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EXCEL - IDEA: XBRL DOCUMENT - Shire plcFinancial_Report.xls
 
 
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 June 30, 2014
 
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 o
 
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 o
 
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 o
Non-accelerated filer o
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o
No x
 
As at July 25, 2014 the number of outstanding ordinary shares of the Registrant was 598,544,132.
 
 
1

 
 
THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, that:
 
 
·
Shire’s products may not be a commercial success;
 
 
·
revenues from ADDERALL XR are subject to generic erosion and revenues from INTUNIV will become subject to generic competition starting in December 2014;
 
 
·
the failure to obtain and maintain reimbursement, or an adequate level of reimbursement, by third-party payors in a timely manner for Shire's products may impact future revenues, financial condition and results of operations;
 
 
·
Shire conducts its own manufacturing operations for certain of its Rare Diseases products and is reliant on third party contract manufacturers to manufacture other products and to provide goods and services. Some of Shire’s products or ingredients are only available from a single approved source for manufacture. Any disruption to the supply chain for any of Shire’s products may result in Shire being unable to continue marketing or developing a product or may result in Shire being unable to do so on a commercially viable basis for some period of time;
 
 
·
the development, approval and manufacturing of Shire’s products is subject to extensive oversight by various regulatory agencies. Submission of an application for regulatory approval of any of our product candidates, such as our planned submission of a New Drug Application to the FDA for lifitegrast as a treatment for the signs and symptoms of dry eye disease in adults, may be delayed for a number of reasons and, once submitted, may be subjected to lengthy review and ultimately rejected. Moreover, regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to significant delays, increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches;
 
 
·
the actions of certain customers could affect Shire's ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely impact Shire’s revenues, financial condition or results of operations;
 
 
·
investigations or enforcement action by regulatory authorities or law enforcement agencies relating to Shire’s activities in the highly regulated markets in which it operates may result in significant legal costs and the payment of substantial compensation or fines;
 
 
·
adverse outcomes in legal matters and other disputes, including Shire’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
 
 
·
Shire faces intense competition for highly qualified personnel from other companies, academic institutions, government entities and other organizations. Shire is undergoing a corporate reorganization and the consequent uncertainty could adversely impact Shire’s ability to attract and/or retain the highly skilled personnel needed for Shire to meet its strategic objectives;
 
 
·
failure to achieve Shire’s strategic objectives with respect to the acquisition of ViroPharma Incorporated may adversely affect Shire’s financial condition and results of operations;
 
 
·
the recommended combination with AbbVie Inc. (AbbVie”) is subject to a number of conditions, including approval by shareholders and regulators
 
and other risks and uncertainties detailed from time to time in Shire’s filings with the Securities and Exchange Commission, including those risks outlined in “Item 1A: Risk Factors” in Shire’s Annual Report on Form 10-K for the year ended December 31, 2013.
 
 
2

 
 
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)
AGRYLIN (anagrelide hydrochloride)
BUCCOLAM® (midazolam hydrochloride oromucosal solution)
CINRYZE® (C1 esterase inhibitor [human])
CALCICHEW® (trademark of Takeda Nycomed AS)
DAYTRANA® (trademark of Noven Pharmaceutical Inc. (“Noven”))
DERMAGRAFT® (trademark of Organogenesis, Inc.)
ELAPRASE® (idursulfase)
ELVANSE® (lisdexamfetamine dimesylate)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
INTUNIV® (guanfacine extended release)
LIALDA® (trademark of Nogra Pharma Limited)
MEZAVANT® (trademark of Nogra Pharma Limited)
PENTASA® (trademark of Ferring B.V. Corp)
PLENADREN® (trademark of DuoCort Pharma AB)
PREMIPLEX® (IGF-I/IGFBP-3)
REPLAGAL® (agalsidase alfa)
RESOLOR® (prucalopride)
TYVENSE® (lisdexamfetamine dimesylate)
VANCOCIN® (vancomycin hydrochloride)
VASCUGEL® (allogeneic aortic endothelial cells cultured in a porcine gelatin matrix [Gelfoam®] with cytokines, implanted)
VENVANSE® (lisdexamfetamine dimesylate)
VPRIV® (velaglucerase alfa)
VYVANSE® (lisdexamfetamine dimesylate)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GlaxoSmithKline (“GSK”))
3TC® (trademark of GSK)
 
 
3

 

SHIRE PLC
Form 10-Q for the three months to June 30, 2014

Table of contents

     
Page
 
         
PART I
FINANCIAL INFORMATION
   5  
         
ITEM 1.
FINANCIAL STATEMENTS
     
         
Unaudited Consolidated Balance Sheets at June 30, 2014 and December 31, 2013
    5  
         
Unaudited Consolidated Statements of Income for the three months and six months to June 30, 2014 and June 30, 2013
    7  
         
Unaudited Consolidated Statements of Comprehensive Income for the three months and six months to June 30, 2014 and June 30, 2013
    9  
         
Unaudited Consolidated Statement of Changes in Equity for the six months to June 30, 2014
    10  
         
Unaudited Consolidated Statements of Cash Flows for the six months to June 30, 2014 and June 30, 2013
    11  
         
Notes to the Unaudited Consolidated Financial Statements
    13  
         
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    38  
           
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    56  
           
ITEM 4.
CONTROLS AND PROCEDURES
    56  
           
PART II
OTHER INFORMATION
    56  
           
ITEM 1.
LEGAL PROCEEDINGS
    56  
           
ITEM 1A.
RISK FACTORS
    56  
           
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    56  
           
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
    56  
           
ITEM 4.
MINE SAFETY DISCLOSURES
    56  
           
ITEM 5.
OTHER INFORMATION
    57  
           
ITEM 6.
EXHIBITS
    57  

 
4

 

PART I: FINANCIAL INFORMATION
ITEM1: FINANCIAL STATEMENTS
 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
 
 
 
   
June 30,
   
December 31,
 
 
 
 
   
2014
   
2013
 
 
 
Notes
    $’M     $’M  
 
 
 
   
 
   
 
 
ASSETS
 
 
                 
Current assets:
 
 
                 
Cash and cash equivalents
 
 
      153.6       2,239.4  
Restricted cash
 
 
      34.1       22.2  
Accounts receivable, net
    6       1,051.5       961.2  
Inventories
    7       585.0       455.3  
Assets held for sale
            -       31.6  
Deferred tax asset
            370.2       315.6  
Prepaid expenses and other current assets
    9       418.6       263.0  
 
                   
Total current assets
            2,613.0       4,288.3  
 
                       
Non-current assets:
                       
Investments
            40.1       31.8  
Property, plant and equipment, net
            852.5       891.8  
Goodwill
    10       2,283.4       624.6  
Other intangible assets, net
    11       5,325.5       2,312.6  
Deferred tax asset
            145.7       141.1  
Other non-current assets
            84.2       32.8  
 
               
 
 
Total assets
            11,344.4       8,323.0  
 
         
 
   
 
 
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Accounts payable and accrued expenses
    12       1,783.0       1,688.4  
Short term borrowings
    14       210.8       -  
Other current liabilities
    13       222.8       119.5  
 
         
 
   
 
 
Total current liabilities
            2,216.6       1,807.9  
 
                       
Non-current liabilities:
                       
Long term borrowings
    14       850.0       -  
Deferred tax liability
            1,403.6       560.6  
Other non-current liabilities
    15       755.1       588.5  
 
         
 
   
 
 
Total liabilities
            5,225.3       2,957.0  
 
         
 
   
 
 
Commitments and contingencies
    16       -       -  

 
5

 


SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
 
 
 
 
   
 
   
 
 
 
 
 
   
June 30,
   
December 31,
 
 
 
 
   
2014
   
2013
 
 
 
Notes
    $’M     $’M  
 
 
 
   
 
   
 
 
 
 
 
                 
Equity:
 
 
                 
Common stock of 5p par value; 1,000 million shares authorized; and 598.3 million shares issued and outstanding (2013: 1,000 million shares authorized; and 597.5 million shares issued and outstanding)
 
 
      58.6       58.6  
Additional paid-in capital
 
 
      4,271.1       4,186.3  
Treasury stock: 11.4 million shares (2013: 13.4 million shares)
 
 
      (368.1 )     (450.6 )
Accumulated other comprehensive income
    17       124.1       110.2  
Retained earnings
            2,033.4       1,461.5  
 
                   
Total equity
            6,119.1       5,366.0  
 
         
 
   
 
 
Total liabilities and equity
            11,344.4       8,323.0  
 
                   
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6

 

SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
   
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
 
   
2014
   
2013
   
2014
   
2013
 
 
 
Notes
    $’M     $’M     $’M     $’M  
Revenues:
 
 
   
 
   
 
   
 
   
 
 
Product sales
 
 
      1,469.6       1,207.9       2,777.7       2,306.1  
Royalties
 
 
      29.2       36.3       61.5       74.8  
Other revenues
 
 
      3.3       8.0       9.7       14.7  
 
 
 
   
 
   
 
   
 
   
 
 
Total revenues
 
 
      1,502.1       1,252.2       2,848.9       2,395.6  
 
 
 
   
 
   
 
   
 
   
 
 
Costs and expenses:
 
 
                                 
Cost of product sales
 
 
      277.0       164.3       506.5       311.7  
Research and development(1)
 
 
      236.9       256.5       597.4       477.1  
Selling, general and administrative (1)
 
 
      496.2       410.0       926.5       801.7  
Goodwill impairment charge
 
 
      -       -       -       7.1  
Gain on sale of product rights
    3       (3.8 )     (4.5 )     (40.2 )     (11.0 )
Reorganization costs
    4       45.8       17.7       95.2       35.2  
Integration and acquisition costs
    5       112.1       17.4       118.7       21.5  
 
         
 
   
 
   
 
   
 
 
Total operating expenses
            1,164.2       861.4       2,204.1       1,643.3  
 
         
 
   
 
   
 
   
 
 
 
                                       
Operating income from continuing operations
            337.9       390.8       644.8       752.3  
 
                                       
Interest income
    22       18.7       0.5       19.2       1.2  
Interest expense
            (11.1 )     (9.1 )     (18.9 )     (18.3 )
Other income/(expense), net
            3.3       (1.3 )     8.0       (2.3 )
 
         
 
   
 
   
 
   
 
 
Total other income/(expense), net
            10.9       (9.9 )     8.3       (19.4 )
 
         
 
   
 
   
 
   
 
 
Income from continuing operations before income taxes and equity in earnings of equity method investees
            348.8       380.9       653.1       732.9  
Income taxes
    22       176.5       (90.5 )     125.9       (161.9 )
Equity in earnings of equity method investees, net of taxes
            3.0       0.5       2.4       0.9  
 
         
 
   
 
   
 
   
 
 
Income from continuing operations, net of taxes
            528.3       290.9       781.4       571.9  
Loss from discontinued operations, net of  taxes
            (5.2 )     (32.8 )     (27.9 )     (249.0 )
 
         
 
   
 
   
 
   
 
 
Net income
            523.1       258.1       753.5       322.9  
 
         
 
   
 
   
 
   
 
 
 
(1)
Research and development (“R&D”) includes intangible asset impairment charges of $22.0 million (2013: $19.9 million) for the three months to June 30, 2014 and $188.0 million for the six months to June 30, 2014 (2013: $19.9 million). Selling, general and administrative (“SG&A”) costs include amortization of intangible assets relating to intellectual property rights acquired of $61.2 million for the three months to June 30, 2014 (2013: $35.9 million) and $119.0 million for the six months to June 30, 2014 (2013: $72.0 million).

 
7

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (continued)

 
 
 
   
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
Notes
   
2014
   
2013
   
2014
   
2013
 
 
       
 
   
 
   
 
   
 
 
Earnings per ordinary share - basic
 
 
   
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
   
 
 
Earnings from continuing operations
 
 
      90.1 c     52.9 c     133.6 c     103.9 c
Loss from discontinued operations
    1       (0.9c )     (6.0c )     (4.8c )     (45.3c )
 
         
 
   
 
   
 
   
 
 
 
                                       
Earnings per ordinary share - basic
            89.2 c     46.9 c     128.8 c     58.6 c
 
         
 
   
 
   
 
   
 
 
Earnings per ordinary share - diluted
                                       
 
                                       
Earnings from continuing operations
            89.5 c     50.9 c     132.3 c     99.9 c
Loss from discontinued operations
    1       (0.9c )     (5.6c )     (4.7c )     (42.4c )
 
         
 
   
 
   
 
   
 
 
Earnings per ordinary share - diluted
            88.6 c     45.3 c     127.6 c     57.5 c
 
         
 
   
 
   
 
   
 
 
Weighted average number of shares (millions):
                         
Basic
    20       586.4       549.6       585.3       550.5  
Diluted
    20       590.3       586.0       590.3       587.5  
 
         
 
   
 
   
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
8

 

SHIRE PLC
 UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
 
 
$'M
   
$'M
   
$'M
   
$'M
 
 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
Net income
    523.1       258.1       753.5       322.9  
Other comprehensive income:
                               
Foreign currency translation adjustments
    11.9       1.6       10.2       (34.5 )
                                 
Unrealized holding (loss)/gain on available-for-sale securities (net of taxes of $0.4 million, $0.9 million, $2.1 million and $1.1 million)
    (0.6 )     1.5       3.7       (0.2 )
 
 
 
   
 
   
 
   
 
 
Comprehensive income
    534.4       261.2       767.4       288.2  
 
 
 
   
 
   
 
   
 
 
 
The components of accumulated other comprehensive income as at June 30, 2014 and December 31, 2013 are as follows:
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Foreign currency translation adjustments
    120.6       110.4  
Unrealized holding gain/(loss) on available-for-sale securities, net of taxes
    3.5       (0.2 )
 
           
Accumulated other comprehensive income
    124.1       110.2  
 
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
9

 

SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In millions of US dollars except share data)
 
 
 
Shire plc shareholders' equity
 
 
 
Common stock Number of shares
M's
   
Common stock
$'M
   
Additional paid-in capital
$’M
   
Treasury stock
$'M
   
Accumulated other comprehensive income
$'M
   
Retained earnings
$'M
   
Total equity
$'M
 
As at January 1, 2014
    597.5       58.6       4,186.3       (450.6 )     110.2       1,461.5       5,366.0  
Net income
    -       -       -       -       -       753.5       753.5  
Other comprehensive income, net of tax
    -       -       -       -       13.9       -       13.9  
Options exercised
    0.8       -       -       -       -       -       -  
 
                                                       
Share-based compensation
    -       -       55.7       -       -       -       55.7  
 
                                                       
Tax benefit associated with exercise of stock options
    -       -       29.1       -       -       -       29.1  
Shares released by Employee Benefit Trust ("EBT")  to satisfy exercise of stock options
    -       -       -       82.5       -       (82.0 )     0.5  
 
                                                       
Dividends
    -       -       -       -       -       (99.6 )     (99.6 )
As at June 30, 2014
    598.3       58.6       4,271.1       (368.1 )     124.1       2,033.4       6,119.1  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
Dividends per share
 
During the six months to June 30, 2014 Shire plc declared and paid dividends of 16.93 US cents per ordinary share (equivalent to 50.79 US cents per ADS) totalling $99.6 million.
 
 
10

 

SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
    753.5       322.9  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    204.8       151.2  
Share based compensation
    55.7       36.4  
Change in fair value of contingent consideration
    21.4       13.7  
Impairment of intangible assets
    188.0       19.9  
Goodwill impairment charge
    -       198.9  
Write down of assets
    13.0       8.3  
Gain on sale of product rights
    (40.2 )     (11.0 )
Unwind of Viropharma inventory fair value step-up
    72.5       -  
Other, net
    14.1       (1.1 )
Movement in deferred taxes
    25.3       21.2  
Equity in earnings of equity method investees
    (2.4 )     (0.9 )
 
               
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (37.3 )     (102.6 )
Increase in sales deduction accruals
    106.0       40.0  
Increase in inventory
    (11.7 )     (53.9 )
Increase in prepayments and other assets
    (137.5 )     (66.5 )
Decrease in accounts and notes payable and other liabilities
    (145.1 )     (160.7 )
Returns on investment from joint venture
    -       3.2  
 
 
 
   
 
 
Net cash provided by operating activities (A)
    1,080.1       419.0  
 
 
 
   
 
 
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Movements in restricted cash
    (11.9 )     (0.5 )
Purchases of subsidiary undertakings and businesses, net of cash acquired
    (4,018.3 )     (227.8 )
Purchases of non-current investments
    (3.1 )     (6.7 )
Purchases of property, plant and equipment ("PP&E")
    (19.1 )     (65.0 )
Proceeds from short-term investments
    56.3       -  
Proceeds from disposal of non-current investments
    8.0       7.7  
Proceeds received on sale of product rights
    52.8       10.3  
Other, net
    (2.8 )     2.7  
 
 
 
   
 
 
Net cash used in investing activities (B)
    (3,938.1 )     (279.3 )
 
 
 
   
 
 

 
11

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from revolving line of credit, long-term and short-term borrowings
    2,310.8       -  
Repayment of revolving line of credit
    (1,251.6 )     -  
Repayment of debt acquired through business combinations
    (551.5 )     -  
Proceeds from ViroPharma call options
    346.7       -  
Payment of dividend
    (99.6 )     (79.2 )
Excess tax benefit associated with exercise of stock options
    29.1       6.1  
Contingent consideration payments
    (10.3 )     (8.8 )
Payments to acquire shares under the share buy-back program
    -       (177.7 )
Payments to acquire shares by the EBT
    -       (50.0 )
Other, net
    (0.3 )     (7.5 )
 
 
 
   
 
 
Net cash provided by/(used in) financing activities(C)
    773.3       (317.1 )
 
 
 
   
 
 
Effect of foreign exchange rate changes on cash and cash equivalents (D)
    (1.1 )     (2.9 )
 
 
 
   
 
 
Net decrease in cash and cash equivalents (A+B+C+D)
    (2,085.8 )     (180.3 )
Cash and cash equivalents at beginning of period
    2,239.4       1,482.2  
 
 
 
   
 
 
Cash and cash equivalents at end of period
    153.6       1,301.9  
 
 
 
   
 
 

Supplemental information associated with continuing
 
 
   
 
 
operations:
 
 
   
 
 
 
 
 
   
 
 
 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
 
               
Interest paid
    (7.7 )     (16.9 )
Income taxes received/(paid)
    82.9       (196.8 )
 
               
 
 
 
   
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
12

 

SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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 balance sheet as at December 31, 2013 was derived from audited financial statements but does not include all disclosures required by US GAAP.
 
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year to December 31, 2013.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.
 
(b) 
Use of estimates in interim financial statements
 
The preparation of interim financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, contingent consideration receivable from product divestments and contingent consideration payable in respect of business combinations and asset purchases. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.
 
(c) 
New accounting pronouncements

To be adopted in future periods

Reporting discontinued operations and disclosures of disposals of components of an entity
 
In April 2014 the Financial Accounting Standard Board (“FASB”) issued guidance on the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments in this update revise the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The guidance requires expanded disclosures for discontinued operations which provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. The guidance also requires an entity to disclose the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting.
 
The guidance will be effective for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
 
 
13

 
 
Revenue from Contracts with Customers
 
In May 2014 the FASB and the International Accounting Standard Board (together as the “Accounting Standard Board”) issued a new accounting standard that is intended to clarify and converge the financial reporting requirements for revenue from contracts with customers. The core principle of the standard is that an “entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”. To achieve that core principle the Accounting Standard Board developed a five-step model (as presented below) and related application guidance, which will replace most existing revenue recognition guidance in US GAAP.
 
Five-step model:

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
 
The Accounting Standard Board also issued new qualitative and quantitative disclosure requirements as part of the new accounting standard which aims to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for annual periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of adopting this guidance.
 
Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
 
In June 2014 the FASB issued guidance on the reporting requirements for development stage entities. The amendments in this update simplify the existing guidance by removing all incremental financial reporting requirements for development stage entities. The amendments also eliminate an exception provided to development stage entities in Topic 810, Consolidation, for determining whether an entity is a variable interest entity on the basis of the amount of equity that is at risk. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. The guidance is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. The guidance to eliminate the exception to the sufficiency-of-equity-at-risk criterion for development stage entities should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued.  The Company is currently evaluating the impact of adopting this guidance.
 
2. 
Business combinations
 
Acquisition of ViroPharma Incorporated (“ViroPharma”)
 
On January 24, 2014, Shire completed its acquisition of 100% of the outstanding share capital of ViroPharma. The acquisition-date fair value of cash consideration paid on closing was $3,997 million.
 
The acquisition of ViroPharma added CINRYZE (C1 esterase inhibitor [human]) to Shire’s portfolio of currently marketed products. CINRYZE is a leading brand for the prophylactic treatment of Hereditary Angioedema (“HAE”) in adolescents and adults.
 
The acquisition of ViroPharma has been accounted for as a purchase business combination using the acquisition method. The assets acquired and the liabilities assumed from ViroPharma have been recorded at their preliminary fair values at the date of acquisition, being January 24, 2014. The Company’s consolidated financial statements include the results of ViroPharma from January 24, 2014.
 
The amount of ViroPharma’s post acquisition revenues and pre-tax losses included in the Company’s consolidated statement of income for the three months to June 30, 2014 were $141.5 million and $20.0 million, respectively. The pre-tax loss is stated after charges on the unwind of inventory fair value adjustments of $33.7 million, intangible asset amortization of $26.8 million and integration costs of $26.4 million.
 
The amount of ViroPharma’s post acquisition revenues and pre-tax losses included in the Company’s consolidated statement of income for the six months to June 30, 2014 were $234.3 million and $79.2 million, respectively. The pre-tax loss is stated after charges on the unwind of inventory fair value adjustments of $72.5 million, intangible asset amortization of $50.1 million and integration costs of $60.7 million.
 
 
14

 
 
The Company’s preliminary allocation of the purchase price to the assets acquired and liabilities assumed, including certain immaterial measurement period adjustments recorded in the second quarter of 2014, is outlined below:
 
 
 
Preliminary
 
 
 
Fair value
 
 
  $’M  
Identifiable assets acquired and liabilities assumed
       
 
       
ASSETS
       
Current assets:
       
Cash and cash equivalents
    232.6  
Short term investments
    57.8  
Accounts receivable
    52.2  
Inventories
    203.6  
Deferred tax assets
    100.2  
Purchased call option
    346.7  
Other current assets
    42.9  
 
 
 
 
Total current assets
    1,036.0  
 
       
Non-current assets:
       
Property, plant and equipment
    24.7  
Goodwill
    1,535.8  
Other intangible assets
       
 - Currently marketed products
    2,320.0  
 - In-Process Research and Development (IPR&D)
    530.0  
Other non-current assets
    10.4  
 
 
 
 
Total assets
    5,456.9  
 
 
 
 
LIABILITIES
       
Current liabilities:
       
Accounts payable and other current liabilities
    116.5  
Convertible bond
    551.4  
 
       
Non-current liabilities:
       
Deferred tax liabilities
    695.9  
Other non-current liabilities
    96.1  
 
 
 
 
 Total liabilities
    1,459.9  
 
 
 
 
Fair value of identifiable assets acquired and liabilities assumed
    3,997.0  
 
 
 
 
 
       
Consideration
       
Cash consideration paid
    3,997.0  
 
 
 
 
The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.
 
(a) Other intangible assets – currently marketed products
 
Other intangible assets totaling $2,320.0 million relate to intellectual property rights acquired for ViroPharma’s currently marketed products, primarily attributed to CINRYZE, for the routine prophylaxis against HAE attacks in adolescent and adult patients. Shire also obtained intellectual property rights to three other commercialized products, PLENADREN, an
 
 
15

 
 
orphan drug for the treatment of adrenal insufficiency in adults, BUCCOLAM, an oromucosal solution for the treatment of prolonged, acute, and convulsive seizures in infants, toddlers, children and adolescents and VANCOCIN, an oral capsule formulation for the treatment of C. difficile-associated diarrhea (“CDAD”). The preliminary fair value of currently marketed products has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each separately identifiable intangible asset.
 
The estimated useful lives of the CINRYZE, PLENADREN, BUCCOLAM and VANCOCIN intangible assets range from 3 to 23 years (weighted average 21 years), with amortization being recorded on a straight line basis.
 
(b) Other intangible assets – IPR&D
 
IPR&D relates to development projects acquired with ViroPharma, that have been initiated and have achieved material progress and whose fair value is estimable with reasonable certainty but (i) have not yet reached technological feasibility or have not yet received the relevant regulatory approval and (ii) have no alternative future use.
 
IPR&D, totaling $530.0 million principally relates to Maribavir , an investigational antiviral product for cytomegalovirus and VP20621, a non-toxigenic strain of C.difficile for the treatment and prevention of CDAD. The preliminary fair value of these IPR&D assets has been estimated based on an income approach, using the present value of incremental after tax cash flows expected to be generated by these development projects after the deduction of contributory asset charges for other assets employed in these projects. The estimated cash flows have been probability adjusted to take into account their stage of completion and the remaining risks and uncertainties surrounding their future development and commercialization.
 
The major risks and uncertainties associated with the timely completion of the acquired IPR&D projects include  the ability to confirm the efficacy of the technology based on the data from clinical trials, and obtaining the relevant regulatory approvals as well as other risks as described in PART 1: ITEM 1A “Risk Factors” of the Company’s annual report on Form 10-K. The valuation of IPR&D has been based on information available at the time of the acquisition and on expectations and assumptions that (i) have been deemed reasonable by the Company’s management and (ii) are based on information, expectations and assumptions that would be available to a market participant. However, no assurance can be given that the assumptions and events associated with such assets will occur as projected. For these reasons, the actual cash flows may vary from forecast future cash flows.
 
The estimated probability adjusted after tax cash flows used in fair valuing other intangible assets have been discounted at rates ranging from 9.5% to 10.0%.
 
(c) Goodwill
 
Goodwill arising of $1,535.8 million, which is not deductible for tax purposes, includes the expected operational synergies that will result from combining the operations of ViroPharma with the operations of Shire; other synergies expected to be realized due to Shire’s structure; intangible assets that do not qualify for separate recognition at the time of the acquisition; and the value of the assembled workforce.
 
In the three months and six months to June 30, 2014 the Company expensed costs of $29.2 million (2013: $nil) and $95.0 million (2013: $nil) relating to the acquisition and post-acquisition integration of ViroPharma, which have been recorded within Integration and acquisition costs in the Company’s consolidated statement of income.
 
Supplemental disclosure of pro forma information

The following unaudited pro forma financial information presents the combined results of the operations of Shire and ViroPharma as if the acquisition of ViroPharma had occurred as at January 1, 2013. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the acquisition been completed at the date indicated. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.

 
16

 
 
 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Revenues
    2,880.7       2,606.4  
 
               
Net income from continuing operations
    770.8       379.0  
 
 
 
   
 
 
 
               
Per share amounts:
               
Net income from continuing operations per share - basic
    131.8 c     68.8 c
 
               
Net income from continuing operations per share - diluted
    130.5 c     64.5 c
 
 
 
   
 
 
The unaudited pro forma financial information above reflects the following pro forma adjustments:
 
 
(i)
an adjustment to decrease net income by $33.8 million for the period to June 30, 2013 to reflect acquisition costs incurred by Shire, and increase net income by $23.2 million for the period to June 30, 2014 to eliminate acquisition costs incurred;
 
 
(ii)
an adjustment to decrease net income by $46.8 million for the period to June 30, 2013, to reflect charges on the unwind of inventory fair value adjustments as acquisition date inventory is sold, and a corresponding increase in net income for the period to June 30, 2014;
 
 
(iii)
an adjustment of $24.1 million in the period to June 30, 2013  to reflect additional interest expense associated with the drawdown of debt to partially finance the acquisition of ViroPharma and the amortization of related deferred debt issuance costs;
 
 
(iv)
an adjustment to increase amortization expense by approximately $4.7 million in the period to June 30, 2014 and $24.6 million in the period to June 30, 2013, related to amortization of the fair value of identifiable intangible assets acquired and the elimination of ViroPharma’s historical intangible asset amortization expense;
 
 
(v)
an adjustment to reflect the additional depreciation expense ($0.1 million and $0.3 million in the period to June 30, 2014 and June 30, 2013 respectively) related to the fair value adjustment to property, plant and equipment acquired;
 
 
(vi)
adjustments to reflect the tax effects of the above adjustments, where applicable.
 
Acquisition of Lumena Pharmaceuticals,  Inc. (“Lumena”)
 
On June 11, 2014 Shire completed the acquisition of 100% of the outstanding share capital of Lumena. The acquisition date fair value of the consideration totaled $464.3 million, comprising cash consideration paid on closing of $300.3 million and the fair value of contingent consideration payable of $164 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $265 million dependent upon achievement of certain clinical development milestones.

This acquisition brings two novel, orally active therapeutic compounds SHP625 (formerly LUM001), in Phase 2 clinical development and SHP626 (formerly LUM002), ready to enter Phase 2 clinical development later in 2014. Both products are inhibitors of the apical sodium-dependent bile acid transport (“ASBT”), which is primarily responsible for recycling bile acids from the intestine to the liver. SHP625 is being investigated for the potential relief of the extreme itching associated with cholestatic liver disease. SHP626 is in development for the treatment of nonalcoholic steatohepatitis.
 
The acquisition of Lumena has been accounted as a business combination using the acquisition method. The assets and liabilities assumed from Lumena have been recorded at their preliminary fair values at the date of acquisition, being June 11, 2014. The Company’s consolidated financial statements and results of operations include the results of Lumena from June 11, 2014.
 
 
17

 

The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities assumed. The purchase price has been allocated on a preliminary basis to acquired IPR&D ($467 million), net current assets assumed ($47.6 million, including cash of $46.3 million), net non-current liabilities assumed (including deferred tax liabilities) ($174.2 million) and goodwill ($123.9 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill arising of $123.9 million is not deductible for tax purposes,
 
In the three and six months to June 30, 2014 the Company has expensed costs of $1.5 million (2013: $nil) relating to the Lumena acquisition, which have been recorded within Integration and acquisition costs in the Company’s consolidated income statement. 
 
Unaudited pro forma financial information to present the combined results of operations of Shire and Lumena are not provided as the impact of this acquisition is not material to the Company’s results of operations for any period presented.
 
Acquisition of Fibrotech Therapeutics Pty Ltd. (“Fibrotech”)
 
On July 4, 2014 Shire completed its acquisition of Fibrotech, an Australian biopharmaceutical company developing a new class of orally available drugs with a novel mechanism of action which has the potential to address both the inflammatory and fibrotic components of disease processes. The acquisition of Fibrotech is expected to strengthen the Company’s growing and innovative portfolio targeting renal and fibrotic diseases, and leverage existing renal capabilities.
 
Cash consideration paid on closing was $75.0 million. Further contingent cash consideration of up to $482.5 million may be payable by the Company in future periods dependent upon the achievement of certain clinical development and regulatory and commercial milestones.
 
The acquisition of Fibrotech will be accounted for as a business combination using the acquisition method. The assets acquired and liabilities assumed from Fibrotech will be recorded at the date of acquisition, at their fair value. Shire’s consolidated financial statements will reflect these fair values at, and the results of Fibrotech will be included in Shire’s consolidated statement of income from, July 4, 2014. As the initial accounting for this business combination has not yet been completed, further disclosures relating to this acquisition will be included in the Company’s Form 10-Q for the nine months ended September 30, 2014.
 
Acquisition of Bikam Pharmaceuticals, Inc. (“Bikam”)
 
On July 9, 2014 Shire completed the acquisition of Bikam, a biopharmaceutical company with pre-clinical compounds that could provide an innovative approach to treating autosomal dominant retinitis pigmentosa (adRP). Cash consideration paid on closing was $2.5 million. Further contingent consideration of up to $92.0 million may be payable by the Company in future periods dependent upon the achievement of certain development, regulatory and sales milestones. As the initial accounting for this business combination has not yet been completed, further disclosures relating to this acquisition will be included in the Companys Form 10-Q for the nine months ended September 30, 2014.
 
3. 
Divestment of product rights
 
On January 1, 2014 the Company transferred the marketing authorizations for the CALCICHEW range of products in the UK and Ireland to Takeda Pharmaceutical Company Limited. In addition in the first quarter of 2014 Shire received cash consideration of $43.5 million from the sale of certain CALCICHEW trade marks to Takeda Nycomed AS (“Takeda”), resulting in a gain (net of taxes) of $43.5 million being recorded in the consolidated statement of income.
 
In the three months to June 30, 2014 the Company recorded total gains on the sale of product rights of $3.8 million (2013: $4.5 million) related to the re-measurement of contingent consideration receivable from the divestment of DAYTRANA.
 
In the six months to June 30, 2014 the Company recorded total gains on the sale of product rights of $40.2 million (2013: $11.0 million), related to the sale of CALCICHEW trademarks to Takeda and the re-measurement of contingent consideration receivable from the divestment of DAYTRANA.
 
 
18

 
 
4. 
Reorganization costs

One Shire business reorganization
 
On May 2, 2013, the Company initiated the reorganization of its business to integrate the three divisions into a simplified One Shire organization in order to drive future growth and innovation.
 
As part of the One Shire reorganization, the Company undertook a review of all of its pipeline programs and identified those projects that fit with the Company’s new strategic direction and have an acceptable likelihood of success. Shire’s pre-clinical investments are now primarily focused on Rare Diseases, meaning that the majority of other pre-clinical projects have been discontinued. Several clinical programs have also been discontinued. The impact of the prioritization and rationalization of the Company’s development portfolio means many of the R&D programs previously run from Basingstoke, UK have ceased. Taken together with the overall streamlining of the R&D organization, this has resulted in a significant number of R&D roles in Basingstoke being eliminated and some positions being re-located. A small number of functional roles that support R&D in Basingstoke have also been affected.
 
In addition the Company has also relocated its international commercial hub from Nyon, Switzerland to Zug, Switzerland. All Nyon-based employees have been impacted by the One Shire transition and the move to Zug. Shire is now in the new Zug office and is providing employees with a reasonable period of time to manage their relocations.
 
In the three and six months to June 30, 2014 the Company incurred reorganization costs totaling $45.8 million and $95.2 million respectively, relating to employee involuntary termination benefits and other reorganization costs. Reorganization costs of $159.8 million have been incurred since May 2013. The One Shire reorganization is expected to be substantially completed by the end of 2014. Currently, the Company estimates that further costs in respect of the One Shire reorganization of approximately $55 million will be expensed as incurred during 2014.

The liability for reorganization costs arising from the One Shire business reorganization at June 30, 2014 is as follows:

 
 
Opening liability
   
Amount
   
 
   
Closing
liability at
 
 
 
at January 1,
   
charged to re-
   
 
   
June 30,
 
 
 
2014
   
organization
   
Paid/Utilized
   
2014
 
 
 
$'M
   
$'M
   
$'M
   
$'M
 
 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
Involuntary termination benefits
    15.3       83.7       (92.9 )     6.1  
Other reorganization costs
    9.5       11.5       (20.2 )     0.8  
 
 
 
   
 
   
 
   
 
 
 
    24.8       95.2       (113.1 )     6.9  
 
 
 
   
 
   
 
   
 
 

At June 30, 2014 the closing reorganization cost liability was recorded within accounts payable and accrued expenses ($6.9 million).

5. 
Integration and acquisition costs

For the three months to June 30, 2014 Shire recorded integration and acquisition costs of $112.1 million (2013: $17.4 million), which included a net charge of $80.6 million relating to changes in the fair values of contingent consideration liabilities. The change in fair value of contingent consideration liabilities in the second quarter of 2014 principally relates to the acquisition of SARcode Biosciences Inc. (“SARcode”), reflecting Shire’s increased confidence in the lifitegrast program and the intention to submit the NDA for lifitegrast in the first quarter of 2015. Integration and acquisition costs also included costs of $31.5 million primarily related to the acquisition and integration of ViroPharma in the three months to June 30, 2014.

For the six months to June 30, 2014 Shire recorded integration and acquisition costs of $118.7 million (2013: $21.5 million), comprising costs of $97.3 million primarily related to the acquisition and integration of ViroPharma and a net charge of $21.4 million relating to the change in fair values of contingent consideration liabilities. The change in fair value

 
19

 

of contingent consideration liabilities in the first half of 2014 principally relates to the acquisition of SARcode (as described above) and the acquisition of FerroKin, reflecting the decision to place the ongoing Phase 2 clinical trial for SHP 602 on clinical hold.

In the three and six months to June 30, 2013 integration and acquisition costs primarily related to the acquisition of SARcode and Lotus Tissue Repair Inc. (“Lotus Tissue Repair”) in addition to net charges related to the change in fair values of contingent consideration liabilities.

6. 
Accounts receivable, net

Accounts receivable at June 30, 2014 of $1,051.5 million (December 31, 2013: $961.2 million), are stated net of a provision for discounts and doubtful accounts of $45.3 million (December 31, 2013: $47.9 million).

Provision for discounts and doubtful accounts:

 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
As at January 1,
    47.9       41.7  
Provision charged to operations
    163.1       150.8  
Provision utilization
    (165.7 )     (150.7 )
 
 
 
   
 
 
As at June 30,
    45.3       41.8  
 
 
 
   
 
 
At June 30, 2014 accounts receivable included $29.4 million (December 31, 2013: $37.8 million) related to royalty income.

7. 
Inventories

At June 30, 2014 inventories include $21.9 million in respect of the fair value of inventories acquired with ViroPharma, stated at fair value (being estimated selling price less estimated costs to complete and sell). All other inventories are stated at the lower of cost or market. Inventories comprise:

 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Finished goods
    191.8       156.6  
Work-in-progress
    279.9       240.5  
Raw materials
    113.3       58.2  
 
 
 
   
 
 
 
    585.0       455.3  
 
 
 
   
 
 
8. 
Results of discontinued operations
 
Following the divestment of the Company’s DERMAGRAFT business in January 2014, the Company recorded charges of $5.2 million and $27.9 million in the three and six months to June 30, 2014 respectively, primarily relating to costs associated with the divestment. These costs have been presented within discontinued operations in the consolidated income statement.
 
The operating results associated with the DERMAGRAFT business have been classified as discontinued operations in the consolidated statements of income for all periods presented. The components of discontinued operations which relate to the DERMAGRAFT business are as follows:
 
 
20

 
 
 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2014
   
2013
   
2014
   
2013
 
 
  $’M     $’M     $’M     $’M  
Revenues:
 
 
   
 
   
 
   
 
 
Product revenues
    -       22.2       1.9       40.7  
 
 
 
   
 
   
 
   
 
 
Loss from discontinued operations before income taxes
    (8.2 )     (48.9 )     (43.9 )     (281.3 )
Income taxes
    3.0       16.1       16.0       32.3  
 
 
 
   
 
   
 
   
 
 
Loss from discontinued operations, net of taxes
    (5.2 )     (32.8 )     (27.9 )     (249.0 )
 
 
 
   
 
   
 
   
 
 
The loss from discontinued operations before income taxes in the six months to June 30, 2013 includes a charge of $191.8 million, being the proportion of the Regenerative Medicine (“RM”) reporting unit goodwill impairment charge that related to the DERMAGRAFT business.

9. 
Prepaid expenses and other current assets
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
       
 
 
Prepaid expenses
    57.4       29.4  
Income tax receivable
    286.2       177.4  
Value added taxes receivable
    14.5       14.5  
Other current assets
    60.5       41.7  
 
 
 
   
 
 
 
    418.6       263.0  
 
 
 
   
 
 
10. 
Goodwill
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Goodwill arising on businesses acquired
    2,283.4       624.6  
 
 
 
   
 
 

In the six months to June 30, 2014 the Company completed the acquisition of ViroPharma and Lumena, which resulted in goodwill with a preliminary value of $1,535.8 million and $123.9 million, respectively (see Note 2 for details).

 
21

 
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
As at January 1,
    624.6       644.5  
Acquisitions
    1,662.7       170.3  
Goodwill impairment charge related to continuing operations
    -       (7.1 )
Goodwill impairment charge related to DERMAGRAFT business recorded to discontinued operations
    -       (191.8 )
Foreign currency translation
    (3.9 )     (4.3 )
 
 
 
   
 
 
As at June 30,
    2,283.4       611.6  
 
 
 
   
 
 
In the six months to June 30, 2013 the Company recorded an impairment charge of $198.9 million related to the goodwill allocated to the former RM reporting unit. Following the divestment of the DERMAGRAFT business, $191.8 million of the impairment charge was reclassified to discontinued operations, being the portion of the former RM reporting unit goodwill impairment charge that related to the DERMAGRAFT business.
 
11. 
Other intangible assets, net
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Amortized intangible assets
               
Intellectual property rights acquired for currently marketed products
    4,911.7       2,573.3  
Other intangible assets
    30.0       46.1  
 
 
 
   
 
 
 
    4,941.7       2,619.4  
Unamortized intangible assets
               
Intellectual property rights acquired for IPR&D
    1,760.5       951.5  
 
 
 
   
 
 
 
    6,702.2       3,570.9  
 
               
Less: Accumulated amortization
    (1,376.7 )     (1,258.3 )
 
 
 
   
 
 
 
    5,325.5       2,312.6  
 
 
 
   
 
 
 
 
22

 
 
The change in the net book value of other intangible assets for the six months to June 30, 2014 and 2013 is shown in the table below:
 
 
 
Other intangible assets
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
As at January 1,
    2,312.6       2,388.1  
Acquisitions
    3,321.4       732.8  
Amortization charged
    (119.0 )     (72.0 )
Amortization charged on DERMAGRAFT product technology, presented within discontinued operations in the consolidated income statement
    -       (19.7 )
Impairment charges
    (188.0 )     (19.9 )
Foreign currency translation
    (1.5 )     (11.2 )
 
 
 
   
 
 
As at June 30,
    5,325.5       2,998.1  
 
 
 
   
 
 
In the six months to June 30, 2014 the Company acquired intangible assets totaling $3,321.4 million, primarily relating to the preliminary fair value of currently marketed intangible assets of $2,320.0 million and IPR&D assets of $997 million, which were acquired with ViroPharma and Lumena (see Note 2 for further details).

The Company reviews its intangible assets for impairment whenever events or circumstances suggest that their carrying value may not be recoverable. In the six months to June 30, 2014 the Company identified indicators of impairment in respect of its SHP602 (iron chelating agent for the treatment of iron overload secondary to chronic transfusion) and SHP613 (for the treatment of improvement in patency of arteriovenous access in hemodialysis patients) IPR&D assets.

The indicators of impairment related to SHP602 included the decision in the first quarter of 2014 to place the ongoing Phase 2 clinical trial in pediatric and adult patients on hold while certain nonclinical findings are analyzed and evaluated. The Company therefore reviewed the recoverability of its SHP602 IPR&D asset in the first quarter of 2014 and recorded an impairment charge of $166.0 million within R&D expenses in the consolidated statement of income to record the SHP602 IPR&D asset to its revised fair value. This fair value was based on the revised discounted cash flow forecasts associated with SHP602, which included a reduced probability of commercial launch, and an overall delay in the forecast timing of launch.

The indicators of impairment related to SHP613 comprised the decision in the second quarter of 2014 to discontinue further development of this asset based on portfolio prioritization as well as unexpected challenges and complexities with the development program. In the second quarter of 2014 the Company recorded an impairment charge of $22.0 million within R&D expenses in the consolidated statement of income to fully write-off the SHP613 IPR&D asset.

Management estimates that the annual amortization charge in respect of intangible assets held at June 30, 2014 will be approximately $232 million for each of the five years to June 30, 2019. Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of acquired IPR&D projects, foreign exchange movements and the technological advancement and regulatory approval of competitor products.
 
 
23

 
 
12. 
Accounts payable and accrued expenses
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Trade accounts payable and accrued purchases
    232.1       202.6  
Accrued rebates – Medicaid
    570.9       549.1  
Accrued rebates – Managed care
    362.2       258.1  
Sales return reserve
    89.1       98.8  
Accrued bonuses
    68.3       130.9  
Accrued employee compensation and benefits payable
    95.2       79.4  
R&D accruals
    66.3       69.6  
Provisions for litigation losses and other claims
    65.6       71.7  
Other accrued expenses
    233.3       228.2  
 
 
 
   
 
 
 
    1,783.0       1,688.4  
 
 
 
   
 
 
13. 
Other current liabilities
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Income taxes payable
    58.6       69.0  
Value added taxes
    26.1       15.8  
Contingent consideration payable
    112.3       12.9  
Other current liabilities
    25.8       21.8  
 
 
 
   
 
 
 
    222.8       119.5  
 
 
 
   
 
 
14. 
Borrowings

Term Loan Agreement
 
In connection with its acquisition of ViroPharma on November 11, 2013 Shire entered into a $2,600 million Facilities Agreement with, among others, Morgan Stanley Bank International Limited (acting as lead arranger and agent) (the “Facilities Agreement”). The Facilities Agreement was subsequently reduced to $975 million. At June 30, 2014 the Facilities Agreement comprises two credit facilities: (i) a $125 million term loan facility which matures on November 10, 2014, which was fully utilized and recorded within short term borrowing, and (ii) an $850 million term loan facility which matures on November 11, 2015, which was fully utilized and recorded within long term borrowing. The $125 million term loan facility was subsequently reduced in July 2014 to $nil.
 
Revolving Credit Facility (“RCF”)
 
On November 23, 2010 the Company entered into a committed multicurrency revolving and swingline facilities agreement with a number of financial institutions, for which Abbey National Treasury Services Plc (trading as Santander Global Banking and Markets), Bank of America Securities Limited, Barclays Capital, Citigroup Global Markets Limited, Lloyds TSB Bank plc and The Royal Bank of Scotland plc acted as mandated lead arrangers and bookrunners. The RCF, which is for an aggregate amount of $1,200 million and includes a $250 million swingline facility, may be used for general corporate purposes and matures on November 23, 2015. As at June 30, 2014 Shire had drawn loans totalling $85 million under the RCF, which are recorded within short term borrowing.
 
 
24

 
 
15. 
Other non-current liabilities
 
 
 
June 30,
   
December 31,
 
 
 
2014
   
2013
 
 
  $’M     $’M  
 
 
 
   
 
 
Income taxes payable
    187.1<