
Contract termination costs
    2.8       -       (1.2 )     1.6  
Other termination costs
    -       2.9       (1.3 )     1.6  
      6.9       5.0       (3.0 )     8.9  

At March 31, 2010 the closing reorganization cost liability was recorded within accounts payable and accrued expenses ($4.1 million) and other non-current liabilities ($4.8 million).

5.    Accounts receivable, net

Accounts receivable at March 31, 2010 of $620.7 million (December 31, 2009: $597.5 million), are stated net of a provision for discounts and doubtful accounts of $20.1 million (December 31, 2009: $20.8 million).

Provision for discounts and doubtful accounts:

   
2010
   
2009
 
      $’M       $’M  
As at January 1,
    20.8       20.2  
Provision charged to operations
    39.5       32.5  
Provision utilization
    (40.2 )     (25.8 )
As at March 31,
    20.1       26.9  

At March 31, 2010 accounts receivable included $93.2 million (December 31, 2009: $92.4 million) of receivables related to royalty income.

6.    Inventories

Inventories are stated at the lower of cost or market value and comprise:

   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Finished goods
    68.5       50.9  
Work-in-progress
    102.9       102.1  
Raw materials
    44.2       36.7  
      215.6       189.7  

At March 31, 2010 inventories included $nil (December 31, 2009: $18.8 million) for products which have not yet received regulatory approval. Pre-approval inventories at December 31, 2009 related to VPRIV, which was granted marketing approval by the US Food and Drug Administration (“FDA”) on February 26, 2010.
 
15


 
7.    Prepaid expenses and other current assets

   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Prepaid expenses
    42.6       44.9  
Income tax receivable
    41.1       -  
Value added taxes receivable
    21.4       37.3  
Other current assets
    25.9       33.0  
      131.0       115.2  

8.    Investments

On March 12, 2009 the Company completed the disposal of its investment in Virochem Pharma Inc. (“Virochem”) to Vertex in a cash and stock transaction. The disposal was part of a transaction entered into by all the shareholders of Virochem with Vertex. The carrying amount of the Company’s investment in Virochem on March 12, 2009 was $14.8 million. In 2009 Shire received consideration of $19.2 million in cash and two million Vertex shares (valued at $50.8 million) from the disposal, recognizing a gain of $55.2 million in the three months to March 31, 2009.

In the three months to March 31, 2010 the Company received further consideration of $2.0 million in cash and 0.2 million Vertex shares (valued at $9.1 million), which had been held in escrow until certain conditions expired in March 2010. The Company recognized an additional gain on disposal of $11.1 million in the three months to March 31, 2010.

The Vertex stock received has been accounted for as an available-for-sale investment.

9.    Other intangible assets, net

   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Intellectual property rights acquired
               
Currently marketed products
    2,330.1       2,351.6  
IPR&D
    6.1       6.1  
Favorable manufacturing contracts
    8.7       8.7  
      2,344.9       2,366.4  
                 
Less: Accumulated amortization
    (615.3 )     (575.7 )
      1,729.6       1,790.7  

At March 31, 2010 the net book value of intangible assets allocated to the Specialty Pharmaceuticals segment was $1,201.6 million (December 31, 2009: $1,238.0 million) and in the Human Genetics Therapies (“HGT”) segment was $528.0 million (December 31, 2009: $552.7 million).

The change in the net book value of other intangible assets for the three months to March 31, 2010 is shown in the table below:
 
16

 

   
Other intangible
 
   
assets
 
      $’M  
         
As at January 1, 2010
    1,790.7  
Acquisitions
    2.7  
Amortization charged
    (35.0 )
Foreign currency translation
    (28.8 )
As at March 31, 2010
    1,729.6  

The weighted average amortization period for acquired currently marketed products is 10 years.
 
The Company reviews its intangible assets for impairment whenever events or circumstances suggest that they may not be recoverable. During the first quarter of 2010, as a result of continuing release liner removal specification concerns, the Company reviewed the recoverability of its DAYTRANA intangible asset, (carrying value $105 million), and based on estimates and intentions at March 31, 2010 the Company determined that its DAYTRANA intangible asset remained recoverable. However, it is reasonably possible that changes to circumstances, estimates or intentions existing at March 31, 2010 could result in impairment of the DAYTRANA intangible asset in future periods.
 
Management estimates that the annual amortization charge in respect of intangible assets held at March 31, 2010 will be approximately $140 million for each of the five years to March 31, 2015. Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of the acquired IPR&D projects, foreign exchange movements and the technological advancement and regulatory approval of competitor products.

 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Trade accounts payable and accrued purchases
    149.7       170.6  
Accrued rebates Medicaid
    246.4       188.2  
Accrued rebates Managed care
    158.9       153.4  
Sales return reserve
    63.9       62.7  
Accrued bonuses
    30.8       66.8  
Accrued employee compensation and benefits payable
    58.2       42.6  
Research and development accruals
    40.3       53.1  
Marketing accruals
    34.5       31.5  
Deferred revenue
    34.3       52.2  
Other accrued expenses
    112.2       108.0  
      929.2       929.1  

11.  Other current liabilities

   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Income taxes payable
    -       46.7  
Value added taxes
    8.8       10.3  
Other accrued liabilities
    27.7       31.0  
      36.5       88.0  
 
 
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12.  Other non-current liabilities
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
      $’M       $’M  
Income taxes payable
    170.0       170.4  
Deferred revenue
    17.1       20.0  
Deferred rent
    14.2       14.5  
Insurance provisions
    20.8       18.3  
Other accrued liabilities
    25.6       23.9  
      247.7       247.1  

13.  Commitments and contingencies

(a)   Leases

Future minimum lease payments under operating leases at March 31, 2010 are presented below:
   
Operating
 
   
leases
 
      $’M  
2010 
    24.0  
2011 
    30.4  
2012 
    18.3  
2013 
    17.0  
2014 
    16.9  
2015 
    16.1  
Thereafter
    57.6  
      180.3  
 
The Company leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2027. Lease and rental expense amounted to $8.6 million and $8.5 million for the three months to March 31, 2010 and 2009 respectively, which is predominately included in Selling, general and administrative expenses in the consolidated statements of income.

(b)   Letters of credit and guarantees

At March 31, 2010 the Company had irrevocable standby letters of credit and guarantees with various banks totalling $16.0 million, providing security for the Company’s performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations and supply commitments. The Company has restricted cash of $9.8 million, as required by these letters of credit.

(c)   Collaborative arrangements

Details of significant collaborative arrangements are included below:

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In-licensing arrangements

(i)    Research Collaboration with Santaris Pharma A/S (“Santaris”) on Locked Nucleic Acid (“LNA”) Drug Platform

On August 24, 2009 Shire announced that it had entered into a research collaboration with Santaris, to develop its proprietary LNA technology in a range of rare diseases. LNA technology has the benefit of shortened target validation and proof of concept, potentially increasing the speed and lowering the cost of development. As part of the joint research project Santaris will design, develop and deliver pre-clinical LNA oligonucleotides for Shire-selected orphan disease targets, and Shire will have the exclusive right to further develop and commercialize these candidate compounds on a worldwide basis.
 
Shire has remaining obligations to pay Santaris $13.5 million subject to certain success criteria, and development and sales milestones up to a maximum of $72 million for each indication. Shire will also pay single or double digit tiered royalties on net sales of the product.
 
Shire and Santaris have formed a joint research committee to monitor R&D activities through preclinical Lead Candidate selection at which point all development and commercialization costs will be the responsibility of Shire.
 
(ii)   JUVISTA
 
On June 19, 2007 Shire signed an agreement with Renovo Limited (“Renovo”) to develop and commercialize JUVISTA, Renovo’s novel drug candidate being investigated for the reduction of scarring in connection with surgery, outside of the EU. On March 1, 2010, the license agreement was revised.
 
In the revised license agreement, the rights to sell JUVISTA in all territories outside the USA, Mexico and Canada were returned to Renovo. Milestone and royalty obligations remain unchanged from the original agreement except that Shire will pay Renovo an additional $5 million milestone if Shire elects to commence a clinical trial following Shire’s review of the clinical trial report from Renovo’s first EU Phase 3 clinical trial. Shire has remaining obligations to pay Renovo $25 million on the filing of JUVISTA with the FDA; up to $150 million on FDA approval; royalties on net sales of JUVISTA; and up to $525 million on the achievement of very significant sales targets.   
 
Under the revised agreement, each party is responsible for its own development costs but future development costs can be shared by agreement. Each party has free-of-charge access to the other party’s data to support regulatory filings in their respective territories. In the three months to March 31, 2010 Shire made a payment to Renovo of $3.2 million (In the three months to March 31, 2009: $nil), being the final payment under the terms of the original license agreement.
 
Out-licensing arrangements

Shire has entered into various collaborative arrangements under which the Company has out-licensed certain product or intellectual property rights for consideration such as up-front payments, development milestones, sales milestones and/or royalty payments. In certain of these arrangements Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success. In the three months to March 31, 2010 Shire received milestone payments totaling $nil (2009: $4.0 million). In the three months to March 31, 2010 Shire recognized milestone income of $0.7 million (2009: $1.8 million) within Other revenues and $12.8 million (2009: $5.7 million) within Product sales for shipment of product to the relevant licensee.

Co-promotion agreements - VYVANSE

On March 31, 2009 Shire announced a three-year co-promotion agreement with GSK for VYVANSE in the US with the aim of improving recognition and treatment of ADHD in adults. The agreement is based on profit sharing above an agreed upon baseline and these profit share payments will be included within Selling, general and administrative costs.


19

 

(d)   Commitments
 
(i)    Clinical testing

At March 31, 2010 the Company had committed to pay approximately $145.7 million (December 31, 2009: $183.9 million) to contract vendors for administering and executing clinical trials. The Company expects to pay $80.9 million of these commitments in the remainder of 2010 (December 31, 2009: $104.1 million in 2010), however the timing of these payments is dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities.

(ii)   Contract manufacturing

At March 31, 2010 the Company had committed to pay approximately $98.8 million (December 31, 2009: $152.3 million) in respect of contract manufacturing. The Company expects to pay all of these commitments in the remainder of 2010 (December 31, 2009: $77.3 million in 2010).

(iii)  Other purchasing commitments

At March 31, 2010 the Company had committed to pay approximately $59.0 million (December 31, 2009: $22.9 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing and IT outsourcing. The Company expects to pay $53.7 million of these commitments in the remainder of 2010 (December 31, 2009: $21.0 million in 2010).

(iv)  Investment commitments

At March 31, 2010 the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $5.6 million (December 31, 2009: $5.4 million) which may all be payable in the remainder of 2010, depending on the timing of capital calls.

(v)   Capital commitments

At March 31, 2010 the Company had committed to spend $16.5 million (December 31, 2009: $41.4 million) on capital projects. This includes commitments for the expansion and modification of its offices and manufacturing facilities at its HGT campus in Lexington, Massachusetts.

(e)  Legal and other proceedings

General

The Company recognizes loss contingency provisions for probable losses when management is able to reasonably estimate the loss. Where the estimated loss lies within a range and no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. In other cases management's best estimate of the loss is recorded. These estimates are developed substantially before the ultimate loss is known and the estimates are refined in each accounting period in light of additional information becoming known. In instances where the Company is unable to develop a reasonable estimate of loss, no litigation loss is recorded at that time. As information becomes known a loss provision is set up when a reasonable estimate can be made. The estimates are reviewed quarterly and are changed when expectations are revised. Any outcome upon settlement that deviates from the Company’s estimate may result in an additional expense in a future accounting period. At March 31, 2010 provisions for litigation losses, insurance claims and other disputes totaled $22.4 million (December 31, 2009: $20.1 million).

Specific

VYVANSE

On February 24, 2009 Actavis Elizabeth LLC (“Actavis”) brought a lawsuit in the US District Court for the District of Columbia (the “District Court”) against the FDA seeking to overturn the FDA's decision granting new chemical entity exclusivity to VYVANSE. Shire has intervened in the lawsuit. On October 23, 2009, following a period for public comment, the FDA issued a letter setting forth its analysis of the legal and regulatory issues and reaffirming its decision that VYVANSE is entitled to new chemical entity exclusivity.  A hearing on cross-motions for summary judgment was held on
 
20

 
 
February 17, 2010. On March 4, 2010 the District Court upheld the FDA’s decision that VYVANSE is entitled to 5-year market exclusivity and confirmed that the FDA’s actions complied with federal administrative law standards as a reasonable exercise of the agency’s scientific expertise.  Actavis has appealed the District Court’s ruling to the US Court of Appeals for the DC Circuit.  No hearing date has been set.

FOSRENOL

In February 2009 Shire was notified that three separate abbreviated new drug applications (“ANDAs”) were submitted under the Hatch-Waxman Act seeking permission to market generic versions of 500mg, 750mg and 1,000mg strengths of FOSRENOL. The notices were received from Barr; Mylan, Inc., Mylan Pharmaceuticals, Inc. and Matrix Laboratories, Inc. (collectively “Mylan”); and Natco Pharma Limited (“Natco”). Within the requisite 45 day period, Shire filed lawsuits in the US District Court of the Southern District of New York against each of Barr, Mylan and Natco for infringement of certain of Shire’s FOSRENOL patents. The filing of the lawsuits triggered a stay of approval of these ANDAs for up to 30 months. The lawsuits have been consolidated into a single case. A Markman hearing is scheduled to occur on June 17, 2010.  No trial date has been set.

INTUNIV

On March 16, April 5, and April 26, 2010 Shire received Paragraph IV Notice Letters from Teva, Actavis, and Anchen Pharmaceuticals Inc. (“Anchen”), respectively, advising of the filing of ANDAs for generic versions of Shire’s 1mg, 2mg, 3mg, and 4mg guanfacine hydrochloride extended release tablets, INTUNIV. INTUNIV is protected by three FDA Orange Book listed patents. The three patents expire in 2015, 2020 and 2022, respectively. Teva’s Paragraph IV Notice Letter was only directed to the patents expiring in 2020 and 2022.  On April 22 Shire filed a lawsuit against Teva in the US District Court for the District of Delaware for the infringement of these patents. Actavis’s and Anchen’s Paragraph IV Notice Letters were directed to all three Orange Book listed patents. Shire is currently reviewing the details of Actavis’s and Anchen’s Paragraph IV Notice Letters.

CARBATROL

On March 10, 2010, Shire settled the lawsuit with Nostrum Pharmaceuticals, Inc. (“Nostrum”) relating to their ANDAs seeking approval to market generic versions of 100mg, 200mg and 300mg strengths of CARBATROL. No payments to Nostrum are involved in the settlement. As required by law, the Company has submitted to the US Federal Trade Commission and the US Department of Justice all of the agreements entered into as part of this settlement.

REMINYL

Generics UK Limited (“Generics UK”) commenced an action in 2007 against the UK Medicines and Healthcare products Regulatory Agency (“MHRA”) seeking judicial review of the MHRA’s application of data exclusivity for REMINYL and the MHRA’s corresponding refusal to grant Generics UK a marketing authorization for a generic version of REMINYL. This case was referred to the European Court of Justice (“ECJ”) which decided the case in favor of the MHRA and upheld data exclusivity for REMINYL until March 2010.

In separate proceedings, Generics UK commenced an action in the UK seeking a declaration to nullify the Supplementary Protection Certificate (“SPC”) for EP 236684 (the patent that claims the use of galantamine for the treatment of Alzheimer’s disease). This case was heard in December 2008, and the court’s decision upholding the SPC (which extends the patent’s term to January 2012) was handed down on May 20, 2009. Generics UK’s appeal of that decision was heard on October 14, 2009 the result of which was that the case was referred to the ECJ.

REPLAGAL

On April 14, 2010 Mt. Sinai School of Medicine of New York University sought to initiate lawsuits in Sweden and Germany alleging that Shire’s enzyme replacement therapy for Fabry disease, REPLAGAL, infringes Mt. Sinai’s European Patent No. 1 942 189, granted April 14, 2010. Mt. Sinai is seeking an injunction against the use of REPLAGAL in these jurisdictions until expiration of the patent on November 30, 2013. Shire will defend its right to commercialize REPLAGAL in these countries and will vigorously oppose the validity of this patent.

Subpoena related to ADDERALL XR, DAYTRANA and VYVANSE

On September 23, 2009 the Company received a subpoena from the US Department of Health and Human Services Office of Inspector General in coordination with the US Attorney for the Eastern District of Pennsylvania seeking
 
21

 
 
production of documents related to the sales and marketing of ADDERALL XR, DAYTRANA and VYVANSE. The Company is cooperating with this investigation.
 
14.  Derivative instruments

Treasury policies and organization

The Company’s principal treasury operations are coordinated by its corporate treasury function. All treasury operations are conducted within a framework of policies and procedures approved annually by the Board of Directors. As a matter of policy, the Company does not undertake speculative transactions that would increase its currency or interest rate exposure.

Interest rate risk

The Company is exposed to interest rate risk on restricted cash, cash and cash equivalents and on foreign exchange contracts on which interest is at floating rates. This exposure is primarily to US dollar, Euro and Canadian dollar interest rates. As the Company maintains all of its investments and foreign exchange contracts on a short term basis for liquidity purposes, this risk is not actively managed. In the three months to March 31, 2010 the average interest rate received on cash and liquid investments was less than 1% per annum. The largest proportion of investments was in US dollar money market and liquidity funds.

The Company incurs interest at a fixed rate of 2.75% on Shire plc’s $1,100 million in principal amount convertible bonds due 2014. The building financing obligation of $46.8 million is also subject to a fixed interest rate over the lease term on the amount outstanding.

No derivative instruments were entered into during the three months to March 31, 2010 to manage interest rate exposure. The Company continues to review its interest rate risk and the policies in place to manage the risk.

Market risk of investments

As at March 31, 2010 the Company has $109.6 million of investments comprising available-for-sale investments in publicly quoted companies ($90.9 million), equity method investments ($14.8 million) and cost method investments in private companies ($3.9 million). The investments in public quoted companies and equity method investments, for certain investment funds which contain a mixed portfolio of public and private investments, are exposed to market risk. No financial instruments or derivatives have been employed to hedge this risk.

Credit risk

Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, trade accounts receivable (from product sales and from third parties from which the Company receives royalties) and derivative contracts. Cash is invested in short-term money market instruments, including money market and liquidity funds and bank term deposits. The money market and liquidity funds in which Shire invests are all triple A rated by both Standard & Poor’s and by Moody’s credit rating agencies.

The Company is exposed to the credit risk of the counterparties with which it enters into derivative contracts. The Company aims to limit this exposure through a system of internal credit limits which require counterparties to have a long term credit rating of A / A2 or better from the major rating agencies. The internal credit limits are approved by the Board of Directors and exposure against these limits is monitored by the corporate treasury function. The counterparties to the derivative contracts are major international financial institutions.

The Company has entered into many agreements with third parties for the provision of services to enable it to operate its business. If the third party can no longer provide the service on the agreed basis, the Company may not be able to continue the development or commercialization of its products as planned or on a commercial basis. Additionally, it may not be able to establish or maintain good relationships with suppliers.

Foreign exchange risk

The Company trades in numerous countries and as a consequence has transactional and translational foreign exchange exposure.

22

 
 
Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. The main trading currencies of the Company are the US dollar, the Canadian dollar, Pounds Sterling and the Euro. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency.

Where significant exposures remain, the Company uses foreign exchange contracts (being spot, forward and swap contracts) to manage the exposure in respect of balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary. These assets and liabilities relate predominantly to intercompany financing and accruals for royalty receipts. The Company utilizes these derivative instruments to manage currency risk on balance sheet foreign exchange exposures but the foreign exchange contracts have not been designated as hedging instruments.

Translational foreign exchange exposure arises on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.

At March 31, 2010 the Company had 20 swap and forward foreign exchange contracts outstanding to manage currency risk. The swaps and forward contracts mature within 90 days. The Company did not have credit risk related contingent features or collateral linked to the derivatives. These foreign exchange contracts were classified in the consolidated balance sheet as follows:
 
   
Fair value
   
Fair value
 
     
March 31,
   
December 31,
 
     
2010
   
2009
 
        $’M       $’M  
Assets
Prepaid expenses and other current assets
    4.7       5.4  
Liabilities
Other current liabilities
    1.4       1.2  

Net gains and losses (both realized and unrealized) arising on foreign exchange contracts have been classified in the consolidated statements of income as follows:

 
Location of net gain recognized in income
 
Amount of net gain
recognized in income
 
Three months to
   
March 31,
   
March 31,
 
     
2010
   
2009
 
        $’M       $’M  
Foreign exchange contracts
Other income, net
    18.2       30.9  


15.  Fair value measurement

Assets and liabilities that are measured at fair value on a recurring basis

The following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
 
 
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Carrying
   
Fair value
 
   
value
                         
         
Total
   
Level 1
   
Level 2
   
Level 3
 
   
$'M
   
$'M
   
$'M
   
$'M
   
$'M
 
Financial assets:
                             
Available-for-sale securities(1)
    90.9       90.9       90.9       -       -  
Foreign exchange contracts
    4.7       4.7       -       4.7       -  
                                         
Financial liabilities:
                                       
Foreign exchange contracts
    1.4       1.4       -       1.4       -  
 
(1)
Available-for-sale securities are included within Investments in the consolidated balance sheet.

Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

 
·
Available-for-sale securities – the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
 
·
Foreign exchange contracts – the fair values of the swap and forward foreign exchange contracts have been determined using an income approach based on current market expectations about the future cash flows.

Financial assets and liabilities that are not measured at fair value on a recurring basis

The carrying amounts and estimated fair values as at March 31, 2010 and December 31, 2009 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

   
March 31, 2010
   
December 31, 2009
 
   
Carrying
         
Carrying
       
   
amount
   
Fair value
   
amount
   
Fair value
 
      $’M       $’M       $’M       $’M  
                                 
Financial assets:
                               
Option over Avexa shares
    -       0.1       -       0.1  
                                 
Financial liabilities:
                               
Convertible bonds
    1,100.0       1,098.0       1,100.0       1,067.0  
Building financing obligation
    46.8       47.8       46.7       47.3  

Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate to fair value because of the short-term maturity of these amounts.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

 
·
Option over Avexa shares - the fair values of the Avexa shares are based on quoted market prices for the shares.
 
 
24


 
 
·
Convertible bonds – the fair value of Shire $1,100 million 2.75% convertible bonds due 2014 is estimated by reference to the market price of the instrument as the convertible bonds are publicly traded.

 
·
Building financing obligations - the fair value of building financing obligations are estimated based on the present value of future cash flows, and an estimate of the residual value of the underlying property at the end of the lease term, associated with these obligations.
 
 
 
 
25

 
 

The following table reconciles net income attributable to Shire plc and the weighted average ordinary shares outstanding for basic and diluted earnings per share for the periods presented:

3 months to March 31,
           
   
2010
   
2009
 
Amounts attributable to Shire plc shareholders
    $’M       $’M  
Numerator for basic earnings per share
    165.9       213.6  
Interest on convertible bonds, net of tax
    8.4       8.4  
Numerator for diluted earnings per share
    174.3       222.0  
                 
                 
Weighted average number of shares:
               
  
 
Millions
   
Millions
 
Basic(1)
    543.9       539.2  
Effect of dilutive shares:
               
Stock based awards to employees(2)
    9.0       5.3  
Convertible bonds 2.75% due 2014(3)
    33.2       32.7  
Diluted
    586.1       577.2  

(1)    Excludes shares purchased by the ESOT and presented by the Company as treasury stock.
(2)    Calculated using the treasury stock method.
(3)    Calculated using the “if-converted” method.

The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:
   
2010 (1)
   
2009 (1)
 
   
No. of shares
   
No. of shares
 
   
Millions
   
Millions
 
Share options out of the money
    16.1       16.6  

(1)
In the three months to March 31, 2010 and 2009 certain stock options have been excluded from the calculation of diluted Earnings per share because their exercise prices exceeded Shire plc’s average share price during the calculation period.
 
 
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17.  Segmental reporting

Shire’s internal financial reporting is in line with its business unit and management reporting structure and includes two segments: Specialty Pharmaceuticals and HGT. The Specialty Pharmaceuticals and HGT reportable segments represent the Company’s revenues and costs for currently promoted and sold products, together with the costs of developing projects for future commercialization. ‘All Other’ has been included in the table below in order to reconcile the two operating segments to the total consolidated figures.

The Company evaluates performance based on revenue and operating income. The Company does not have inter-segment transactions. Assets that are directly attributable or allocable to the segments have been separately disclosed.

   
Specialty Pharmaceuticals
   
HGT
   
All Other
   
Total
 
3 months to March 31, 2010
    $’M       $’M       $’M       $’M  
Product sales
    541.4       176.8       -       718.2  
Royalties
    58.6       -       36.7       95.3  
Other revenues
    0.7       0.7       1.3       2.7  
Total revenues
    600.7       177.5       38.0       816.2  
                                 
Cost of product sales(1)
    80.4       21.5       -       101.9  
Research and development(1)
    73.9       57.1       -       131.0  
Selling, general and administrative(1)
    249.5       62.7       47.7       359.9  
Reorganization costs
    3.4       -       1.6       5.0  
Integration and acquisition costs
    0.6       -       -       0.6  
Total operating expenses
    407.8       141.3       49.3       598.4  
Operating income/(loss)
    192.9       36.2       (11.3 )     217.8  
                                 
Total assets
    1,997.6       1,613.1       1,128.0       4,738.7  
Long-lived assets(2)
    184.6       436.2       53.7       674.5  
Capital expenditure on long-lived assets(2)
    2.3       25.5       1.9       29.7  
 
(1)
Depreciation from manufacturing plants ($8.6 million) and amortization of favorable manufacturing contracts ($0.4 million) is included in Cost of product sales; depreciation of research and development assets ($3.7 million) is included in Research and development; and all other depreciation and amortization ($51.6 million) is included in Selling, general and administrative.
(2)
Long-lived assets comprise all non-current assets, excluding goodwill and other intangible assets, deferred tax assets, investments, income tax receivable and financial instruments.
 
 
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Specialty Pharmaceuticals
   
HGT
   
All Other
   
Total
 
3 months to March 31, 2009
    $’M       $’M       $’M       $’M  
Product sales
    632.5       123.5       -       756.0  
Royalties
    0.9       -       49.7       50.6  
Other revenues
    7.0       1.4       2.8       11.2  
Total revenues
    640.4       124.9       52.5       817.8  
                                 
Cost of product sales(1)
    61.2       19.9       2.5       83.6  
Research and development(1)
    126.6       56.8       2.5       185.9  
Selling, general and administrative(1)
    229.8       46.0       43.1       318.9  
Reorganization costs
    2.2       -       -       2.2  
Integration and acquisition costs
    0.7       0.7       -       1.4  
Total operating expenses
    420.5       123.4       48.1