10-Q 1 dp25575_10q.htm FORM 10-Q
 
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, 2011

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 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 [  ]
 
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]
 
As at July 29, 2011 the number of outstanding ordinary shares of the Registrant was 562,367,582.
 
 
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, 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)
CARBATROL® (carbamazepine extended-release capsules)
DAYTRANA® (trademark of Noven Pharmaceutical Inc. (“Noven”))
DERMAGRAFT® (Human Fibroblast-Derived Dermal Substitute)
ELAPRASE® (idursulfase)
EQUASYM® IR (methylphenidate hydrochloride)
EQUASYM® XL (methylphenidate hydrochloride)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
INTUNIV® (guanfacine extended release)
JUVISTA® (trademark of Renovo Limited (“Renovo”))
LIALDA® (mesalamine)
MEZAVANT® (mesalazine)
PENTASA® (trademark of Ferring B.V. (“Ferring”))
REPLAGAL® (agalsidase alfa)
RESOLOR® (prucalopride)
VENVANSE® (lisdexamfetamine dimesylate)
VPRIV® (velaglucerase alfa)
VYVANSE® (lisdexamfetamine dimesylate)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GlaxoSmithKline (“GSK”))
3TC® (trademark of GSK)
 
 
2

 
SHIRE PLC
Form 10-Q for the three months to June 30, 2011

Table of contents

     
 Page
PART I  
FINANCIAL INFORMATION
   
ITEM 1.  
FINANCIAL STATEMENTS
   
  Unaudited Consolidated Balance Sheets at June 30, 2011 and December 31, 2010  
4
  Unaudited Consolidated Statements of Income for the three months and six months to June 30, 2011 and June 30, 2010  
6
  Unaudited Consolidated Statement of Changes in Equity for the six months to June 30, 2011  
8
  Unaudited Consolidated Statements of Comprehensive Income for the three months and six months to June 30, 2011 and June 30, 2010  
9
  Unaudited Consolidated Statements of Cash Flows for the six months to June 30, 2011 and June 30, 2010  
10
  Notes to the Unaudited Consolidated Financial Statements  
12
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
35
ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
53
ITEM 4.  
CONTROLS AND PROCEDURES
 
53
PART II  
OTHER INFORMATION
 
53
ITEM 1. 
LEGAL PROCEEDINGS
 
53
ITEM 1A.  
RISK FACTORS
 
53
ITEM 2.  
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
53
ITEM 3.  
DEFAULTS UPON SENIOR SECURITIES
 
53
ITEM 4.  
RESERVED
 
53
ITEM 5.  
OTHER INFORMATION
 
54
ITEM 6. EXHIBITS   
54
 
3

 
 
PART 1. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
SHIRE PLC
 
UNAUDITED CONSOLIDATED BALANCE SHEETS
 

 
 
 
   
June 30,
   
December 31,
 
 
 
 
   
2011
   
2010
 
 
 
Notes
      $’M       $’M  
ASSETS
 
 
                 
Current assets:
 
 
                 
Cash and cash equivalents
 
 
      144.6       550.6  
Restricted cash
 
 
      21.9       26.8  
Accounts receivable, net
    4       797.2       692.5  
Inventories
    5       336.3       260.0  
Deferred tax asset
            166.9       182.0  
Prepaid expenses and other current assets
    6       198.6       168.4  
Total current assets
            1,665.5       1,880.3  
 
                       
Non-current assets:
                       
Investments
            125.7       101.6  
Property, plant and equipment, net
            905.8       853.4  
Goodwill
    7       612.9       402.5  
Other intangible assets, net
    8       2,679.4       1,978.9  
Deferred tax asset
            128.3       110.4  
Other non-current assets
            48.0       60.5  
Total assets
            6,165.6       5,387.6  
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Accounts payable and accrued expenses
    9       1,317.5       1,239.3  
Convertible bonds
    10       1,100.0       -  
Deferred tax liability
            4.4       4.4  
Other current liabilities
    11       75.5       49.6  
Total current liabilities
            2,497.4       1,293.3  
 
                       
Non-current liabilities
                       
Convertible bonds
            -       1,100.0  
Deferred tax liability
            579.0       352.1  
Other non-current liabilities
    12       173.6       190.8  
Total liabilities
            3,250.0       2,936.2  
Commitments and contingencies
    13                  

 
4

 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)


 
 
 
 
   
 
 
 
 
 
June 30,
   
December 31,
 
 
 
 
2011
   
2010
 
 
Notes
    $’M       $’M  
 
 
               
Equity:
 
               
Common stock of 5p par value; 1,000 million shares authorized; and 562.3 million shares issued and outstanding (2010: 1,000 million shares authorized; and 562.2 million shares issued and outstanding)
 
    55.7       55.7  
Additional paid-in capital
 
    2,799.6       2,746.4  
Treasury stock: 11.5 million shares (2010: 14.0 million shares)
 
    (253.4 )     (276.1 )
Accumulated other comprehensive income
 
    204.3       85.7  
Retained earnings/(accumulated deficit)
 
    109.4       (160.3 )
Total equity
 
    2,915.6       2,451.4  
Total liabilities and equity
 
    6,165.6       5,387.6  

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

 
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,
 
   
 
   
2011
   
2010
   
2011
   
2010
 
   
Notes
      $’M       $’M       $’M       $’M  
Revenues:
                                     
  Product sales
 
 
      993.3       764.3       1,882.6       1,482.4  
  Royalties
 
 
      63.4       82.7       137.0       178.0  
  Other revenues
 
 
      6.2       2.4       15.5       5.1  
Total revenues
 
 
      1,062.9       849.4       2,035.1       1,665.5  
Costs and expenses:
 
 
                                 
  Cost of product sales (1)
 
 
      143.7       119.1       268.2       221.0  
  Research and development
 
 
      176.9       147.0       354.8       278.0  
  Selling, general and administrative (1)
 
 
      440.3       354.4       843.2       714.3  
  Loss/(gain) on sale of product rights
 
 
      2.2       (4.1 )     3.5       (4.1 )
  Reorganization costs
    3       7.5       8.6       13.0       13.6  
  Integration and acquisition costs
            9.0       -       2.6       0.6  
Total operating expenses
            779.6       625.0       1,485.3       1,223.4  
                                         
Operating income
            283.3       224.4       549.8       442.1  
                                         
Interest income
            0.6       0.5       1.2       0.8  
Interest expense
            (9.9 )     (8.3 )     (19.1 )     (17.3 )
Other (expense)/income, net
            -       (2.6 )     0.3       8.2  
Total other expense, net
            (9.3 )     (10.4 )     (17.6 )     (8.3 )
Income before income taxes and equity in earnings of equity method investees
            274.0       214.0       532.2       433.8  
Income taxes
            (69.7 )     (54.5 )     (117.8 )     (108.1 )
Equity in earnings of equity method investees, net of taxes
            1.2       1.0       2.4       0.5  
Net income
            205.5       160.5       416.8       326.2  

(1)  
Cost of product sales includes amortization of intangible assets relating to favorable manufacturing contracts of $0.4 million for the three months to June 30, 2011 (2010: $0.4 million) and $0.9 million for the six months to June 30, 2011 (2010: $0.9 million). Selling, general and administrative costs includes amortization for intangible assets relating to intellectual property rights acquired of $36.7 million for the three months to June 30, 2011 (2010: $33.8 million) and $72.7  million for the six months to June 30, 2011 (2010: $68.4 million).


 
6

 

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
 
2011
   
2010
   
2011
   
2010
 
Earning per ordinary share - basic
 
 
 
   
 
   
 
   
 
 
 
 
 
 
   
 
   
 
   
 
 
 
 
 
 
   
 
   
 
   
 
 
Earnings per ordinary share - basic
 
    37.2 c     29.4 c     75.7 c     59.8 c
 
 
                               
Earnings per ordinary share - diluted
 
                               
 
 
                               
Earnings per ordinary share - diluted
 
    35.9 c     28.6 c     72.9 c     58.2 c
 
 
                               
Weighted average number of shares (millions):
 
                               
Basic
16
    552.3       546.6       551.1       545.7  
Diluted
16
    595.1       590.0       594.8       589.1  
 
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
   
Retained earnings/ (accumulated deficit)
$'M
   
Total equity
$'M
 
As at January 1, 2011
    55.7       562.2       2,746.4       (276.1 )     85.7       (160.3 )     2,451.4  
Net income
    -       -       -       -       -       416.8       416.8  
Foreign currency translation
    -       -       -       -       100.2       -       100.2  
Options exercised
    -       0.1       0.8       -       -       -       0.8  
Share-based compensation
    -       -       35.9       -       -       -       35.9  
 
                                                       
Excess tax benefit associated with exercise of stock options
    -       -       16.5       -       -       -       16.5  
Shares purchased by Employee Share Ownership Trust ("ESOT")
    -       -       -       (63.9 )     -       -       (63.9 )
 
                                                       
Shares released by ESOT  to satisfy exercise of stock options
    -       -       -       86.6       -       (86.6 )     -  
 
                                                       
Unrealized holding gain on available-for-sale securities, net of taxes
    -       -       -       -       16.0       -       16.0  
Other than temporary impairment of available-for-sale securities
    -       -       -       -       2.4       -       2.4  
Dividends
    -       -       -       -       -       (60.5 )     (60.5 )
As at June 30, 2011
    55.7       562.3       2,799.6       (253.4 )     204.3       109.4       2,915.6  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
Dividends per share
 
During the six months to June 30, 2011 Shire plc declared and paid dividends of 10.85 US cents per ordinary share (equivalent to 32.55 US cents per ADS) totalling $60.5 million.
 
 
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,
 
 
 
2011
   
2010
   
2011
   
2010
 
 
 
$'M
   
$'M
   
$'M
   
$'M
 
 
 
 
   
 
   
 
   
 
 
Net income
    205.5       160.5       416.8       326.2  
Other comprehensive income:
                               
Foreign currency translation adjustments
    29.6       (47.1 )     100.2       (82.2 )
Unrealized holding gain/(loss) on available-for-sale securities (net of taxes of $1.1 million, $1.6 million, $3.4 million and $2.6 million)
    5.9       (15.9 )     16.0       (22.6 )
Other than temporary impairment of available-for-sale securities (net of taxes of $nil, $nil, $nil and $nil)
    -       1.5       2.4       1.5  
Comprehensive income
    241.0       99.0       535.4       222.9  

The components of accumulated other comprehensive income as at June 30, 2011 and December 31, 2010 are as follows:
 


 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Foreign currency translation adjustments
    185.6       85.4  
Unrealized holding gain on available-for-sale securities, net of taxes
    18.7       0.3  
Accumulated other comprehensive income
    204.3       85.7  

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

 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
      $’M       $’M  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
    416.8       326.2  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    132.3       129.1  
Share based compensation
    34.9       26.7  
Gain on sale of non-current investments
    -       (11.1 )
Loss/(gain) on sale of product rights
    3.5       (4.1 )
Other
    (5.7 )     11.0  
Movement in deferred taxes
    17.7       58.8  
Equity in earnings of equity method investees
    (2.4 )     (0.5 )
                 
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (56.2 )     (43.9 )
Increase in sales deduction accrual
    66.1       154.3  
Increase in inventory
    (30.6 )     (50.1 )
Increase in prepayments and other assets
    (13.8 )     (83.3 )
Decrease in accounts payable and other liabilities
    (77.1 )     (43.2 )
Net cash provided by operating activities (A)
    485.5       469.9  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Movements in restricted cash
    4.8       6.0  
Purchases of subsidiary undertakings, net of cash acquired
    (719.7 )     -  
Purchases of non-current investments
    (4.5 )     -  
Purchases of property, plant and equipment ("PP&E")
    (95.0 )     (208.1 )
Purchases of intangible assets
    -       (2.7 )
Proceeds from disposal of non-current investments, PP&E and product rights
    6.9       2.1  
Returns of equity investments and proceeds from short term investments
    1.6       -  
Net cash used in investing activities (B)
    (805.9 )     (202.7 )
 
 
 
10

 

 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
      $’M       $’M  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from drawings of revolving credit facility (RCF)
    30.0       -  
Repayment of debt acquired with ABH
    (13.1 )     -  
Payment under building finance obligation
    (0.4 )     (1.3 )
Extinguishment of building finance obligation
    -       (43.1 )
Tax benefit of stock based compensation
    18.8       4.4  
Proceeds from exercise of options
    0.8       1.8  
Payment of dividend
    (60.5 )     (49.8 )
Payments to acquire shares by ESOT
    (63.9 )     (1.7 )
Net cash used in financing activities(C)
    (88.3 )     (89.7 )
Effect of foreign exchange rate changes on cash and cash equivalents (D)
    2.7       6.1  
Net (decrease)/increase in cash and cash equivalents (A+B+C+D)
    (406.0 )     183.6  
Cash and cash equivalents at beginning of period
    550.6       498.9  
Cash and cash equivalents at end of period
    144.6       682.5  

Supplemental information associated with continuing
 
 
   
 
 
operations:
 
 
   
 
 
 
 
 
   
 
 
 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
 
               
Interest paid
    (16.2 )     (13.0 )
Income taxes paid
    (147.7 )     (205.0 )
 
               
Non cash investing and financing activities:
               
Equity in Vertex Pharmaceuticals, Inc. (“Vertex”) received as part consideration for disposal of non-current investment
    -       9.1  

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

 
 
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 of December 31, 2010 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, 2010.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.

(b)           Use of estimates in interim financial statements
 
The preparation of interim financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, the valuation of equity investments, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, and contingent consideration receivable from product divestments. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.

(c)           New accounting pronouncements

Adopted during the period

Revenue Recognition in Multiple Deliverable Revenue Arrangements

On January 1, 2011 the Company adopted new guidance issued by the Financial Accounting Standard Board (“FASB”) 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 nor 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 than the assumptions of a market place participant. The guidance eliminates the residual method of allocation and requires that arrangement consideration be allocated using the relative selling price method. The guidance also significantly expands the disclosures related to a vendor’s multiple-deliverable revenue arrangements. The guidance has been adopted prospectively from January 1, 2011 for new arrangements, or existing arrangements which have been materially modified subsequent to the date of adoption. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.

 
12

 
 
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

On January 1, 2011 the Company adopted new guidance issued by the FASB 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 Company has historically accounted for share based payment awards in a manner consistent with the guidance, and therefore the adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
 
Milestone Method of Revenue Recognition

On January 1, 2011 the Company adopted new guidance issued by the FASB 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: (i) 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; (ii) milestones should be considered substantive in their entirety and may not be bifurcated; (iii) an arrangement may contain both substantive and non substantive milestones; and (iv) each milestone should be evaluated individually to determine if it is substantive. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
 
Fees Paid to Federal Government by Pharmaceutical Manufacturers

On January 1, 2011 the Company adopted new guidance issued by the FASB on the accounting for the annual fee paid by pharmaceutical manufacturers to the US Treasury in accordance with the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act for each calendar year beginning on or after January 1, 2011. The annual fee in 2011 is $2.5 billion. A portion of the fee will be allocated to individual entities on the basis of the amount of their branded prescription drug sales to certain US Government programs for the preceding year as a percentage of the industry’s branded prescription drug sales for the same period to these same programs. This guidance specifies that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The adoption of the guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
Disclosure of Supplementary Pro Forma Information for Business Combinations

On January 1, 2011 the Company adopted new guidance issued by the FASB which clarifies the acquisition date that should be used for reporting pro forma financial information disclosures in a business combination when comparative financial statements are presented. The guidance specifies that the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The guidance also improves the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. The guidance is effective prospectively for business combinations for which the acquisition date is on or after January 1, 2011. The Company has historically presented proforma business combination disclosures in accordance with the guidance, and therefore the adoption of guidance did not impact the Company’s disclosure on business combinations.
 
To be adopted in future periods
 
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting standards (“IFRS”)
 
In May 2011 the FASB issued guidance on fair value measurement and disclosure, which both amends existing requirements and improves the comparability of fair value measurement and disclosure between US GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The guidance will be effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company is currently evaluating the impact of adopting this guidance.

 
13

 
Presentation of Comprehensive Income

In June 2011 the FASB issued guidance on the presentation of comprehensive income which revises the manner in which entities present comprehensive income in their financial statements. The guidance requires entities to report components of comprehensive income in either: (i) a single, continuous statement of comprehensive income; or (ii) two separate but consecutive statements. The guidance does not change those items which must be reported in other comprehensive income, and does not change the definition of net income or the calculation of earnings per share. The guidance will be effective retrospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company is currently evaluating the impact of adopting this guidance.

2.           Business combinations

Acquisition of Advanced BioHealing, Inc (“ABH”)
 
On May 17, 2011 the Company announced that it had entered into an Agreement and Plan of Merger, (the “Agreement”) to acquire 100% of the outstanding shares and other equity instruments of ABH. On June 28, 2011, in accordance with the terms of the Agreement, Shire completed its acquisition of ABH.  The preliminary fair value of cash consideration payable by the Company is $739.2 million, subject to certain customary post closing adjustments. The purchase price was funded by a combination of Shire’s existing cash resources and a $30.0 million draw down of Shire’s revolving credit facility.

The acquisition of ABH adds the DERMAGRAFT product, a regenerative bio-engineered skin substitute, to Shire’s portfolio. DERMAGRAFT is marketed in the US for the treatment of diabetic foot ulcers (“DFU”) greater than six weeks in duration, and brings future growth prospects through a potential expanded indication for venous leg ulcers (“VLU”). The acquisition combines ABH’s expertise and commercial capability in regenerative medicine with the Company’s strengths and expertise in human cell biological manufacturing.
 
The acquisition of ABH has been accounted for as a purchase business combination. The assets acquired and the liabilities assumed from ABH have been recorded at their preliminary fair values at the date of acquisition, being June 28, 2011. The Company’s consolidated financial statements and results of operations include the results of ABH from June 28, 2011. In the three and six months to June 30, 2011 the Company included revenues of $2.0 million (2010: $nil) and post tax losses of $0.6 million (2010: $nil) for ABH within its Unaudited Consolidated Statements of Income.

The Company’s preliminary allocation of the purchase price to the assets acquired and liabilities assumed is outlined below:
 
 
14

 

 
 
Preliminary
 
 
 
Fair value
 
 
    $’M  
Identifiable assets acquired and liabilities assumed
       
 
       
ASSETS
       
Current assets:
       
Cash and cash equivalents
    14.6  
Accounts receivable
    30.1  
Inventories
    31.8  
Deferred tax assets
    32.3  
Other current assets
    7.9  
Total current assets
    116.7  
 
       
Non-current assets:
       
Property, plant and equipment
    16.5  
Goodwill
    192.5  
Other intangible assets
       
 - DERMAGRAFT product technology
    710.0  
 - other intangible assets
    1.5  
Other non-current assets
    0.1  
Total assets
    1,037.3  
LIABILITIES
       
Current liabilities:
       
Accounts payable and other current liabilities
    49.3  
 
       
Non-current liabilities:
       
Long term debt, less current portion
    9.1  
Deferred tax liabilities
    238.7  
Other non-current liabilities
    1.0  
Total liabilities
    298.1  
Fair value of identifiable assets acquired and liabilities assumed
    739.2  
 
       
Consideration
       
Cash consideration payable
    739.2  

The purchase price allocation is preliminary pending final determination of the cash consideration payable (which may be adjusted based on ABH’s closing adjusted working capital) and the fair values of certain assets acquired and liabilities assumed. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.
 
Other intangible assets include $710.0 million relating to DERMAGRAFT product technology, representing DFU and the potential expanded indication for VLU in the US, the product brand name and related relationships. The fair value of this asset has been estimated using an income approach, using the excess earnings method. The estimated useful life of the technology is 18 years, and amortization expense will be recorded on a straight line basis.
 
Goodwill arising of $192.5 million, which is not deductible for tax purposes, has been assigned to the Specialty Pharmaceuticals (SP) operating segment. Goodwill includes the values of tax synergies, assembled workforce and future
 
 
15

 
 
potential indications for the DERMAGRAFT product which do not meet the criteria for recognition as separate intangible assets.

In the three and six months to June 30, 2011 the Company incurred acquisition-related costs of $6.9 million (2010: $nil), which have been charged to Integration and acquisition costs in the Company’s income statement.
 

Supplemental disclosure of pro forma information

The following unaudited pro forma financial information presents the combined results of the operations of Shire and ABH as if the acquisition of ABH had occurred at January 1, 2010. 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.

 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Revenues
    2,125.3       1,730.1  
 
               
Net income attributable to Shire plc
    401.6       313.6  
 
               
Per share amounts:
               
Net income per ordinary share attributable to Shire plc – basic
    72.9c       57.5c  
 
               
Net income per ordinary share attributable to Shire plc – diluted
    70.3c       56.1c  
The unaudited pro forma financial information above reflects the following pro forma adjustments:

(i)  
an adjustment to net income of $49.9 million and $9.8 million for the six months to June 30, 2011 and 2010 respectively, to eliminate the income statement effect of changes in the fair value of ABH’s preferred stock warrants (which were extinguished on acquisition of ABH);

(ii)  
an adjustment to increase amortization expense by approximately $20.0 million for both the six months to June 30, 2011 and 2010, to reflect amortization of intangible assets, principally for DERMAGRAFT product technology, over their estimated useful lives;

(iii)  
an adjustment to decrease net income by $6.9 million for the six months to June 30, 2010 to reflect acquisition and integration costs incurred by Shire, and increase net income by $23.9 million for the six months to June 30, 2011 to eliminate the acquisition and integration costs incurred by ABH and Shire;

(iv)  
an adjustment of $1.4 million and $1.5 million in the six months to June 30, 2011 and June 30, 2010 respectively to reflect interest income foregone on the Company’s cash resources used to fund the acquisition of ABH and interest expense incurred as result of the partial funding of the acquisition of ABH through the Company’s revolving credit facility; and

(v)  
adjustments to reflect the tax effects of the above adjustments, where applicable.


3.           Reorganization costs

Establishment of an International Commercial Hub in Switzerland

In March 2010 the Company initiated plans to relocate certain research and development (“R&D”) and commercial operations to Switzerland to support its Human Genetic Therapies (“HGT”) and SP businesses outside the US. In the six months to June 30, 2011, the Company incurred reorganization costs totaling $8.0
 
 
16

 
 
million relating to employee involuntary termination benefits and other re-organization costs. The transition to the international commercial hub in Switzerland will be effected over the remainder of 2011. The total reorganization costs incurred since March 2010 are $29.3 million.

Owings Mills

In March 2009 the Company initiated plans to phase out operations and close its SP manufacturing facility at Owings Mills, Maryland. Between 2009 and 2011, all products manufactured by Shire at this site will transition to DSM Pharmaceuticals, Inc., and operations and employee numbers at the site will wind down over this period. In the six months to June 30, 2011 the Company incurred reorganization costs of $5.0 million which relate to employee involuntary termination benefits and other costs. The total reorganization costs incurred since March 2009 are $30.7 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 six months to June 30, 2011 incurred accelerated depreciation of $4.4 million, which has been charged to Cost of product sales. The reorganization costs and accelerated depreciation have been recorded within the SP operating segment.

The liability for reorganization costs arising on the establishment of the international commercial hub in Switzerland and transfer of manufacturing from Owings Mills at June 30, 2011 is as follows:

 
 
Opening
   
 
   
 
   
Closing
 
 
 
 liability
   
Amount
   
 
   
liability at
 
 
 
at January 1,
   
charged to re-
   
 
   
June 30,
 
 
 
2011
   
organization
   
Paid/Utilized
   
2011
 
 
 
$'M
   
$'M
   
$'M
   
$'M
 
 
 
 
   
 
   
 
   
 
 
Involuntary termination benefits
    10.1       5.9       (3.7 )     12.3  
Other reorganization costs
    2.3       7.1       (9.1 )     0.3  
 
    12.4       13.0       (12.8 )     12.6  

At June 30, 2011 the closing liability for reorganization costs was recorded within accounts payable and accrued expenses.

4.           Accounts receivable, net

Accounts receivable at June 30, 2011 of $797.2 million (December 31, 2010: $692.5 million), are stated net of a provision for discounts and doubtful accounts of $28.8 million (December 31, 2010: $23.4 million).

Provision for discounts and doubtful accounts:

 
 
2011
   
2010
 
 
    $’M       $’M  
As at January 1,
    23.4       20.8  
Provision charged to operations
    114.8       85.2  
Provision utilization
    (109.4 )     (83.2 )
As at June 30,
    28.8       22.8  

At June 30, 2011 accounts receivable included $63.4 million (December 31, 2010: $75.8 million) related to royalty income.

 
17

 
5.           Inventories

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

 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Finished goods
    98.6       91.9  
Work-in-progress
    162.4       113.9  
Raw materials
    75.3       54.2  
 
    336.3       260.0  

At June 30, 2011 inventories included $14.0 million (December 31, 2010: $4.1 million) of costs capitalized prior to regulatory approval of the related product or relevant manufacturing process. At June 30, 2011 pre-approval inventory relates solely to VPRIV manufactured at the Company’s new manufacturing facility at Lexington Technology Park (“LTP”), which has not yet received regulatory approval.

6.           Prepaid expenses and other current assets
 
 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Prepaid expenses
    41.9       45.1  
Income tax receivable
    71.3       42.4  
Value added taxes receivable
    20.9       21.5  
Other current assets
    64.5       59.4  
 
    198.6       168.4  

 
7.           Goodwill
 

 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Goodwill arising on businesses acquired
    612.9       402.5  

During the six months to June 30, 2011 the Company completed its acquisition of ABH for cash consideration payable of $739.2 million, which resulted in goodwill of $192.5 million (see Note 2). The goodwill has been assigned to the SP operating segment.

At June 30, 2011 goodwill of $444.5 million (December 31, 2010: $245.9 million) is held in the SP segment and $168.4 million (December 31, 2010: $156.6 million) in the HGT segment.

 
18

 

 
2011
2010
 
$’M
$’M
 
____________
____________
As at January 1,
402.5
384.7
Acquisitions
192.5
-  
Foreign currency translation
17.9
(29.0)
 
____________
____________
As at June 30,
612.9
355.7
 
____________
____________

8.           Other intangible assets, net
 

 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Amortized intangible assets
               
Intellectual property rights acquired for currently marketed products
    2,562.2       2,516.4  
Acquired product technology
    710.0       -  
Other intangible assets
    24.2       22.0  
 
    3,296.4       2,538.4  
Unamortized intangible assets
               
Intellectual property rights acquired for In-process R&D (“IPR&D”)
    150.6       139.7  
 
    3,447.0       2,678.1  
 
               
Less: Accumulated amortization
    (767.6 )     (699.2 )
 
    2,679.4       1,978.9  

At June 30, 2011 the net book value of intangible assets allocated to the SP segment was $2,184.5 million (December 31, 2010: $1,482.9 million) and in the HGT segment was $494.9 million (December 31, 2010: $496.0 million).

The change in the net book value of other intangible assets for the six months to June 30, 2011 and 2010 is shown in the table below:

 
 
Other intangible assets
 
 
 
2011
   
2010
 
 
    $’M       $’M  
As at January 1,
    1,978.9       1,790.7  
Acquisitions
    711.5       2.7  
Amortization charged
    (73.6 )     (69.3 )
Foreign currency translation
    62.6       (71.0 )
As at June 30,
    2,679.4       1,653.1  

In the six months to June 30, 2011 the Company acquired intangible assets totaling $711.5 million, principally relating to DERMAGRAFT product technology acquired with ABH (see Note 2 for further details). The weighted average amortization period of acquired amortizable intangible assets is 18 years.

 
19

 
Management estimates that the annual amortization charge in respect of intangible assets held at June 30, 2011 will be approximately $183 million for each of the five years to June 30, 2016. 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.

9.           Accounts payable and accrued expenses
 
 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Trade accounts payable and accrued purchases
    218.2       234.7  
Accrued rebates – Medicaid
    399.3       379.6  
Accrued rebates – Managed care
    210.0       170.3  
Sales return reserve
    75.4       69.8  
Accrued bonuses
    65.2       91.6  
Accrued employee compensation and benefits payable
    66.5       48.1  
R&D accruals
    57.5       60.7  
Marketing accruals
    25.0       26.5  
Deferred revenue
    4.9       13.7  
Other accrued expenses
    195.5       144.3  
 
    1,317.5       1,239.3  

There are potentially different interpretations as to how shipments of authorized generic ADDERALL XR to Teva and Impax should be included in the Medicaid rebate calculation. Since authorized generic launch in 2009 the Company has recorded its accrual for Medicaid rebates based on its best estimate of the rebate payable, consistent with the Company’s interpretation of the Medicaid rebate legislation. Shire believes that its interpretation of the Medicaid rebate legislation is reasonable and correct. Additionally, from October 1, 2010 forward, provisions of the 2010 Affordable Care Act provide further clarity, in a manner consistent with the Company’s interpretation, as to how shipments of authorized generics from that date should be included in the Medicaid rebate calculation.

However, the Centers for Medicare and Medicaid Services (“CMS”) could disagree with Shire’s interpretation of the Medicaid rebate legislation for shipments of authorized generics prior to October 1, 2010.  CMS could require Shire to apply an alternative interpretation of the Medicaid rebate legislation and request that Shire pays up to $210 million above the recorded liability.  However, Shire believes it has a strong legal basis supporting its interpretation of the Medicaid rebate legislation, and that there would be a strong basis firstly to limit any additional payment to a level approximating the full, un-rebated cost to the States of ADDERALL XR (equivalent to approximately $132 million above the recorded liability), and secondly to initiate litigation to recover any amount paid in excess of the recorded liability.  The result of any such litigation cannot be predicted.

10.           Convertible Bonds


Shire 2.75% Convertible Bonds due 2014

On May 9, 2007 Shire issued $1,100 million in principal amount of 2.75% convertible bonds due in 2014 and convertible into fully paid ordinary shares of Shire plc (the “Bonds”). The Bonds were issued at 100% of their principal amount, and unless previously purchased and cancelled, redeemed or converted, will be redeemed on May 9, 2014 (the “Final Maturity Date”) at their principal amount.
 
The Bonds may be redeemed at the option of the Bond holders at their principal amount including accrued but unpaid interest on May 9, 2012 (the “Put Option”), or following the occurrence of a change of control of Shire. In lieu of settling any such redemption in cash, the terms of the Bonds also permit the Company to deliver the underlying ordinary shares and, if necessary, a cash top-up amount. In accordance with US GAAP, as the exercise of the Put Option could require
 
 
 
20

 
the Company to redeem the Bonds within twelve months of the balance sheet date, the Bonds have been presented as a current liability at June 30, 2011.

11.           Other current liabilities

 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Income taxes payable
    4.7       16.2  
Value added taxes
    13.0       9.9  
Short-term debt
    30.0       -  
Other current liabilities
    27.8       23.5  
 
    75.5       49.6  

Shire has a revolving credit facility (“RCF”) of $1,200 million which matures in 2015, of which $30 million was utilized at June 30, 2011.

12.           Other non-current liabilities
 
 
 
June 30,
   
December 31,
 
 
 
2011
   
2010
 
 
    $’M       $’M  
Income taxes payable
    111.4       130.0  
Deferred revenue
    14.2       14.1  
Deferred rent
    11.8       12.8  
Insurance provisions
    15.5       13.5  
Other non-current liabilities
    20.7       20.4  
 
    173.6       190.8  

13.           Commitments and contingencies

(a)           Leases

Future minimum lease payments under operating leases at June 30, 2011 are presented below:
 
 
Operating
 
 
 
leases
 
 
    $’M  
2011
    18.2  
2012
    31.6  
2013
    27.6  
2014
    24.7  
2015
    19.7  
2016
    17.1  
Thereafter
    41.1  
 
    180.0  
 
 
21

 
 
The Company leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2021. Lease and rental expense amounted to $17.7 million and $16.6 million for the six months to June 30, 2011 and 2010 respectively, which is predominately included in selling, general and administrative (“SG&A”) expenses in the Consolidated Statements of Income.

(b)           Letters of credit and guarantees

At June 30, 2011 the Company had irrevocable standby letters of credit and guarantees with various banks totaling $30.4 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 $9.2 million, as required by these letters of credit.

(c)           Collaborative arrangements

Details of significant updates in collaborative arrangements in the six months to June 30, 2011 are included below:

In-licensing arrangements

JUVISTA
 
On June 19, 2007 Shire signed an agreement with Renovo Limited (“Renovo”) to develop and commercialize JUVISTA. On February 11, 2011, Renovo announced its Phase 3 trial for JUVISTA in scar revision surgery did not meet its primary or secondary endpoints. On March 2, 2011, Shire terminated its agreement with Renovo.
 
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 six months to June 30, 2011 Shire received milestone payments totaling $6.8 million (2010: $nil). In the six months to June 30, 2011 Shire recognized milestone income of $8.6 million (2010: $4.3 million) within other revenues and $27.6 million (2010: $22.8 million) within product sales for shipment of product to the relevant licensee.
 
(d)           Commitments
 
(i)           Clinical testing

At June 30, 2011 the Company had committed to pay approximately $273.8 million (December 31, 2010: $156.2 million) to contract vendors for administering and executing clinical trials. The timing of these payments is dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities.

(ii)           Contract manufacturing

At June 30, 2011 the Company had committed to pay approximately $117.2 million (December 31, 2010: $108.6 million) in respect of contract manufacturing. The Company expects to pay $67.2 million of these commitments in 2011.

(iii)           Other purchasing commitments

At June 30, 2011 the Company had committed to pay approximately $150.6 million (December 31, 2010: $104.1 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Company expects to pay $141.8 million of these commitments in 2011.

(iv)           Investment commitments

At June 30, 2011 the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $8.3 million (December 31, 2010: $5.7 million) which may all be payable in 2011, depending on the timing of capital calls.

 
22

 
 
(v)           Capital commitments

At June 30, 2011 the Company had committed to spend $76.0 million (December 31, 2010: $76.0 million) on capital projects. This includes commitments for the expansion and modification of its offices and manufacturing facilities at the 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 the Company records a loss contingency provision based on its best estimate of the probable loss. Where no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. These estimates are often developed substantially before the ultimate loss is known, so estimates are refined each accounting period, as additional information becomes 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 the estimates are changed when expectations are revised. Any outcome upon settlement that deviates from the Company’s estimate may result in an additional expense or release in a future accounting period. At June 30, 2011 provisions for litigation losses, insurance claims and other disputes totaled $43.4 million (December 31, 2010: $33.8 million).

Specific

VYVANSE
 
In May and June 2011, Shire was notified that six separate Abbreviated New Drug Applications (“ANDAs”) were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of VYVANSE. The notices were from Sandoz, Inc. (“Sandoz”); Amneal Pharmaceuticals LLC (“Amneal”); Watson Laboratories, Inc.; Roxane Laboratories, Inc. (“Roxane”); Mylan Pharmaceuticals, Inc.; and Actavis Elizabeth LLC and Actavis Inc. (collectively, “Actavis”).  Within the requisite 45 day period, Shire filed lawsuits for infringement of certain of Shire’s VYVANSE patents in the US District Court for the District of New Jersey against each of Sandoz, Roxane, Amneal and Actavis; in the US District Court for the Central District of California against Watson Laboratories, Inc.; and in the US District Court for the Eastern District of New York against Mylan Pharmaceuticals, Inc. and Mylan Inc. (collectively “Mylan”).  The filing of the lawsuits triggered a stay of approval of all six ANDAs for up to 30 months.
 
INTUNIV
 
In March and April 2010, Shire was notified that three separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of INTUNIV. The notices were from Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries, Ltd (collectively, “Teva”); Actavis; and Anchen Pharmaceuticals, Inc. and Anchen, Inc. (collectively, "Anchen"). Within the requisite 45 day period, Shire filed lawsuits in the US District Court for the District of Delaware against each of Teva, Actavis and Anchen for infringement of certain of Shire’s INTUNIV patents. The filing of the lawsuits triggered a stay of approval of these ANDAs for up to 30 months. These lawsuits have been consolidated.  The previously scheduled Markman hearing was cancelled by the Court and has not been rescheduled. No trial date has been set.
 
In October 2010, Shire was notified that two separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of the 4mg strength of INTUNIV. The notices were from Watson Pharmaceuticals, Inc. and from Impax Laboratories, Inc. (“Impax”). Shire was subsequently advised that Impax amended its ANDA to include the 1mg, 2mg and 3mg strengths of INTUNIV.  Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Northern District of California against each of Watson Pharmaceuticals, Inc., Watson Laboratories, Inc.-Florida, Watson Pharma, Inc., ANDA, Inc. (collectively “Watson”) and Impax for infringement of certain of Shire’s INTUNIV patents.  The filing of the lawsuit triggered a stay of approval of these ANDAs for up to 30 months. A Markman hearing has been scheduled for May 2, 2012. No trial date has been set.
 
In February 2011, Shire was notified that Mylan Pharmaceuticals, Inc had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of the 4mg strength of INTUNIV.   Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Southern District of New York against Mylan for infringement of certain of Shire’s INTUNIV patents.  In April 2011, Shire filed a lawsuit against Mylan in the US District Court for the District of West Virginia for infringement of certain of Shire’s INTUNIV patents and dismissed the lawsuit in the Southern District of
 
 
23

 
 
New York. The filing of the lawsuit in West Virginia did not trigger a stay of approval of this ANDA.  A Markman hearing has been scheduled for June 7, 2012. A trial is scheduled to start on September 16, 2013.
 
In March 2011, Shire was notified that Sandoz had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of the 4mg strength of INTUNIV.  Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of Colorado against Sandoz for infringement of certain of Shire’s INTUNIV patents. The filing of the lawsuit triggered a stay of approval of this ANDA for up to 30 months.  No trial date has been set.

REPLAGAL
 
Mt. Sinai School of Medicine of New York University (“Mt. Sinai”) initiated lawsuits against Shire in Sweden on April 14, 2010 and in Germany on April 20, 2010 alleging that Shire’s enzyme replacement therapy (“ERT”) for Fabry disease, REPLAGAL, infringes Mt. Sinai’s European Patent No. 1 942 189, granted April 14, 2010.  Mt. Sinai sought injunctions against the use of REPLAGAL in these jurisdictions until expiration of the patent. Mt. Sinai has been granted Supplementary Protection Certificates (“SPC”) in respect of the patent in certain EU countries (including Sweden and Germany) which, where granted, extends the patent until August 2016. Where no SPC has been granted, the patent expires November 2013.
 
Shire filed an opposition against Mt. Sinai’s patent before the European Patent Office (“EPO”) on July 23, 2010 and commenced invalidity proceedings in the UK on December 8, 2010. Mt. Sinai has counterclaimed alleging infringement in the UK proceedings.  A hearing date has not been set for the EPO opposition or Swedish law suit.  The UK hearing date is scheduled for May 2012.

On January 18, 2011 the German Court found that REPLAGAL infringes Mt. Sinai’s patent, and granted Mt Sinai’s request for an injunction. Shire has appealed this decision, but no hearing date has been set. As a result of the supply shortage for the only other ERT for Fabry Disease, Mt. Sinai had undertaken not to enforce the injunction in Germany prior to September 30, 2011 and on June 30, 2011, as a result of the on-going supply shortage of the other ERT, Mt. Sinai has extended its undertaking until December 31, 2011.

FOSRENOL

In February 2009 Shire was notified that three separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of FOSRENOL. The notices were received from Barr Laboratories, Inc. (“Barr”); Mylan, Inc., Mylan Pharmaceuticals, Inc. and Matrix Laboratories, Inc. (collectively, “Mylan-Matrix”); and Natco Pharma Limited (“Natco”). Within the requisite 45 day period, Shire filed lawsuits in the US District Court for the Southern District of New York against each of Barr, Mylan-Matrix and Natco for infringement of certain of Shire’s FOSRENOL patents. A Markman hearing was held on June 17, 2010.  In April 2011, Shire and Barr reached a settlement which provides Barr with a license to market its own generic version of FOSRENOL in the US but only after October 1, 2021, or earlier under certain circumstances. No payments to Barr are involved with the settlement. As a result of the settlement, the lawsuit against Barr was subsequently dismissed. The lawsuit against Mylan-Matrix has been dismissed, and consequently, Mylan-Matrix may enter the market upon FDA approval of its version of generic FOSRENOL.  No trial date has been set with respect to Natco and a stay of approval of up to 30 months remains in effect.

In December 2010, Shire was notified that an ANDA was submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of FOSRENOL.  The notice was from Alkem Laboratories Ltd. (“Alkem”).  Within the requisite 45 day period, Shire filed lawsuits in both the US District Court for the Southern District of New York and the US District Court for the Northern District of Illinois against Alkem for infringement of certain of Shire’s FOSRENOL patents. The filing of the lawsuits triggered a stay of approval of this ANDA for up to 30 months. No trial date has been set.

LIALDA

In May 2010 Shire was notified that an ANDA was submitted under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. The notice was received from Zydus Pharmaceuticals USA, Inc. (“Zydus”). Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of Delaware against Zydus and Cadila Healthcare Limited, doing business as Zydus Cadila. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months. A Markman hearing is scheduled for April 26, 2012.  A trial is scheduled for October 8, 2012.
 
ADDERALL XR
 
On November 1, 2010 Impax filed suit against Shire in the US District Court for the Southern District of New York claiming that Shire is in breach of its supply contract for the authorized generic version of ADDERALL XR.   Shire’s ability to supply this product is limited by quota restrictions that the US Drug Enforcement Administration places on amphetamine, which is the product’s active ingredient.  Impax is seeking specific performance, equitable relief and
 
 
24

 
 
damages. Shire has filed a counterclaim against Impax seeking damages and a declaratory judgment that Shire has satisfied its obligations under the supply contract.  A trial is scheduled for January 9, 2012.
 
In February 2011, Shire was notified that an ANDA was submitted under the Hatch-Waxman Act seeking permission to market a generic version of all approved strengths of ADDERALL XR. The notice was received from Watson Laboratories, Inc. (“Watson Laboratories”).  This new ANDA is not covered under the existing settlement agreements entered into in November 2007 between Shire and Watson Pharmaceuticals, Inc (the “Settlement Agreements”). The Settlement Agreements cover a different ANDA and do not provide any license for Watson Laboratories to sell the products covered in Watson Laboratories’ new ANDA. Within the requisite 45 day period, Shire filed a lawsuit in the U.S. District Court for the Southern District of New York against Watson Pharmaceuticals, Inc., Watson Laboratories, Inc.-Florida, Watson Pharm, Inc., Andrx Corporation, and Andrx Pharmaceuticals, L.L.C. for infringement of certain of Shire’s ADDERALL XR patents and also for breach of contract in connection with the Settlement Agreements. The filing of the lawsuit triggered a stay of approval of this ANDA for up to 30 months. No trial date has been set.
 
Subpoena related to ADDERALL XR, DAYTRANA and VYVANSE

On September 23, 2009 the Company received a civil subpoena from the US Department of Health and Human Services Office of Inspector General in coordination with the US Attorney for the Eastern District of Pennsylvania seeking production of documents related to the sales and marketing of ADDERALL XR, DAYTRANA and VYVANSE. The investigation covers whether Shire engaged in off-label promotion and other conduct that may implicate the civil False Claims Act. Shire is cooperating fully with this investigation. At this time, Shire is unable to predict the outcome or duration of 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. 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, short-term debt and on foreign exchange contracts on which interest is at floating rates. This exposure is primarily to US dollar, Pounds Sterling, Euro and Canadian dollar interest rates. As the Company maintains all of its cash and liquid investments and foreign exchange contracts on a short term basis for liquidity purposes, this risk is not actively managed. In the six months to June 30, 2011 the average interest rate received on cash and cash equivalents was less than 1% per annum. The largest proportion of these cash and cash equivalents were in US dollar money market and liquidity funds.

The Company incurs interest at a fixed rate of 2.75% on the Company’s $1,100 million principal amount of convertible bonds due 2014.

During the six months to June 30, 2011 the Company did not enter into any derivative instruments 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

At June 30, 2011 the Company had investments of $125.7 million, comprising available-for-sale investments being principally equity investments in publicly quoted companies ($107.5 million), equity method investments ($9.3 million) and cost method investments in private companies ($8.9 million). The investments in available-for-sale securities 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 royalty receipts) 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.
 
 
25

 

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 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’s revenues from product sales are mainly governed by agreements with major pharmaceutical wholesalers and relationships with other pharmaceutical distributors and retail pharmacy chains. For the year to December 31, 2010 there were two customers in the US who accounted for 44% of the Company’s product sales. However, such customers typically have significant cash resources and as such the risk from concentration of credit is considered minimal. The Company has taken steps to manage any credit risk associated with these transactions and operates clearly defined credit evaluation procedures.

Foreign exchange risk

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

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

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

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

At June 30, 2011 the Company had 22 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
 
 
 
 
June 30,
   
December 31,
 
 
 
 
2011
   
2010
 
 
 
    $’M       $’M  
Assets
Prepaid expenses and other current assets
    1.1       3.7  
Liabilities
Other current liabilities
    4.1       2.7  

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

 
26

 
 
 
Location of net (loss)/gain
 recognized in income
 
Amount of net (loss)/gain
 recognized in income
 
Six months to
 
June 30,
   
June 30,
 
 
 
 
2011
   
2010
 
 
 
    $’M       $’M  
Foreign exchange contracts
Other income, net
    (2.6 )     38.5  

These net foreign exchange (losses)/gains are offset within Other income, net by net foreign exchange gains/(losses) arising on the balance sheet items that these contracts were put in place to manage.

15.           Fair value measurement

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

At June 30, 2011 and December 31, 2010 the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).

   
Carrying
   
Fair value
 
   
value
   
 
   
 
   
 
   
 
 
   
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
At June 30, 2011
 
$'M
   
$'M
   
$'M
   
$'M
   
$'M
 
Financial assets:
 
 
   
 
   
 
   
 
   
 
 
Available-for-sale securities(1)
    107.5       107.5       107.5       -       -  
Contingent consideration receivable (2)
    53.1       53.1       -       -       53.1  
Foreign exchange contracts
    1.1       1.1       -       1.1       -  
                                         
Financial liabilities:
                                       
Foreign exchange contracts
    4.1       4.1       -       4.1       -  
                                         
           
 
 
                                         
           
Total
   
Level 1
   
Level 2
   
Level 3
 
At December 31, 2010
 
$'M
   
$'M
   
$'M
   
$'M
   
$'M
 
Financial assets:
                                       
Available-for-sale securities(1)
    83.9       83.9       83.9       -       -  
Contingent consideration receivable (2)
    61.0       61.0       -       -       61.0  
Foreign exchange contracts
    3.7       3.7       -       3.7       -  
                                         
Financial liabilities:
                                       
Foreign exchange contracts
    2.7       2.7       -       2.7       -  
 
(1)
Available-for-sale securities are included within Investments in the consolidated balance sheet.
(2)
Contingent consideration receivable is included within Prepaid expenses and other current assets and Other non-current assets in the consolidated balance sheet.

 
27

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

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

 
·
Available-for-sale securities – the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
 
·
Contingent consideration receivable – the fair value of the contingent consideration receivable has been estimated using the income approach (using a discounted cash flow method). This discounted cash flow approach uses significant unobservable inputs, such as future sales of the divested product, relevant contractual royalty rates, an appropriate discount rate and assumed weightings applied to scenarios used in deriving a probability weighted fair value.
 
·
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.
 
Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

The change in the fair value of the Company’s contingent consideration receivable, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), is as follows:

   
Contingent
consideration
receivable
 
   
2011
 
   
$'M
 
   
 
 
Balance at January 1,
    61.0  
Loss recognized in the income statement due to change in fair value during the period
    (3.5 )
Reclassification of amounts due from Noven to Other receivables within Other current assets
    (9.2 )
Foreign exchange translation recorded to other comprehensive income
    4.8  
         
Balance at June 30,
    53.1  

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

The carrying amounts and estimated fair values as at June 30, 2011 and December 31, 2010 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

 
 
June 30, 2011
   
December 31, 2010
 
 
 
Carrying
   
 
   
Carrying
   
 
 
 
 
amount
   
Fair value
   
amount
   
Fair value
 
 
    $’M       $’M       $’M       $’M  
 
                               
Financial liabilities:
                               
Convertible bonds
    1,100.0       1,283.9       1,100.0       1,139.8  
Building financing obligation
    8.4       9.4       8.4       8.2  

 
28

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

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

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

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

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and drawings under the RCF approximate to fair value because of the short-term maturity of these amounts.
 
 
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16.           Earnings per share

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

   
3 months to
   
3 months to
   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
      $’M       $’M       $’M       $’M  
Amounts attributable to Shire plc shareholders
                               
Numerator for basic earnings per share
    205.5       160.5       416.8       326.2  
Interest on convertible bonds, net of tax
    8.4       8.4       16.8       16.8  
Numerator for diluted earnings per share
    213.9       168.9       433.6       343.0  
                                 
                                 
Weighted average number of shares:
                               
  
 
Millions
   
Millions
   
Millions
   
Millions
 
Basic(1)
    552.3       546.6       551.1       545.7  
Effect of dilutive shares:
                               
Share based awards to employees(2)
    9.3       10.2       10.3       10.2  
Convertible bonds 2.75% due 2014(3)
    33.5       33.2       33.4       33.2  
Diluted
    595.1       590.0       594.8       589.1  

(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:
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
No. of shares
   
No. of shares
   
No. of shares
   
No. of shares
 
   
Millions
   
Millions
   
Millions
   
Millions
 
Share awards(1)
    2.9       8.1       3.8       8.1  

(1) Certain stock options have been excluded from the calculation of diluted EPS because (a) their exercise prices exceeded Shire plc’s average share price during the calculation period or (b) satisfaction of the required performance/market conditions cannot be measured until the conclusion of the performance 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: SP and HGT. The SP 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.

   
SP
   
HGT
   
All Other
   
Total
 
3 months to June 30, 2011
    $’M       $’M       $’M       $’M  
Product sales
    676.7       316.6       -       993.3  
Royalties
    51.8       -       11.6       63.4  
Other revenues
    4.7       0.2       1.3       6.2  
Total revenues
    733.2       316.8       12.9       1,062.9  
                                 
Cost of product sales(1)
    94.1       49.6       -       143.7  
Research and development(1)
    105.1       71.8       -       176.9  
Selling, general and administrative(1)
    294.7       91.9       53.7       440.3  
Loss on sale of product rights
    2.2       -       -       2.2  
Reorganization costs
    2.7       -       4.8       7.5  
Integration and acquisition costs
    9.0       -       -       9.0  
Total operating expenses
    507.8       213.3       58.5       779.6  
Operating income/(loss)
    225.4       103.5       (45.6 )     283.3  
                                 
Total assets
    3,555.3       1,875.9       734.4       6,165.6  
Long-lived assets(2)
    174.9       691.1       42.9       908.9  
Capital expenditure on long-lived assets(2)
    18.2       27.4       5.3       50.9  

(1)
Depreciation from manufacturing plants ($10.5 million) and amortization of favorable manufacturing contracts ($0.4 million) is included in Cost of product sales; depreciation of research and development assets ($6.1 million) is included in Research and development; and all other depreciation and amortization ($51.8 million) is included in Selling, general and administrative.
(2)
Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments).
 
 
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SP
   
HGT
   
All Other
   
Total
 
3 months to June 30, 2010
    $’M       $’M       $’M       $’M  
Product sales
    551.3       213.0