Shire plc: IFRS Results for the Year Ending December 31, 2007
BASINGSTOKE, England, March 25, 2008 /PRNewswire-FirstCall/ -- Shire plc the global specialty biopharmaceutical company announces its preliminary results prepared under International Financial Reporting Standards ("IFRS") for the twelve months to December 31, 2007.
On February 21, 2008 Shire announced its results for the same period under US GAAP.
Notes to Editors
Shire's strategic goal is to become the leading specialty biopharmaceutical company that focuses on meeting the needs of the specialist physician. Shire focuses its business on attention deficit and hyperactivity disorder (ADHD), human genetic therapies (HGT), gastrointestinal (GI) and renal diseases. The structure is sufficiently flexible to allow Shire to target new therapeutic areas to the extent opportunities arise through acquisitions. Shire's in-licensing, merger and acquisition efforts are focused on products in niche markets with strong intellectual property protection either in the US or Europe. Shire believes that a carefully selected portfolio of products with relatively small-scale sales forces will deliver strong results.
For further information on Shire, please visit the Company's website: http://www.shire.com
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 materialise, Shire's results could be materially affected. The risks and uncertainties include, but are not limited to, risks associated with: the inherent uncertainty of pharmaceutical research; product development including, but not limited to, the successful development of JUVISTA(R) (Human TGFbeta3) and velaglucerase alfa (GA-GCB); manufacturing and commercialisation including, but not limited to, the establishment in the market of VYVANSE(TM)(lisdexamfetamine dimesylate) (Attention Deficit and Hyperactivity Disorder ("ADHD")); the impact of competitive products including, but not limited to, the impact of those on Shire's ADHD franchise; patents including, but not limited to, legal challenges relating to Shire's ADHD franchise; government regulation and approval including, but not limited to, the expected product approval date of INTUNIV(TM) (guanfacine extended release) (ADHD); Shire's ability to secure new products for commercialisation and/or development; and other risks and uncertainties detailed from time to time in Shire plc's filings with the Securities and Exchange Commission, particularly Shire plc's Annual Report on Form 10-K for the year ended December 31, 2007.
The following are trademarks of Shire or companies within the Shire Group which are the subject of trademark registrations in certain territories:
ADDERALL XR(R) (mixed salts of a single-entity amphetamine) ADDERALL(R) (mixed salts of a single-entity amphetamine) CALCICHEW(R) range (calcium carbonate with or without vitamin D3) CARBATROL(R) (carbamazepine) extended-release capsules DAYTRANA(TM) (methylphenidate transdermal system) ELAPRASE(R) (idursulfase) FOSRENOL(R) (lanthanum carbonate) INTUNIV(TM) (guanfacine) extended release LIALDA(TM) (mesalamine) MEZAVANT(R) (mesalazine) REMINYL(R) (galantamine hydrobromide) (UK and Republic of Ireland) REMINYL XL(TM) (galantamine hydrobromide) (UK and Republic of Ireland) REPLAGAL(R) (agalsidase alfa) VYVANSE(TM) (lisdexamfetamine dimesylate) XAGRID(R) (anagrelide hydrochloride)
The following are trademarks of third parties referred to in this press release:
3TC (lamivudine) (trademarks of GlaxoSmithKline (GSK)) COMBIVIR (lamivudine) (trademark of GSK) DYNEPO (epoetin delta) (trademark of Sanofi Aventis) EPIVIR (lamivudine) (trademark of GSK) EPZICOM (lamivudine) (trademark of GSK) JUVISTA (trademark of Renovo) PENTASA (mesalamine) (trademark of Ferring) RAZADYNE (galantamine) (trademark of Johnson & Johnson) RAZADYNE ER (galantamine) (trademark of Johnson & Johnson) REMINYL (galantamine) (trademark of Johnson & Johnson, excluding UK and Republic of Ireland) REMINYL XL (galantamine) (trademark of Johnson & Johnson, excluding UK and Republic of Ireland) SOLARAZE (diclofenac sodium (3%w/w)) (trademark of Almirall) VANIQA (eflornithine hydrochloride) (trademark of Almirall) ZEFFIX (lamivudine) (trademark of GSK)
Results of operations under IFRS
For the year to December 31, 2007 the Group's total revenues increased by 36% to US$2,436.3 million, compared to US$1,796.5 million in 2006. Net income for the year to December 31, 2007 was US$82.4 million compared to US$56.2 million in 2006. The results for 2007 include impairment charges in respect of goodwill and other intangible assets totaling US$390.5 million (2006: US$273.0 million) and gains on the sale of product rights of US$102.9 million (2006: US$63.0 million).
The following table provides an analysis of the Group's total revenues by source: Year to December 31, 2007 2006 Change US$M US$M % __________ __________ ________ Product sales 2,170.2 1,535.8 +41 Royalties 247.2 242.9 +2 Other revenues 18.9 17.8 +6 __________ __________ ________ Total 2,436.3 1,796.5 +36 _________ _________ ________ Product sales Year to December 31, Product sales US prescription 2007 2006 growth growth US$M US$M % % ______________ __________ ______________ ________ Specialty Pharmaceuticals ADHD ADDERALL XR 1,030.9 863.6 +19 +3 VYVANSE 76.5 - N/A N/A DAYTRANA 64.2 25.1 +156 +166 ADDERALL - 23.6 N/A N/A GI PENTASA 176.4 137.8 +28 +3 LIALDA/MEZAVANT 50.5 - N/A N/A RENAL FOSRENOL 102.2 44.8 +128 +5 DYNEPO 14.2 - N/A N/A Other therapeutic areas CALCICHEW 54.2 45.5 +19 N/A CARBATROL 72.3 68.3 +6 -5 XAGRID 66.8 53.3 +25 N/A REMINYL/REMINYL XL 31.2 21.5 +45 N/A Other 105.1 111.0 -5 _____________ __________ ______________ 1,844.5 1,394.5 +32 _____________ __________ ______________ Human Genetic Therapies REPLAGAL 143.9 117.7 +22 N/A ELAPRASE 181.8 23.6 +670 N/A _____________ __________ _____________ 325.7 141.3 +131 _____________ __________ _____________ Total 2,170.2 1,535.8 +41 _____________ __________ _____________
The following discussion includes references to US prescription and US market share data for key products. The source of this data is IMS Health, December 2007.
ADDERALL XR - ADHD
As a result of the launch of VYVANSE in July 2007 ADDERALL XR's average share of the US ADHD market for 2007 fell to 25.5% (2006: 26.1%). US prescriptions for ADDERALL XR for the year to December 31, 2007 increased by 3% compared to the same period in 2006 due to a 6% growth in the US ADHD market offset by the 0.6% fall in average market share.
Sales of ADDERALL XR for the year to December 31, 2007 were US$1,030.9 million, an increase of 19% compared to the same period in 2006 (2006: US$863.6 million). Product sales growth was higher than prescription growth due primarily to price increases in January and October 2007.
As previously disclosed, the United States Federal Trade Commission ("FTC") informed Shire on October 3, 2006 that it was reviewing the ADDERALL XR patent litigation settlement agreement between Shire and Barr Laboratories, Inc. ("Barr"). On June 22, 2007, the Group received a civil investigative demand requesting that it provides information to the FTC relating to its settlement with Barr and its earlier settlement with Impax Laboratories, Inc. The Group is cooperating fully with this investigation and believes that the settlements are in compliance with all applicable laws.
Patent litigation proceedings relating to ADDERALL XR are on-going. Further information can be found in our filings with the SEC, including our Annual Report on Form 10-K for the year to December 31, 2007.
VYVANSE - ADHD
VYVANSE was launched in the US market in July 2007 and at December 31, 2007 its market share had reached 5.2% (average annual market share 1.8%). Product sales of US$76.5 million for the year to December 31, 2007 were net of US$42.2 million sales deductions, primarily coupons, wholesaler discounts and rebates, which are expected over time to be approximately 28% of product sales before sales deductions.
All initial launch stocks of VYVANSE totaling US$57.8 million were recognised into revenue during the year to December 31, 2007.
DAYTRANA - ADHD
Product sales for the year to December 31, 2007 were US$64.2 million (2006: US$25.1 million). DAYTRANA's average share of the US ADHD market increased to 2.1% in 2007 compared to 0.8% in 2006 (DAYTRANA was launched in June 2006). US prescriptions of DAYTRANA for the year to December 31, 2007 over 2006 benefited from a full year of demand, 6% growth in the US ADHD market and higher market share. For the six month period to December 31, 2007 prescriptions of DAYTRANA were up 31% compared to the same period in 2006. During September 2007 Shire announced a voluntary market withdrawal of a limited quantity of DAYTRANA patches following feedback from patients and caregivers who had experienced difficulty in removing the release liner. Patches are now being manufactured using an enhanced process, which Shire believes offers improved ease of use when peeling off the release liner.
On January 9, 2008 the US Food and Drug Administration ("FDA") issued a warning letter to Noven Pharmaceuticals Inc. ("Noven"), which related to Noven's manufacture of DAYTRANA. Further regulatory action could result if the FDA's concerns are not satisfied fully. Noven submitted a response to the FDA on January 30, 2008 and the FDA responded on March 14, 2008 indicating that Noven's responses appear to be satisfactory. It is expected that the FDA will perform a follow-up FDA inspection of Noven's manufacturing plant to ensure compliance.
The addition of VYVANSE combined with ADDERALL XR and DAYTRANA's market share helped Shire grow its total share of the US ADHD market to 31.1% at December 31, 2007 compared to 28.0% at December 31, 2006. Shire has the leading portfolio of products in the US ADHD market.
PENTASA - Ulcerative colitis
US prescriptions of PENTASA for the year to December 31, 2007 were up 3% compared to the same period in 2006 primarily due to a 4% increase in the US oral mesalamine prescription market, offset by a 0.1% decrease in PENTASA's average market share from 17.3% in 2006 to 17.2% in 2007.
Sales of PENTASA for the year to December 31, 2007 were US$176.4 million, an increase of 28% compared to the same period in 2006 (2006: US$137.8 million). Sales growth is higher than prescription growth primarily due to restocking to normal levels in 2007 and the impact of price increases in November 2006 and August 2007.
LIALDA/MEZAVANT - Ulcerative colitis
Shire launched LIALDA in the US oral mesalamine market in March 2007, and by December 31, 2007 LIALDA had reached a market share of 8.0% (average annual market share 3.9%). LIALDA's product sales for the year to December 31, 2007 were US$50.5 million. All initial launch stocks of LIALDA totaling US$34.3 million were recognised into revenue during the year to December 31, 2007.
The product was launched in the UK in November 2007, Canada in January 2008 and further launches are planned in the EU during 2008, subject to the successful conclusion of pricing and reimbursement negotiations. In the UK and Ireland the product will be called MEZAVANT XL and Shire plans to market the product in most other EU countries as MEZAVANT.
Since the launch of LIALDA in March 2007, PENTASA and LIALDA's combined share of the US oral mesalamine prescription market had grown to 24.9% as at December 31, 2007, up from 17.6% as at December 31, 2006.
FOSRENOL - Hyperphosphatemia
FOSRENOL is now available in 25 countries and global sales totalled US$102.2 million for the year to December 31, 2007 (2006: US$44.8 million). Outside the US, FOSRENOL has now been launched in Germany, France, UK, Italy and Spain (in January 2008) and a number of other countries. Sales of FOSRENOL outside the US for the year ended December 31, 2007 were US$40.1 million compared to the same period in 2006 (2006: US$4.6 million).
US sales of FOSRENOL for the year to December 31, 2007 were up 54% to US$62.1 million compared to the same period in 2006 (2006: US$40.2 million). FOSRENOL's average market share of the US phosphate binder market increased from 8.5% in 2006 to 8.6% in 2007. The increase in product sales is due to a small wholesaler stocking increase in 2007 compared to significant wholesaler de-stocking of initial launch stocks in 2006, the continued shift to the 1 gram strength tablet launched in 2006, partially offset by higher sales deductions in 2007 compared to the same period in 2006 (relating to a one-off provision made in 2007 for returns of the 750 gram dose).
DYNEPO - Anaemia associated with Chronic Kidney Disease ("CKD")
DYNEPO was launched in March 2007 in Germany and later in the year in the UK, France, Italy and Ireland with sales for 2007 reaching US$14.2 million.
CARBATROL - Epilepsy
US prescriptions for CARBATROL for the year to December 31, 2007 were down 5% compared to the same period in 2006. This was primarily due to a comparable decline in the US extended release carbamazepine prescription market; CARBATROL's average market share remained constant.
Sales of CARBATROL for the year to December 31, 2007 were US$72.3 million, an increase of 6% compared to the same period in 2006 (2006: US$68.3 million). Product sales increased despite the decrease in prescriptions, due to a sales price increase in April 2007 and restocking to normal levels, partially offset by higher sales deductions.
Patent litigation proceedings relating to CARBATROL are ongoing. Further information can be found in our filings with the SEC, including our Annual Report on Form 10-K for the year to December 31, 2007.
XAGRID - Thrombocythemia
Sales for the year to December 31, 2007 were US$66.8 million, an increase of 25% compared to the same period in 2006 (2006: US$53.3 million). Expressed in transaction currencies (XAGRID is primarily sold in Euros and Pounds sterling), sales increased by 15% due to growth in many of Shire's existing markets, with exchange rate movements against the US dollar accounting for the remaining 10% increase.
Human Genetic Therapies
REPLAGAL - Fabry disease
Sales for the year to December 31, 2007 were US$143.9 million, an increase of 22% compared to the same period in 2006 (2006: US$117.7 million). Expressed in transaction currencies (REPLAGAL is primarily sold in Euros and Pounds sterling) sales increased by 13% due to higher unit sales in Europe and Canada and the continued roll out of REPLAGAL to new countries, including those in Latin America, with REPLAGAL now approved in 41 countries (including Japan). Exchange rate movements against the US dollar accounted for the remaining 9% increase in sales.
ELAPRASE - Hunter syndrome
Sales for the year to December 31, 2007 were US$181.8 million (2006: US$23.6 million). Sales growth in 2007 was driven primarily by a full year of sales in the US (ELAPRASE was launched in the US in August 2006), sales in Europe (ELAPRASE was launched in several European markets in the first half of 2007), and pre-approval sales in several Latin American markets. ELAPRASE was approved for sale and marketing in Japan in October 2007 and is now approved for marketing and commercial distribution in 38 countries worldwide.
Royalty revenue increased by 2% to US$247.2 million for the year to December 31, 2007 (2006: US$242.9 million).
Year to December 31, 2007 2006 Change US$M US$M % __________ __________ __________ 3TC 145.3 150.9 -4 ZEFFIX 41.0 34.8 +18 Others 60.9 57.2 +6 __________ __________ __________ Total 247.2 242.9 +2 __________ __________ __________
Royalties from sales of 3TC for the year to December 31, 2007 were US$145.3 million, a decrease of 4% compared to the same period in 2006 (2006: US$150.9 million). Excluding favourable foreign exchange movements of 4%, there has been a decline of 8% compared to the same period in 2006.
Shire receives royalties from GSK on worldwide 3TC sales. GSK's worldwide sales of 3TC for the year to December 31, 2007 were US$1,110 million, a decrease of 2% compared to the same period in 2006 (2006: US$1,138 million), but a decrease of approximately 7% on a constant exchange rate basis. While the nucleoside analogue market for HIV has continued to grow, competitive pressures such as new entrants to the market and products in competing markets have increased leading to a decline in 3TC sales.
In 2007 generic drug companies filed Abbreviated New Drug Applications ("ANDA") seeking approval for Epivir, Combivir, Zeffix and Epzicom in the US. Pursuant to the GSK/Shire license for lamivudine products, GSK has the right to enforce the licensed patents. In November 2007 GSK filed a patent infringement lawsuit against Teva Pharmaceuticals, Inc. ("Teva") in the US District Court for the District of Delaware for infringement of one of the patents relating to Combivir. The patent, which covers the combination of AZT and lamivudine to treat HIV, expires in May 2012. Teva had filed an ANDA with the FDA with a certification of invalidity, unenforceability and non-infringement of that combination patent. Teva did not challenge two other patents relating to Combivir that expire in 2010 and 2016. The case is in its early stages.
Royalties from sales of ZEFFIX for the year to December 31, 2007 were US$41.0 million, an increase of 18% compared to the same period in 2006 (2006: US$34.8 million). The impact of foreign exchange movements has contributed 8% to the reported growth; excluding favourable foreign exchange movements there has been an increase of 10% compared to the same period in 2006.
Shire receives royalties from GSK on worldwide ZEFFIX sales. GSK's worldwide sales of ZEFFIX for the year to December 31, 2007 were US$341 million, an increase of 13% compared to the same period in 2006 (2006: US$301 million). This increase was mainly due to strong growth in the Chinese market and favourable foreign exchange rate movements.
Other royalties are primarily in respect of REMINYL and REMINYL XL (known as RAZADYNE and RAZADYNE ER in the US), a product marketed worldwide (excluding the UK and the Republic of Ireland) by Janssen Pharmaceutical N.V. ("Janssen"), an affiliate of Johnson & Johnson. Shire has the exclusive marketing rights in the UK and the Republic of Ireland.
Barr and other companies have filed ANDA with the FDA for generic versions of RAZADYNE. Janssen and Synaptech Inc. ("Synaptech") have filed lawsuits against some of those ANDA filers. A trial was held during the week of May 21, 2007. No decision from the court has been issued to date.
Janssen and Synaptech filed lawsuits against Barr and Sandoz Inc. ("Sandoz") for infringement of their patent rights relating to RAZADYNE ER as a result of Barr and Sandoz filing ANDAs with the FDA for generic versions of RAZADYNE ER. No court dates have been set.
Cost of sales
For the year to December 31, 2007 the cost of sales was 14% of product sales (2006: 16%). The cost of sales for REPLAGAL in 2006 included a US$47.0 million (3% of product sales) adjustment in respect of inventories acquired through the acquisition of Transkaryotic Therapies Inc. ("TKT"). Excluding the impact of this fair value adjustment, cost of sales as a percentage of product sales in 2006 was 13% in 2006. The increase in cost of sales as a percentage of product sales in 2007 over 2006 was primarily due to a shift in product mix resulting from increased sales of launched products, which had lower margins than existing products, and the write-off of inventory following the voluntary market withdrawal of a limited quantity of DAYTRANA patches.
For the year to December 31, 2007 cost of sales included a charge of US$5.3 million for share based compensation (2006: US$2.0 million) which included a US$2.1 million cumulative catch up charge (2006: US$nil) in respect of the 2005 option awards, for further information see SG&A below.
Research and development (R&D)
R&D expenditure increased to US$775.2 million for the year to December 31, 2007 (36% of product sales), up from US$295.8 million in the year to December 31, 2006 (19% of product sales).
The increase in R&D expenditure during the year to December 31, 2007 primarily relates to the following:
(i) a non-cash charge of US$100.0 million recognised on the effective settlement of Shire's pre-existing relationship with New River Pharmaceuticals Inc. ("New River"). This charge represents the write-off of capitalised up-front and milestone payments made by Shire prior to the acquisition of New River. This charge is presented within R&D as at the time of the New River acquisition VYVANSE, although approved by the FDA, had not yet received the final scheduling classification from the Drug Enforcement Agency ("DEA") and was therefore not available for commercial sale. Further details in respect of this charge are included in Note 3 of the Financial Statements; and
(ii) an intangible asset impairment charge for the year to December 31, 2007 of US$256.4 million (2006: US$nil) of which US$205.0 million (2006: US$nil) relates to capitalised in-process R&D ("IPR&D") for DYNEPO (primarily the oncology indication), as the Group considers it unlikely that it will pursue the indication for commercialisation. See Note 7 for further details.
Excluding these intangible impairment charges of US$256.4 million and the US$100.0 million charge on the effective settlement of the pre-existing relationship with New River, R&D expenditure in the year to December 31, 2007 was US$418.8 million or 19% of product sales (2006: US$295.8 million) an increase of US$123.0 million.
The increase in R&D expenditure in 2007 was due to Phase 3(b) and Phase 4 studies to support new product launches; the continuation of Phase 3 trials on velaglucerase alfa (GA-GCB); the development of the Women's Health franchise and JUVISTA; the pre-clinical development of three HGT projects and the newly in-licensed products from Amicus Therapeutics, Inc. ("Amicus") and Alba Therapeutics Corporation ("Alba").
For the year to December 31, 2007 R&D included a charge of US$16.6 million (2006: US$3.9 million) for share based compensation which included a US$4.6 million (2006: US$nil) cumulative catch up charge in respect of 2005 option awards, for further information see SG&A below.
Selling, general and administrative (SG&A) expenses
SG&A expenses increased from US$1,219.9 million (79% of product sales) in the year to December 31, 2006 to US$1,381.1 million in 2007 (64% of product sales), an increase of 13%, which is less than the product sales increase of 41%. Year to December 31, 2007 2006 Change US$M US$M % _______ _______ _______ Sales costs 310.7 233.2 +33 Marketing costs 401.5 343.3 +17 Other SG&A costs 329.2 252.9 +30 _______ _______ _______ 1,041.4 829.4 +26 Depreciation, amortisation and impairment 339.7 390.5 -13 charges(1) _______ _______ _______ Total SG&A costs 1,381.1 1,219.9 +13 _______ _______ ______
(1) Excludes (i) depreciation from manufacturing plants of US$5.0 million (2006: US$4.8 million) and amortisation of favourable supply contracts of US$1.2 million (2006: US$nil) which is included in cost of sales and (ii) other intangible assets impairment charges in respect of products under development of US$256.4 million (2006: US$nil) included in R&D.
Excluding depreciation, amortisation and impairment charges, SG&A costs increased by 26% to US$1,041.4 million (2006: US$829.4 million), and represented 48% of product sales (2006: 54%). The increase in SG&A expenses was expected, with additional expenditure required for:
- An increase in the ADHD sales force to promote VYVANSE;
- The cost of the new GI sales force in the US;
- The advertising, promotional and marketing spend to support the launches of VYVANSE, LIALDA and ELAPRASE; and
- A net charge of US$17.0 million in respect of legal settlements, being a charge of US$27.0 million for settlement of the TKT purported securities fraud class action shareholder suit relating to REPLAGAL, partially offset by a US$10.0 million release of existing legal provisions (1% of product sales).
The depreciation charge within SG&A for the year to December 31, 2007 was US$47.3 million (2006: US$36.0 million), which in 2007 included property, plant and equipment write-downs of US$1.8 million (2006: US$0.5 million). Amortisation charges, including the amortisation on acquired products, were US$147.3 million for the year to December 31, 2007 (2006: US$81.5 million), the increased charge is primarily due to the amortisation of DAYTRANA, ELAPRASE, DYNEPO and VYVANSE intangible assets following the product launches in June 2006, August 2006, March 2007 and July 2007 respectively.
Intangible asset impairment charges within SG&A for the year to December 31, 2007 were US$0.4 million (2006: US$1.1 million). Impairment charges relating to goodwill for the year to December 31, 2007 were US$133.7 million (2006: US$271.9 million) related to the goodwill arising on the acquisition of BioChem Pharma Inc. Depreciation, amortisation and impairment charges also include an adjustment to goodwill of US$11.0 million (2006: US$nil) in respect of the prior year acquisition of TKT.
For the year to December 31, 2007 SG&A included a charge of US$51.7 million for share based compensation (2006: US$14.6 million), which included a US$22.5 million cumulative catch up charge (2006: US$nil) in respect of 2005 option awards.
The catch-up charge relates to options issued by Shire in 2005 under the 2000 Executive Scheme. This charge arises as a result of the strong growth in revenue and profits (as determined under US GAAP) which the Group generated in the fourth quarter of 2007. This growth has in turn caused the Group to revise its original assumptions on which the IFRS 2 charge was based.
Gain on sale of product rights
For the year to December 31, 2007 Shire recognised gains of US$102.9 million on the sale of non-core products.
Shire received US$209.6 million (net of transaction costs of US$2.2 million) from Laboratorios Almirall S.A. ("Almirall") for a portfolio of non core products comprising the dermatology products SOLARAZE and VANIQA and six non-promoted products across a range of indications, which were sold by Shire primarily in the UK, France, Germany, Italy, Spain and Ireland. This sale will realise a total gain of US$109.7 million, of which US$89.9 million was recognised during Q4 2007. The remaining deferred gain of US$19.8 million will be recognised in 2008 after the transfer of the relevant consents.
Shire received US$24.8 million on the sale of other non-core products, realising a total gain of US$17.2 million, of which US$13.0 million was recognised during 2007. (The remaining deferred gain of US$4.2 million relating to these disposals is expected to be recognised in 2008 on the transfer of marketing authorisations.)
During the year to December 31, 2006 Shire recognised a gain of US$63.0 million on the disposal of ADDERALL to Duramed.
For the year to December 31, 2007 Shire received investment revenues of US$50.6 million (2006: US$50.5 million). Investment revenues primarily relate to interest received on cash balances. Included in 2006 was interest of US$6.5 million received from IDB Biomedical Inc. ("IDB") on repayment of injectable flu development drawings arising on the disposal of the vaccines business in 2004. Excluding this one-off item, investment revenues in 2007 are higher than in 2006 due to slightly higher average cash balances and higher average US Dollar interest rates.
For the year to December 31, 2007 the Group incurred finance costs of US$93.1 million (2006: US$27.0 million). The increase in finance costs in 2007 over 2006 follows the acquisition of New River which was partly funded by US$1.3 billion of term loans, utilised under Shire's US$2.3 billion banking facility (see Note 8). These term loans were subsequently partially repaid using the proceeds from Shire's 2.75% convertible bond issued in May 2007. The remaining US$200 million of the term loans was also repaid during the year to December 31, 2007. Finance costs for the year to December 31, 2007 included an US$11.9 million write-off of deferred financing costs following the repayment of these term loans. Finance costs relating to the convertible bonds, representing interest expense based upon the stated coupon of the bonds, amortised discount and issue costs totalled US$43.6 million for the year to December 31, 2007.
In the year to December 31, 2007 and 2006 finance costs included a provision for interest, which may be awarded by the Court in respect of amounts due to those ex-TKT shareholders who have requested appraisal of the acquisition consideration payable for their TKT shares. A trial date for the appraisal rights litigation has been set for May 12, 2008. Further information can be found in our filings with the SEC, including our Annual Report on Form 10-K for the year to December 31, 2007.
Share of post tax profit from associates and joint ventures
The Group's share of profit from its associates and joint ventures totalled US$1.8 million for the year to December 31, 2007 (2006: US$5.8 million). This comprised earnings of US$6.5 million from the 50% share of the anti-viral commercialisation partnership with GSK in Canada (2006: US$6.3 million), offset by losses of US$4.7 million being the Group's share of losses in the GeneChem, AgeChem and EGS Healthcare Funds (2006: losses of US$0.5 million).
The effective tax rate for the year to December 31, 2007 was -162% (2006: 88%).
In 2007 and 2006 the Group recorded impairment charges in respect of goodwill relating to the acquisition of BioChem Pharma Inc. of US$133.7 million (2006: US$271.9 million): no tax deduction is available on this goodwill impairment. Excluding the goodwill impairment the effective tax rate is -31%, (2006: 28%).
This negative tax rate in the year to December 31, 2007 of 31% has resulted from the release of deferred tax liabilities following other intangible asset impairment charges recognised in 2007 and the variation in the mix of profits from the jurisdictions in which the Group operates. Additionally, the tax rate in 2007 compared to 2006 has benefited from a reduced charge in respect of tax contingencies of US$34.0 million (2006: US$187.0 million) and an increase in favourable permanent differences, relating to R&D tax credits and the tax effect of the gain on disposal of product rights. These benefits were partially offset by the adverse impact of the movement in deferred taxes not recognised of US$7.0 million (2006: US$91.0 million favourable).
Principal Differences: IFRS and US GAAP Net Income for the year to December 31, 2007 and 2006.
The primary differences between net (loss) / income as reported under US GAAP and net income as reported under IFRS for the years ended December 31, 2007 and 2006 related to:
(a) In-process research and development ("IPR&D")
IPR&D arising on the acquisition of New River relating to VYVANSE for non-paediatric patients in the US and VYVANSE in the rest of the world ("RoW"), which has been capitalised as an intangible asset under IFRS. As required under US GAAP the value ascribed to these IPR&D projects of US$1,866.4 million (2006: US$nil) has been expensed as research and development costs as of the acquisition date.
(b) Goodwill impairment
The impairment of goodwill of US$133.7 million (2006: US$271.9 million) under IFRS, not recorded under US GAAP. The impairment principally relates to the goodwill recognised under IFRS in respect of the acquisition of BioChem Pharma Inc: this goodwill was not recorded under US GAAP as the treatment of the combination as a pooling of interests under US GAAP resulted in no goodwill arising.
(c) Intangible asset impairment
An impairment charge of US$256.8 million (2006: US$1.1 million) was recorded under IFRS, primarily relating to the impairment of IPR&D in respect of the oncology indication of DYNEPO. These assets are not recognised on the US GAAP balance sheet as they were expensed as research and development costs at the time of their acquisition.
(d) Intangible assets capitalised
Up-front and milestone payments in respect of in-licensed technology of US$147.8 million (2006: US$80.5 million) have been capitalised under IFRS: these payments have been expensed as research and development costs as incurred under US GAAP.
(e) Effective settlement of the pre-existing relationship with New River
A non-cash charge under IFRS of US$100.0 million arose on effective settlement of the Group's pre-existing relationship with New River, in respect of the write-off of up-front and milestone payments capitalised under IFRS as intangible assets; no loss was recorded under US GAAP as these payments had been expensed as a research and development cost as incurred.
(f) Finance costs in respect of convertible bonds
Finance costs recognised in respect of the US$1,100.0 million 2.75% convertible bonds due 2014 are US$21.9 million (2006: US$nil) higher under IFRS compared to US GAAP.
Under both US GAAP and IFRS finance costs include the stated coupon on the bonds, together with amortisation of the direct costs of issue. However, under IFRS, finance costs also include amortisation of the discount arising from separately accounting for the equity conversion feature at inception; this equity conversion feature is not separately accounted for under US GAAP. Finance costs are higher under IFRS as compared to US GAAP as a result of the amortisation of this discount.
(g) Other differences
Other differences include goodwill allocated to the gain on disposal of product rights; adjustments to goodwill relating to prior years acquisitions; the amortisation of intangible assets capitalised under IFRS and not US GAAP; accruals for payroll taxes on share options; and share based payment charges.
Consolidated income statement Year to December 31, Notes 2007 2006 US$M US$M _______ _________ _________ Continuing operations: Revenue 2,436.3 1,796.5 Cost of sales (312.7) (252.9) __________ __________ Gross profit 2,123.6 1,543.6 Research and development (including other intangible asset impairments of US$256.4 million (2006: US$nil)) (775.2) (295.8) Selling, general and administrative (including goodwill and other intangible asset impairments of US$134.1 million (2006: (1,381.1) (1,219.9) US$273.0 million) Gain on sale of product rights 102.9 63.0 __________ __________ Operating profit 70.2 90.9 Investment revenues 50.6 50.5 Finance costs (93.1) (27.0) Other income/(expense), net 1.9 9.4 Share of post tax profit from associates and joint ventures 1.8 5.8 __________ __________ Profit before taxation 31.4 129.6 Taxation 4 51.0 (114.0) __________ __________ Profit for the year from continuing Operations 82.4 15.6 Discontinued operations: Gain on disposal of discontinued operation, net of tax - 40.6 __________ __________ Profit for the year 82.4 56.2 __________ __________ 5 Earnings per share (expressed in cents per share) - Basic 15.3c 11.2c - Diluted 15.0c 11.0c __________ __________ Earnings per share from continuing 5 operations (expressed in cents per share) - Basic 15.3c 3.1c - Diluted 15.0c 3.0c __________ __________
The accompanying notes are an integral part of these consolidated financial statements.
The profit for the year is all attributable to the equity holders of the parent.
Consolidated statement of recognised income and expense 2007 2006 Year to December 31, Notes US$M US$M ________ __________ __________ Profit for the year 82.4 56.2 __________ __________ Exchange differences on translation of foreign operations 24.2 26.7 Unrealised holding loss on available-for-sale securities, net of taxes of US$5.2 million (2006: US$nil) (16.5) (1.8) Realised gain on available-for-sale securities (0.1) - __________ __________ Net income recognised directly in equity 7.6 24.9 __________ __________ Total recognised income for the year 90.0 81.1 __________ __________
The accompanying notes are an integral part of these consolidated financial statements. The total recognised income for the year is attributable to equity holders of the parent.
Consolidated balance sheet December 31, December 31, Notes 2007 2006 US$M US$M ________ __________ __________ ASSETS Non-current assets Goodwill 6 2,254.0 1,805.9 Other intangible assets 7 4,501.2 1,747.8 Property, plant and equipment 297.9 259.1 Deferred tax assets 173.4 120.0 Investments accounted for using equity method 24.9 24.2 Available-for-sale investments 85.3 31.6 Other receivables 15.9 12.3 __________ __________ 7,352.6 4,000.9 __________ __________ Current assets Inventories 174.1 131.1 Trade and other receivables 543.3 396.1 Current tax assets 8.2 11.8 Cash and cash equivalents 762.5 1,126.9 Restricted cash 39.5 29.8 Assets held for sale 14.7 - __________ __________ 1,542.3 1,695.7 __________ __________ Total assets 8,894.9 5,696.6 __________ __________ LIABILITIES AND SHAREHOLDERS' EQUITY Non-current liabilities Convertible bonds 8 910.2 - Other borrowings 7.9 6.9 Trade and other payables 34.3 24.6 Deferred tax liabilities 1,093.9 147.2 Long-term provisions 20.5 27.6 __________ __________ 2,066.8 206.3 __________ __________ Current liabilities Other borrowings 4.7 3.5 Trade and other payables 678.2 585.5 Liability to dissenting shareholders 480.2 452.3 Current tax liabilities 390.2 295.3 Provisions 56.2 8.3 __________ __________ 1,609.5 1,344.9 __________ __________ Total liabilities 3,676.3 1,551.2 __________ __________ Consolidated balance sheet (continued) December 31, December 31, Notes 2007 2006 US$M US$M ________ __________ __________ Shareholders' equity Share capital 48.7 43.7 Share premium 194.1 125.7 Treasury shares (280.8) (94.8) Exchangeable shares 33.6 59.5 Equity component of convertible bonds 8 195.6 - Other reserve 2,099.7 2,099.7 Capital reduction reserve 2,914.5 2,946.5 Retained earnings 13.2 (1,034.9) __________ __________ Total shareholders' equity 9 5,218.6 4,145.4 __________ __________ Total liabilities and shareholders' equity 8,894.9 5,696.6 __________ __________
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated cash flow statement Year to December 31, Notes 2007 2006 US$M US$M ____ _________ __________ Net cash generated from operating activities 10 567.0 565.0 Investing activities Movement in restricted cash (9.7) 0.7 Purchase of subsidiary undertaking, net of cash and cash equivalents acquired (2,458.6) (0.8) Expenses relating to the New River acquisition (61.0) - Loan repaid by ID Biomedical Corporation (IDB) - 70.6 Purchase of property, plant and equipment (PP&E) (93.7) (68.7) Purchase of intangible assets (223.0) (173.6) Purchase of available-for-sale financial assets (63.2) (9.8) Net decrease in current financial assets 55.8 6.9 Proceeds/deposits received from sale of product rights 234.4 63.4 Proceeds from sale of PP&E 0.8 3.4 Proceeds from sale of available-for-sale financial assets 0.5 - Interest received 52.5 47.2 Dividend received from associates 2.3 0.4 Dividend from joint venture 6.8 5.8 __________ __________ Net cash used in investing activities (2,556.1) (54.5) __________ __________ Financing activities Proceeds from issue of Shire 2.75% convertible bonds due 2014 8 1,100.0 - Redemption of New River 3.75% convertible notes due 2013 (279.4) - Redemption of 2% guaranteed convertible loan notes 2011 - (0.1) Payment of debt issuance costs 8 (32.8) - Proceeds from drawings under bank facility 8 1,300.0 - Repayment of drawings under bank facility 8 (1,300.0) - Proceeds from exercise of New River purchased call option 141.8 - Proceeds from issue of ordinary shares, net of issue costs 877.3 - Proceeds from exercise of share options 30.4 82.0 Proceeds from exercise of warrants 13.0 - Payments to acquire shares by ESOT(1) (186.0) (92.0) Repayment of finance lease obligations (4.3) (5.5) Dividends paid (41.3) (32.4) __________ __________ Net cash provided by/(used in) financing activities 1,618.7 (48.0) __________ __________ Net (decrease)/increase in cash and cash equivalents (370.4) 462.5 Cash and cash equivalents at beginning of year 1,126.9 656.5 Effect of foreign currency translation 6.0 7.9 __________ __________ Cash and cash equivalents at end of year 762.5 1,126.9 __________ __________ (1) Employee Share Option Trust 1. General information
Shire plc ("the Company") and its subsidiaries (collectively referred to as the "Group" or "Shire") develop and market products for specialty physicians. The Group focuses on four therapeutic areas: ADHD, gastro-intestinal, human genetic therapies and renal.
The Company is a public limited company incorporated under the Companies Act 1985 and domiciled in the United Kingdom. The address of its registered office is Hampshire International Business Park, Chineham, Basingstoke, Hampshire, United Kingdom, RG24 8EP.
The Company has its primary listing on the London Stock Exchange and its secondary listing on the NASDAQ National Market in the United States of America.
These consolidated financial statements are presented in US Dollars as this is the currency of the primary economic environment in which the Group operates.
2. Accounting Presentation and Policies
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient disclosure and other information to fully comply with IFRS. The Company's statutory accounts for the year ended December 31, 2007 have been prepared in accordance with IFRS as adopted by the EU. The accounting policies adopted in this preliminary announcement are consistent with those followed in the preparation of the Company's statutory accounts for the years ended December 31, 2007 and 2006. Certain amounts reported in previous periods in respect of manufacturing set up costs for new products have been reclassified from research and development to cost of sales to conform to the 2007 presentation.
The financial information set out above does not constitute the Company's statutory accounts for the years ended December 31, 2007 or 2006, but is derived from those accounts. Statutory accounts for 2006 have been delivered to the Registrar of Companies and those for 2007 will be delivered in due course. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under s. 237(2) or (3) Companies Act 1985.
3. Business combinations
On April 19, 2007 Shire completed its acquisition of New River by way of a short-form merger, in an all-cash transaction. The acquisition was effected by merging Shuttle Corporation, an indirect wholly owned subsidiary of Shire, with and into New River, with New River continuing as the surviving corporation. As consideration, Shire paid to New River's shareholders US$64 in cash for each share of New River common stock outstanding at the time of the acquisition.
The acquisition of New River allows Shire to capture the full economic value of VYVANSE, and gain control of the future development and commercialisation of this product.
VYVANSE for ADHD in paediatric patients was approved by the FDA on February 23, 2007 and Shire received notification from the DEA of the final Schedule II classification for VYVANSE on May 3, 2007.
The acquisition of New River has been accounted for as a purchase business combination in accordance with IFRS 3. Under the purchase method of accounting, the assets and liabilities of New River are recorded at their fair values at the acquisition date. The financial statements of Shire issued after the completion of the acquisition reflect these fair values, with the results of New River being included within the Consolidated Income Statement from April 19, 2007.
Total consideration, including amounts payable in respect of stock options, share appreciation rights ("SARs"), warrants over New River's common stock and costs directly attributable to the business combination was approximately US$2.6 billion at the price of US$64 per share of New River's common stock, as analysed below:
US$M __________ Cash consideration for 37.1 million outstanding shares of New River common stock at US$64 per share (net of 1.5 million of common stock repurchased through a prepaid forward purchase 2,276.0 contract(1)) Cash cost of settling New River's stock options and SARs 124.5 Cash cost for settling sold warrants over 4.0 million shares 133.0 of New River's common stock Direct acquisition costs 61.0 __________ 2,594.5 __________
(1) New River entered into this prepaid forward purchase contract with Merrill Lynch in July 2006.
Accounting for the Effective Settlement of the New River Collaboration Agreement
Prior to the acquisition of New River, on January 31, 2005 Shire entered into a collaboration agreement with New River which governed the development, manufacture and commercialisation of VYVANSE for the treatment of ADHD in the US and rest of the world territories. In March 2005, this collaboration agreement was split into two separate agreements, the US Collaboration Agreement and the RoW Territory License Agreement (together the "New River Collaboration Agreements").
Under the terms of the New River Collaboration Agreements, the parties were required to collaborate on the development, manufacturing, marketing and sales of VYVANSE in the US. Profits from the collaboration arising in the US were to be divided according to a predetermined formula, based on the scheduling of VYVANSE by the DEA. Post-approval milestones were due under the New River Collaboration Agreements if the product received favourable scheduling (schedule III, IV or V or unscheduled) and on the achievement of certain sales milestones.
Through the New River Collaboration Agreements Shire also acquired the license in the RoW territory to develop and commercialise VYVANSE, in consideration of a low double-digit royalty.
Shire paid an initial sum of US$50 million to New River in January 2005 on signing the original collaboration agreement and a further US$50 million was paid by Shire to New River following acceptance of the filing of a New Drug Application ("NDA") by the FDA in January 2006. These payments were capitalised by Shire as intangible assets in accordance with IAS 38, 'Intangible Assets'. As at the acquisition date, no amortisation had been recorded in respect of these intangible assets as they were not yet available for use as final DEA scheduling was yet to be received.
As Shire has a pre-existing relationship with New River, Shire has accounted for the acquisition of New River as a multiple element transaction, with one element being the business combination and one element being the effective settlement of Shire's pre-existing relationship with New River. As no specific guidance exists under IFRS 3 'Business Combinations' governing the accounting for business combinations when a pre-existing relationship is present, Shire has analogised the multiple element approach as outlined in IAS 18, 'Revenue', together with specific guidance in US GAAP in respect of accounting for business combinations when pre-existing relationships exist as outlined in Emerging Issues Task Force 04-1, 'Accounting for Pre-existing Relationships between the Parties to a Business Combination' ("EITF 04-1"). In accounting for the New River acquisition under IFRS, Shire has therefore applied the principles outlined in EITF 04-1 in accounting for the effective settlement of the New River Collaboration Agreements.
In accordance with the principles of EITF 04-1, Shire has measured the effective settlement of the New River Collaboration Agreements resulting from its pre-existing relationship with New River and has determined that, in respect of the US Collaboration Agreement, it was less favourable to Shire when compared with pricing for current market transactions for similar items. The RoW Territory License Agreement was determined to be at current market rates. The valuation of the New River Collaboration Agreements and their current market comparators has been based upon information available at the time of the acquisition and using the expectations and assumptions that have been deemed reasonable by Shire's management.
The US Collaboration Agreement was deemed less favourable to Shire at the time of the acquisition when compared with pricing for current market transactions for similar items; Shire has recorded a charge of US$100.0 million in the Consolidated income statement (together with related tax effects of US$32.7 million), to write down the value of capitalised upfront and milestone payments in respect of the New River Collaboration Agreement, on the effective settlement of the pre-existing relationship. Shire did not adjust the purchase price for New River to reflect any loss resulting from this effective settlement because settlement provisions in the US Collaboration Agreement available to the Group would have enabled effective settlement of the New River Collaboration Agreement at no cost to the Group. However, no charge has been recorded in respect of the RoW Territory License Agreement, as Shire has determined that this agreement was stated at current market rates.
Purchase price allocation
Shire's cost of acquiring New River of approximately US$2.6 billion has been allocated on a preliminary basis to the assets acquired and liabilities assumed according to their estimated fair values at the date of acquisition. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. To the extent that these preliminary estimates of the fair value of the assets acquired and the liabilities assumed need to be adjusted, Shire will do so in accordance with IFRS 3.
The following table presents Shire's preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on their fair values. Book Value Fair Value Fair Value Adjustments US$M US$M US$M ____________ ___________ ___________ Non-current assets: Other intangible assets, net - Intellectual property - developed technology - 1,133.3 1,133.3 - Favourable manufacturing contracts - 9.2 9.2 - In process research and development - 1,943.3 1,943.3 Property, plant and equipment, net 2.6 (1.8) 0.8 Deferred tax assets, non-current 1.1 52.4 53.5 Current assets: Inventories 4.8 6.6 11.4 Accounts receivable, net 0.3 - 0.3 Prepaid expenses and other current assets 2.4 (2.2) 0.2 Purchased call option 141.8 - 141.8 Short-term investments 55.8 - 55.8 Cash and cash equivalents 74.9 - 74.9 Non-current liabilities: Sold warrants (133.0) 133.0 - Deferred income, non-current (59.5) 59.5 - Deferred tax liability, non-current (1.1) (1,109.5) (1,110.6) Current liabilities: Convertible loa
Posted: March 2008
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