Shire 10-K 2006
Documents found in this filing:
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes [X] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
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 June 30, 2005, the last business day of the Registrants most recently completed second quarter, the aggregate market value of the ordinary shares, £0.05 par value per share of the Registrant held by non-affiliates was approximately $5,503 million. This was computed using the average bid and asked price at the above date.
As at February 21, 2006, the number of outstanding ordinary shares of the Registrant was 497,618,998.
THE SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire's results could be materially affected. The risks and uncertainties include, but are not limited to, risks associated with: the inherent uncertainty of pharmaceutical research, product development, manufacturing and commercialization; the impact of competitive products, including, but not limited to, the impact of those on Shire's Attention Deficit and Hyperactivity Disorder (ADHD) franchise; patents, including, but not limited to, legal challenges relating to Shire's ADHD franchise; government regulation and approval, including, but not limited to, the expected product approval dates of DAYTRANA (MTS/METHYPATCH) (ADHD), SPD503 (ADHD), SPD465 (ADHD), MESAVANCE (SPD476) (ulcerative colitis), ELAPRASE (I2S) (Hunter syndrome), and NRP104 (ADHD), including its scheduling classification by the Drug Enforcement Administration in the United States; Shires ability to benefit from its acquisition of Transkaryotic Therapies, Inc.; Shire's ability to secure new products for commercialization and/or development; and other risks and uncertainties detailed from time to time in Shire's filings and its predecessor registrant Shire Pharmaceuticals Group plcs filings with the Securities and Exchange Commission (SEC).
The following are trademarks, either owned or licensed by Shire or companies within the Shire Group, which are the subject of trademark registrations in certain territories.
ITEM 1: Business
Shire plc (Shire) and its subsidiaries (collectively referred to as the Company or the Group) is a leading specialty pharmaceutical company that focuses on meeting the needs of the specialist physician.
Shire Pharmaceutical Group plc (SPG) was incorporated under the laws of England and Wales on January 1, 1994 and was a public limited company until November 25, 2005. Shire was incorporated under the laws of England and Wales on June 27, 2005 and is a public limited company. Following the implementation of a Scheme of Arrangement, on November 25, 2005, Shire replaced SPG as the holding company for the Shire Group.
Historically the Company has grown through acquisition, completing seven major mergers or acquisitions in an eleven-year period from 1994 to 2005. Divestments of non-core assets over the past two years have streamlined the Companys operations. The Company will continue to evaluate companies, products and project opportunities that offer a good strategic fit and enhance shareholder value in the future.
The Companys strategic goal is to become the leading specialty pharmaceutical company that focuses on meeting the needs of the specialist physician. The Companys therapeutic focus is on central nervous system (CNS), gastrointestinal (GI), human genetic therapies (HGT) and general products (GP). The structure is sufficiently flexible to allow the Company to target new therapeutic areas to the extent opportunities arise through acquisitions. The Company believes that a carefully selected portfolio of products with strategically aligned and relatively small-scale sales forces will deliver strong results.
The Companys focused strategy is to develop and market products for specialty physicians. The Companys in-licensing, merger and acquisition efforts are focused on products in niche markets with strong intellectual property protection either in the US or Europe.
Consistent with this strategy, the Company completed the acquisition of Transkaryotic Therapies Inc. (TKT) on July 27, 2005. This acquisition added HGT to the Companys existing business, which is complementary to, and consistent with, the Companys stated strategy of meeting the needs of the specialist physician using small-scale sales forces. TKT was renamed Shire Human Genetic Therapies (SHGT) with effect from January 17, 2006.
In January 2005 the Company entered into an agreement with New River Pharmaceuticals Inc. (New River) to collaborate in developing, manufacturing, marketing and selling NRP104 in the US, and acquired the license to develop and commercialize NRP104 in the rest of the world. NRP104 is a compound for the treatment of ADHD and on December 6, 2005 New River filed a New Drug Application (NDA) with the US Food and Drug Administration (FDA) for NRP104 for the treatment of ADHD in pediatric populations (ages 6-12).
On July 27, 2005 the Company completed its acquisition of TKT in an all-cash transaction. The acquisition was effected by merging a wholly owned subsidiary of Shire with and into TKT, with TKT continuing as the surviving corporation. As consideration, the Company paid to TKTs stockholders $37 in cash for each share of TKT common stock outstanding at the time of the acquisition, less any applicable withholding taxes. The total consideration for the acquisition of TKT, including amounts payable in respect of stock options and convertible securities, is approximately $1.6 billion at the merger price of $37 per share. This could change if the Company is required to pay a different amount of consideration in respect of approximately 11.3 million shares for which holders have asserted appraisal rights. See ITEM 7: Managements Discussion and Analysis of Financial Conditions and Results of Operations and ITEM 3: Legal Proceedings for more information.
In connection with the Companys reorganization program announced in 2004, the North American site consolidation was completed in 2005 and the number of North American sites, (excluding those acquired as a result of the TKT acquisition), has been reduced from sixteen to four.
ADDERALL XR Settlement of Impax Laboratories, Inc. (Impax) Litigation
In January 2006, the Company settled its ADDERALL XR patent infringement lawsuits with Impax. The litigations involved the Companys US patents, Nos. 6,322,819 (the 819 Patent), 6,605,300 (the 300 Patent) and 6,913,768 (the 768 Patent). As part of the settlement, Impax has confirmed that its proposed generic ADDERALL XR product infringes the Companys 819, 300 and 768 Patents and that the three patents are valid and enforceable. Under the terms of the settlement, Impax will be permitted to market generic versions of ADDERALL XR in the US no later than January 1, 2010 and will pay the Company a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as the Companys authorized generic. No payments to Impax are involved in the settlement agreement.
On January 26, 2006 the FDA accepted New Rivers NDA for NRP104 for review. In accordance with the terms of the agreement with New River, this has triggered a $50 million milestone payment by the Company.
ADDERALL XR FDA Advisory Committee recommendation
On February 9, 2006, an FDA Advisory Committee recommended to the FDA that risk information about cardiovascular events be included in a "black box warning" for all stimulant medicines used to treat ADHD. In making its recommendation, the Advisory Committee recognized that the reported incidence rates of the rare serious cardiovascular adverse events that were discussed by the Committee are generally within the rates that would be expected from the untreated general population. ADDERALL XR and ADDERALL already include a "black box warning" in their labels for safety concerns related to amphetamine abuse or misuse and also warn of the risk of sudden death in patients with structural cardiac abnormalities. The Company stands behind the current labeling and believes that further action is unwarranted.
ID Biomedical Inc. (IDB) loan repayment
On February 10, 2006 the Company received notice from IDB that it intended to repay in full all of its loan drawings for injectable flu development of $70.6 million, together with accrued and capitalized interest of $8.1 million (see Note 6 to the Companys consolidated financial statements contained in Part IV of this Annual report). The Company received the $78.7 million outstanding on February 14, 2006. The amounts outstanding in respect of IDBs drawings for pipeline development (principal drawings of $29.4 million) are unaffected by this repayment.
Financial information about operating segments
Substantially all of the Companys revenues, operating profits or losses and net assets are attributable to the research and development (R&D), manufacture, sale and distribution of pharmaceutical products within two operating segments: Pharmaceutical products and Royalties. Segment revenues, profits or losses and assets for 2005, 2004 and 2003 are presented in Note 25 to the Companys consolidated financial statements contained in Part IV of this Annual Report.
Sales and marketing
At December 31, 2005, the Company employed 1,056 sales and marketing staff to service its operations throughout the world, which included its major markets in the US, Europe and Canada.
Currently marketed products
The table below lists the Companys key currently marketed products, indicating the owner, licensor and marketer of the product and the territory in which the product is being marketed.
Treatments for GI diseases
Treatments for CNS disorders
ADDERALL XR and ADDERALL
ADDERALL XR and ADDERALL are treatments for ADHD. ADHD is estimated to affect 7.8% of US children aged 4 to 17. Symptoms present themselves as impulsivity/hyperactivity, inattention or both. In up to 66% of children affected by this disorder, symptoms will persist into adulthood, with estimates of up to 8.6 million adults in the United States having ADHD. According to IMS Health, a leading global provider of business intelligence for the pharmaceutical and healthcare industries, the US market for ADHD treatments was approximately $3.02 billion for the year to December 31, 2005.
ADDERALL XR is a patented formulation, which uses MICROTROL drug delivery technology and is designed to provide an all-day treatment with one morning dose. It is available in 5mg, 10mg, 15mg, 20mg, 25mg and 30mg capsules and can be administered as a capsule or sprinkled on soft food. In the ADHD market, a once-a-day formulation provides the following important patient benefits:
The FDA approved ADDERALL XR as a once-daily treatment for children with ADHD in October 2001, for adults in August 2004 and for adolescents (aged 13 to 17) in July 2005.
ADDERALL XR was made commercially available for the treatment of children in Canada in February 2004. On February 9, 2005, Health Canada suspended the marketing authorization of ADDERALL XR in Canada. The Company strongly disagreed with this action and filed an appeal with Health Canada. On August 24, 2005, the Company announced that Health Canada would reinstate the marketing authorization of ADDERALL XR in Canada with effect from August 26, 2005.
During October 2005, the Company filed a Citizen Petition with the FDA requesting that the FDA require more rigorous bioequivalence testing or additional clinical testing for generic or follow-on drug products that reference ADDERALL XR before they can be approved. The Company believes that these requested criteria will ensure that generic formulations of ADDERALL XR or follow-on drug products will be clinically effective and safe. In January 2006, the Company chose to file a supplemental amendment to its original Citizen Petition, which included additional clinical data in support of the original filing. The FDA has six months to respond to the Companys petition. However, the FDA is not precluded from granting approval or tentative approval to generic or follow-on products referencing ADDERALL XR during that time.
Litigation proceedings relating to the Companys ADDERALL XR patents are in progress. For further information see ITEM 3: Legal Proceeedings. If the Company does not prevail in the lawsuits, the Companys sales of ADDERALL XR would decrease. Any decrease in the sales of ADDERALL XR would significantly reduce revenues and earnings.
CARBATROL is a treatment for epilepsy. Approximately 2.7 million people in the United States suffer from epilepsy, a disorder that is characterised by a propensity for recurrent seizures and is defined by two or more unprovoked seizures. CARBATROL is an extended release formulation of carbamazepine that uses MICROTROL technology. It can be administered as a capsule or sprinkled on food and delivers consistent blood levels of the drug over 24 hours, when taken twice daily. When administered in an immediate release formulation, carbamazepine requires dosing three to four times a day. CARBATROL's extended release formulation therefore provides potential compliance advantages for patients. Carbamazepine is one of the most widely prescribed anti-epileptic drugs. CARBATROL is available in 100mg, 200mg and 300mg capsules.
A promotional services agreement for CARBATROL for the US market with Impax was signed in January 2006. This agreement will take effect from July 2006.
Patent litigation proceedings relating to CARBATROL are in progress. For further information see ITEM 3: Legal Proceedings.
Treatments for GI diseases
Ulcerative colitis is a chronic, relapsing type of inflammatory bowel disease in which part, or all, of the large intestine becomes inflamed and often ulcerated. Patients experience intermittent attacks separated by periods of remission and can suffer from diarrhoea, bleeding and abdominal pain. Once diagnosis is confirmed, patients are usually treated for life. The worldwide diagnosed population for ulcerative colitis is expected to reach 1.3 million by 2012. The mainstay treatments for inflammatory bowel disease are mesalamine (5-aminosalicylic acid; 5-ASA) based products.
PENTASA controlled release capsules are indicated for the induction of remission and for the treatment of patients with mildly to moderately active ulcerative colitis. PENTASA is a ethylcellulose-coated, controlled release capsule formulation designed to release therapeutic quantities of mesalamine throughout the gastrointestinal tract. In the US, PENTASA is available in 250mg and 500mg capsules.
COLAZIDE is indicated for the treatment of mild-to-moderate active ulcerative colitis and maintenance of remission, and is a mesalamine derivative in which mesalamine is linked to an inactive carrier. The link is cleaved by colonic bacteria, delivering 99% of the mesalamine dose to the colon.
Human genetic diseases
REPLAGAL is a treatment for Fabry disease. Fabry disease is a rare, inherited genetic disorder resulting from a deficiency in the activity of the lysosomal enzyme alpha-galactosidase A. This enzyme is involved in the breakdown of fats. Although the signs and symptoms of Fabry disease vary widely from patient to patient, the most common include severe pain of the extremities, impaired kidney function often progressing to full kidney failure, early heart disease, stroke and disabling gastrointestinal symptoms. The disease is estimated to affect 1 in 40,000 males and is less frequent in females.
REPLAGAL is a fully human alpha-galactosidase A protein that replaces the deficient alpha-galactosidase A with an active enzyme to stop or ameliorate the clinical manifestations of Fabry disease. In August 2001, REPLAGAL was granted marketing authorization and co-exclusive orphan drug status in the European Union with up to 10 years market exclusivity.
A rival product received orphan drug status in the US in April 2003. As a result, REPLAGAL will be excluded from the United States market for seven years, until April 2010 or until such time as FDA approval is received, if later.
Treatments for diseases in the GP area
Myeloproliferative disorders (MPDs), including essential thrombocythemia (ET) and polycythemia vera, are a group of diseases in which one or more blood cell types are overproduced. In the case of platelets, which are involved in the blood clotting process, excess numbers can result in abnormal blood clot formation giving rise to events such as heart attack and stroke. Excessive platelet production can also lead to the formation of abnormal platelets, which may not be as effective in the clotting process. This can lead to events such as gastrointestinal bleeding.
Anagrelide hydrochloride is marketed in the US (under the trade name AGRYLIN) for the treatment of thrombocythemia secondary to a MPD. AGRYLIN's pediatric marketing exclusivity expired in September 2004 in the US. On April 18, 2005 the FDA rejected the Company's Citizen Petition requesting that any generic anagrelide product should have more rigorous bio-equivalence testing to ensure the safety and efficacy of the product. The FDA subsequently approved several generic versions of AGRYLIN, which, as expected, adversely affected the Company's sales of this product in North America in 2005. Sales of AGRYLIN in North America were down 61% on 2004 sales.
In Europe anagrelide hydrochloride is marketed as XAGRID for the reduction of elevated platelet counts in at risk ET patients and was granted orphan drug status in Europe in November 2004, providing it with up to 10 years market exclusivity.
FOSRENOL is a phosphate binder for use in end-stage renal failure patents receiving dialysis. It is estimated that there are around 1.7 million patients worldwide with end-stage renal disease. In this condition the kidneys are unable to regulate the balance of phosphate in the body. If untreated, the resultant retention and elevated blood phosphate levels (hyperphosphatemia) can combine with other biochemical disturbances and result in bone disorders described as renal osteodystrophy. Research also suggests that hyperphosphatemia is associated with the development of cardiovascular disease which accounts for nearly 50% of deaths in dialysis patients.
FOSRENOL binds dietary phosphate in the gastrointestinal tract to prevent it from passing through the gut lining and, based upon this mechanism of action, phosphate absorption from the diet is decreased. Formulated as a convenient chewable tablet, FOSRENOL received FDA approval for the 250mg and 500mg dosage strengths in the US in October 2004 and was made available on prescription in the US in January 2005. In November 2005, the Company received FDA approval for the higher dose strengths of 750mg and 1000mg. Marketing approval was first gained in Sweden in March 2004, and further regulatory approvals have been sought in a number of other EU Member States pursuant to the Mutual Recognition Process. Launches began in Europe during 2005. In December 2005, FOSRENOL was launched by the Company in Ireland under its local trade name FOZNOL, and via its distributors as FOSRENOL in Sweden, Denmark and Austria. The Company continues its discussions relating to FOSRENOL with regulatory authorities across Europe and other regions and further launches are expected in European markets over the next few months, subject to obtaining national approvals and concluding pricing and reimbursement negotiations.
REMINYL and REMINYL XL
REMINYL and REMINYL XL are treatments for the symptomatic treatment of mild to moderately severe dementia of the Alzheimer type. It is estimated that approximately 500,000 people in the UK suffer from Alzheimer's disease, which affects the ability to carry out normal daily activities and affects memory, language and behavior. The disease is progressive, with death usually occurring within eight to ten years following the onset of symptoms.
REMINYL and REMINYL XL are marketed by the Company in the UK and Ireland and by Janssen Pharmaceutica
N.V. (Janssen), an affiliate of Johnson & Johnson, and in the rest of the world (under the name RAZADYNE and RAZADYNE ER in the US) the Company receives royalties on Janssens sales. REMINYL XL is a new once-daily prolonged release formulation of REMINYL. REMINYL XL was launched by the Company in the UK and Ireland in June 2005 and by Janssen in the US in May 2005 as RAZADYNE ER.
On April 11, 2005, Ortho-McNeil Neurologics Inc. (Janssens US affiliate company) announced that REMINYL would be marketed in the US under the new product name of RAZADYNE. Subsequently, in the US, REMINYL XL was launched as RAZADYNE ER. Ortho-McNeil Neurologics Inc. worked closely with the FDA on a name change following dispensing errors in the US, between REMINYL and the Type 2 diabetes mellitus drug known as AMARYL. The Company is only aware of one similar dispensing error outside the US.
On March 1, 2005, the National Institute for Health and Clinical Excellence (NICE) in England and Wales issued an Appraisal Consultation Document (ACD). This document included a recommendation that all existing approved products for the symptomatic treatment of mild to moderate Alzheimers disease in England and Wales should no longer be reimbursed by the National Health Service (NHS) when used in the treatment of new patients. The recommendation potentially affected sales of REMINYL and of REMINYL XL in England and Wales. An amended ACD was issued by NICE on January 23, 2006. The new ACD recommends that REMINYL and REMINYL XL, together with other drugs in the same class, be reimbursed by the NHS when used for the treatment of either (i) patients with existing Alzheimers disease already being treated with one of these drugs; or (ii) newly diagnosed patients once their disease has progressed to a moderate stage. Therefore the current recommendation excludes the reimbursement of treatment for patients presenting with mild symptoms of Alzheimers disease for which REMINYL and REMINYL XL are approved. A final appraisal document is expected from NICE in July 2006.
The Company is licensed to distribute the CALCICHEW range of calcium and calcium/vitamin D3 supplements for the adjunctive treatment of osteoporosis. Osteoporosis is characterised by a progressive loss of bone mass that renders bone fragile and liable to fracture. More than three million people in the United Kingdom (UK) are estimated to suffer from this condition.
SOLARAZE is a topical preparation for the treatment of Actinic Keratosis (AK). AK is a common form of pre-malignant skin tumour. AK is caused primarily by long-tem exposure to the sun (UV radiation) and may progress to squamous cell carcinoma (SCC) in up to 10% of cases. The reported incidence of AK is up to 25% in the northern hemisphere increasing to 60% in Australian adults.
In May 2002, the Company acquired the exclusive sales and marketing rights to SOLARAZE in Europe. In December 2002 the Company acquired additional right to manufacture, distribute and sell SOLARAZE in Australia, New Zealand, South Africa and other Pacific Rim markets.
LODINE SR contains etodolac 600mg in a sustained release formulation and is indicated for use in the treatment of rheumatoid arthritis and osteoarthritis in the UK and Republic of Ireland. More than seven million adults in the UK have long-term health problems associated with arthritis and related conditions.
The Company owns the exclusive UK sales and marketing rights to LODINE, as a result of its merger with Roberts Pharmaceuticals Corporation in December 1999.
Royalties received from antiviral products
The Company receives royalties on antiviral products that were out-licensed by Shire to GSK. These antiviral products are for Human Immunodeficiency Virus (HIV) and Hepatitis B. The table below lists these products, indicating the owner/licensor and marketer of the product and the territory in which the product is being marketed.
(1) This is not a comprehensive list of trademarks for this product. Other trademarks are used in some markets.
HIV is a retrovirus that has been isolated and recognized as the causative agent of Acquired Immunodeficiency Syndrome (AIDS). There are many strains of HIV throughout the world, although they all exhibit the same disease mechanism.
According to UNAIDS (a joint United Nations program on AIDS) by the end of 2005, 40.3 million people worldwide were living with HIV/AIDS, including 17.5 million women and 2.3 million children under the age of 15. In 2005, 4.9 million people became newly infected with HIV, including 700,000 children. Of these, 3.2 million new infections occurred in Sub-Saharan Africa. In an effort to combat the AIDS epidemic in Africa and reduce the cost of medicines used to treat AIDS in sub-Saharan Africa, Shire has waived a significant proportion of its royalty entitlements on sales of products containing lamivudine in this region.
According to an IMS report on World-Wide Antiretroviral Sales in 2005, the antiretroviral (anti-HIV) market reached $8.1 billion in sales, with nucleotide/nucleoside transcriptase inhibitors (such as 3TC) representing 55% of the market ($4.4 billion). The vast majority of sales were generated in North America and Western Europe.
Lamivudine was originally discovered by Shire BioChem Inc. (BioChem), a wholly-owned subsidiary of the Company, and was out-licensed to Glaxo Wellcome in 1990 (now part of GSK). Shire has licensed to GSK the worldwide rights, with the exception of Canada, to develop manufacture and sell lamivudine (now marketed in various single and combination formulations including 3TC/EPIVIR, COMBIVIR, TRIZIVIR and EPZICOM). In Canada 3TC is sold by the Company in partnership with GSK.
3TC (lamivudine) is indicated for the treatment of HIV infection and AIDS and was first approved in the US in November 1995. It is now marketed in the US as EPIVIR. Approval in Canada followed shortly after in December 1995 and in the EU in August 1996.
The safety and efficacy of 3TC together with 3TCs ease of administration has successfully established 3TC as the cornerstone of combination therapy in HIV infection. In combination with other antiretrovirals, 3TC is used in the majority of triple and quadruple combination therapies with other nucleoside analog, protease inhibitors and non-nucleoside reverse transcriptase inhibitors (NNRTI). It was also part of the pivotal clinical trials used as the basis for approval of five other HIV antiretroviral agents: the nucleoside analog abacavir, the NNRTI efavirenz, and the protease inhibitors indinavir, nelfinavir and amprenavir.
In September 1997, the FDA authorized the marketing of COMBIVIR, the first product to combine two antiretroviral drugs in a single tablet formulation. Each tablet of COMBIVIR contains 3TC and zidovudine (AZT) and can be taken twice daily, offering the advantage of reducing significantly the number of tablets a person on a 3TC/AZT based treatment regimen needs to take. COMBIVIR was approved for use in Europe in March 1998 and in Canada in December 1998.
In November 2000, the FDA authorized the marketing of TRIZIVIR in the US. Each tablet of TRIZIVIR contains 3TC, AZT and abacavir (ABC) and can be taken twice daily. TRIZIVIR was the first tablet to combine three anti-HIV agents. TRIZIVIR was approved for use in the EU in January 2001 and in Canada in October 2001.
In August 2004, the FDA authorized the marketing of EPZICOM in the US. Each tablet of EPZICOM contains 3TC and ABC and can be taken once a day. EPZICOM, in combination with other antiretroviral agents, is indicated for the treatment of HIV-1 infection in adults. In December 2004, the European commission and Japan authorized the marketing of EPZICOM in the EU and Japan.
Hepatitis B infection
Hepatitis B virus (HBV) is the causative agent of both acute and chronic forms of Hepatitis B, a liver disease that is a major cause of death and disease throughout the world. Two billion people worldwide have been infected with HBV. Of those infected, over 350 million people are chronically infected. Although vaccines to prevent infection by HBV are currently available, they have not been shown to be effective in those already infected with the virus.
ZEFFIX (lamivudine) is an orally available treatment for chronic hepatitis B infection and for the prevention of liver graft reinfection.
Shire has licensed to GSK the worldwide rights, with the exception of Canada, to develop manufacture and sell ZEFFIX, EPIVIR and HBV/HEPTOVIR. In Canada HEPTOVIR is sold by Shire in partnership with GSK.
Products under development
Shire focuses its development resources on late-stage development projects within its core therapeutic areas of CNS, GI, HGT and GP.
The table below lists the Companys key products under development by therapeutic area, indicating the most advanced development status reached in any market for each and Shires territorial rights.
Treatments for CNS disorders
DAYTRANA (previously known as METHYPATCH/MTS /SPD485)
In February 2003, the Company announced the acquisition of the worldwide sales and marketing rights of DAYTRANA from Noven. DAYTRANA is a skin patch where methylphenidate is diffused through the skin for the once-daily treatment of ADHD.
On December 23, 2005, Shire announced the receipt of an approvable letter from the FDA for once-daily use to treat ADHD in children aged 6 to 12 years. The approvable letter contains proposed labeling, as well as requests for data clarification, post-marketing surveillance, and post-marketing studies. The Company is in dialogue with the FDA to address these issues and hopes to reach final agreement with the FDA to allow launch in 2006.
The FDA has announced plans to continue further research to confirm or refute the findings of a published clinical study which suggested that methylphenidate treatment may be associated with chromosomal aberrations. Data from this study is not yet available and the likely impact of these findings on methylphenidate products cannot be predicted at the date of publication of this document.
In addition to FDA approval, an application must be made to the US Drug Enforcement Administration (DEA) for procurement quotas in order to obtain access to methylphenidate. The Company had previously disclosed that, under new legislation, the DEA could not establish procurement quotas for controlled substances (including methylphenidate) until the DEA reviewed and provided public comment on the product's labeling, promotion and risk management plan, and it was possible that this new review process could delay the granting of procurement quotas. This legislation has expired and not been renewed, and the DEA has now granted procurement quotas to the Company's partner, Noven. Manufacturing of the product has commenced.
The Company signed a collaborative agreement with New River on January 31, 2005, for the new chemical entity NRP104, for ADHD. NRP104 is an amphetamine pro-drug where lysine is linked to a d-amphetamine single salt. NRP104 is inactive until metabolized in the GI tract, and may accordingly offer the advantage of reduced potential for abuse or overdose versus traditional stimulants. On December 6, 2005, Shire and New River announced that New River had filed an NDA with the FDA for NRP104. On January 26, 2006, the FDA accepted the NDA for review.
Under the terms of the agreement, the Company will collaborate with New River on developing, manufacturing, marketing and selling NRP104 in the US.
In the rest of the world, the Company has a license to develop and commercialize NRP104.
SPD503 (modified release formulation of guanfacine) is a non-stimulant "non-scheduled" compound in Phase 3 development for use in ADHD. During 2005, representatives of the Company met with the FDA to discuss the proposed regulatory filing strategy. In order to optimize the characterization of the product in the label, the Company has agreed with the FDA to include results from an on-going study in its submission package. As a result, its FDA filing is expected in 2006.
SPD465 is a development project for the ADDERALL XR franchise. SPD465 is now in Phase 3 of development and its FDA filing is expected in 2006.
Development for SPD483, a development project for the ADDERALL XR franchise, is on hold to assure consistency with the Companys overall ADHD strategy.
Treatments for GI diseases
MESAVANCE (previously known as SPD476)
Ulcerative colitis is a serious chronic inflammatory disease of the colon. Typically patients go through periods of relapse and remission over a number of years. 5-aminosalicylic acid (5-ASA) based products are the first line treatment for ulcerative colitis. Existing treatments generally require the patients to ingest a large volume of pills and are differentiated by the manner of release of the active drug in the colon.
MESAVANCE (mesalamine) is an investigational compound being studied for the induction of clinical and endoscopic remission in patients with active, mild-to-moderate ulcerative colitis. It is a high strength (1200mg) product using a unique formulation and delivery platform, Multi Matrix System (MMX) to provide delayed and extended release of mesalamine throughout the colon. On December 22, 2005, Shire announced submission of an NDA to the FDA and in February 2006 submitted Marketing Authorization Applications (MAA) to European Regulatory Agencies. In January 2006, the Company also filed a New Drug Submission for MESAVANCE with Health Canada.
Shire has licensed the exclusive right to develop and commercialize MESAVANCE in the US, Canada, Europe (excluding Italy) and the Pacific Rim from Giuliani S.p.A.
Development for SPD480, a 5-ASA based foam product for the treatment of ulcerative colitis, was discontinued during the year as it no longer met the Companys criteria for continued development of the product.
Treatments for Human Genetic diseases
ELAPRASE (previously known as I2S)
ELAPRASE (idursulfase) is under development for the treatment of Hunter syndrome (Mucopolysaccharidosis Type II, or MPS II). Hunter syndrome is an inherited lysosomal storage disorder caused by a deficiency of the enzyme iduronate-2-sulfatase. As a result of this deficiency, complex carbohydrates accumulate in cells of the body, causing debilitating symptoms in the patient and many patients die during childhood. On November 23, 2005 a Biologics License Application (BLA) was filed with the FDA. If approved, it will be the first human enzyme replacement therapy for the treatment of Hunter syndrome. ELAPRASE has previously received Fast Track designation from the FDA, and the Company has subsequently received Priority Review of this submission, which has resulted in a six-month review. Orphan drug status has also been given by both the FDA and the European Medicines Evaluation Agency (EMEA). On December 1, 2005 submission of a MAA for idursulfase was made to the EMEA. Review of a MAA by the EMEA typically takes 12 months.
GA-GCB (Gene-Activated glucocerebrosidase) is being developed for the treatment of Gaucher disease. Gaucher disease is the most common of the inherited lysosomal storage diseases and is caused by a deficiency of the enzyme glucocerebrosidase. As a result of this deficiency, certain lipids accumulate in specific cells of the liver, spleen and bone marrow causing significant clinical symptoms in the patient, including enlargement of the liver and spleen, hematological abnormalities and bone disease.
In April 2004, TKT initiated a clinical trial to evaluate the safety and clinical activity of GA-GCB, its enzyme replacement therapy for the treatment of Gaucher disease. Results from this study were announced during the last quarter of 2005 and based upon these positive results the Company intends to commence a pivotal Phase 3 clinical trial in 2006.
Patent litigation proceedings in Israel with Genzyme Corporation relating to GA-GCB were dismissed in January 2006. See ITEM 3: Legal Proceedings, for further information.
Treatments for other diseases in the GP area
FOSRENOL (lanthanum carbonate), the Companys treatment for patients with end stage renal disease, received FDA approval for the 250mg and 500mg dosage strengths in October 2004 and approval for 750mg and 1000mg dosage strengths in November 2005. The first European approval (by reference member state Sweden) was granted in March 2004 (see currently marketed products section above). In December 2005, FOSRENOL was launched by the Company in Ireland and via its distributors in Sweden, Denmark and Austria. The Company continues its discussions relating to FOSRENOL with regulatory authorities across Europe and other regions and further launches are expected in European markets over the next few months, subject to obtaining national approvals and concluding pricing and reimbursement negotiations.
DYNEPO (epoetin delta) was approved in the EU in March 2002 and is indicated for the treatment of anemia in patients with chronic renal failure. It may be used in patients on dialysis and patients not on dialysis. The Company is preparing for commercial manufacture in Europe and expects to commence a staged launch in Europe of the product in the first half of 2007.
Patent litigation proceedings relating to DYNEPO are in progress in the US. See ITEM 3: Legal Proceedings, for further information.
Principal licensing and collaborative agreements
REMINYL and REMINYL XL
Pursuant to an agreement with Synaptech Inc. (Synaptech), the owner of the patents on galantamine for use in the treatment of Alzheimer's disease, the Company has the exclusive right under Synaptechs patents and know-how to develop, manufacture and sell REMINYL and REMINYL XL for use in the treatment of Alzheimer's disease and related dementias worldwide except North America, Japan, Korea, Taiwan, Thailand and Singapore. The Company pays Synaptech royalties on the net sales of REMINYL and REMINYL XL by the Company and its sublicensees in these territories for Alzheimer's disease and related dementias.
The Company, in turn, entered into a sub-license with Janssen under which it granted Janssen exclusive rights under the Synaptech patents and know-how to develop, manufacture and sell REMINYL and REMINYL XL for use in Alzheimer's disease and related dementias in all territories licensed to the Company, except the UK and the Republic of Ireland. Janssen pays the Company royalties on its net sales of REMINYL and REMINYL XL for Alzheimers disease and related dementias. Janssen has entered into a separate license agreement with Synaptech covering North America, Japan, Korea, Taiwan, Thailand and Singapore.
The Company has also entered into a co-development, know-how and supply agreement with Janssen under which it licensed to Janssen all of its global clinical data and know-how relating to the use of galantamine in Alzheimer's disease and related dementias worldwide, except for the UK and the Republic of Ireland. In consideration for this license over Shires clinical data and know-how, Janssen pays the Company additional royalties on its net sales of REMINYL and REMINYL XL for Alzheimers disease and related dementias. The Company has the right to acquire any improvements for REMINYL and REMINYL XL developed or acquired by Janssen, including any new formulations or any new indications, in the UK and the Republic of Ireland. In return for such rights, the Company has agreed to pay a small percentage of any R&D or acquisition costs incurred.
The Company and Janssen co-promoted REMINYL and REMINYL XL in the UK and the Republic of Ireland until May 3, 2004. With effect from May 3, 2004, the Company terminated the co-promotion arrangement with Janssen and the Company purchased the exclusive rights to promote REMINYL and REMINYL XL in the UK and the Republic of Ireland for $30 million.
By agreement between the Company and GSK and certain of it affiliates dated January 31, 1990, and amended as at November 20, 1995, February 15, 2002, May 20, 2002 and February 20, 2004, the Company licensed to GSK the worldwide rights, with the exception of Canada, to develop, manufacture and sell the nucleoside analog lamivudine marketed as 3TC, ZEFFIX, HEPTODIN, HEPTOVIR, EPIVIR, EPIVIR-HBV, COMBIVIR, TRIZIVIR and EPZICOM (3TC and Abacavir) (together referred to in this section as lamivudine). A partnership exists between GSKs Canadian subsidiary, Glaxosmithkline Inc., and the Company to supply, market and sell lamivudine in Canada. GSK has agreed to manufacture all the required lamivudine to be supplied in Canada by the partnership.
In consideration for the grant of such rights, GSK agreed to undertake and fund the development of lamivudine and to pay the Company a royalty on sales of lamivudine. The amount of relevant patent prosecution costs and certain contractual and litigation costs may be deducted from royalties payable to the Company by GSK. If GSK terminates the license agreement as a result of a default by the Company, GSK will retain a non-exclusive, paid-up license from the Company to make, have made, use and sell lamivudine worldwide.
The Company acquired the rights to the global patents for FOSRENOL from AnorMED Inc. in 2004. Under the terms of the acquisition agreement, the Company was required to pay AnorMED $18 million when FOSRENOL was approved in the US, $7 million upon obtaining approval in certain European countries and $6 million upon obtaining regulatory approval in Japan. In return for these payments AnorMED is required to assign the relevant patent rights to the Company. As Shire owns the patents there will be no obligation to make any royalty payments to AnorMED.
As at December 31, 2005, $18 million has been paid as a result of FOSRENOL's approval in the US, $1 million has been paid as a consequence of FOSRENOLs approval in Sweden and $6 million remains outstanding pertaining to regulatory approvals yet to be obtained in Europe. An assignment agreement relating to all FOSRENOL patents outside Europe and Japan has been executed by the parties and has been filed at the relevant patent offices.
By an agreement between the Company and Bayer Yakuhin Limited (Bayer) dated December 8, 2003, Shire granted Bayer the exclusive right to develop, register, formulate, package, label, market and sell lanthanum carbonate under the brand name FOSRENOL in Japan. In consideration of the grant of these rights, Bayer has agreed to fund the development of lanthanum carbonate in Japan and pay the Company a royalty on sales of lanthanum carbonate. Bayer has agreed to pay the Company a milestone payment of $8 million on receipt of marketing authorization in Japan. Bayer has granted the Company a non-exclusive, royalty-free, perpetual license to use any know-how or data developed or generated by Bayer during its development activities under the agreement for the registration, marketing, sale and use of FOSRENOL in any country outside Japan.
DAYTRANA (previously known as METHYPATCH/MTS)
In February 2003, the Company acquired from Noven the worldwide sales and marketing rights to DAYTRANA, a methylphenidate transdermal delivery system for the once daily treatment of ADHD. The Company made an upfront milestone payment of $25 million for these rights. The Company is committed to pay an additional $50 million upon regulatory approval of the product. In addition the Company has an obligation to make further milestone payments, which are linked to the future sales performance of the product, of up to $75 million.
In January 2005, Shire entered into an agreement with New River to collaborate in developing, manufacturing, marketing and selling NRP104 in the US. In the rest of the world, Shire acquired the license to develop and commercialize NRP104, in return for which New River will receive a low double-digit royalty.
Shire will account for the US product sales and New River may supply up to 25% of the sales effort in the US under a co-promotion right. New River will be financially and operationally responsible for clinical and manufacturing development in the US.
Upon FDA approval, the parties will divide US operating profit in accordance with the following general principles: Shire will retain 75% of profits for the first two years following launch and the parties will share the profits equally thereafter.
Shire paid an initial sum of $50 million on signing and a further $50 million has been paid to New River following acceptance of filing of the NDA by the FDA in January 2006. Up to $300 million in milestone payments could also be payable to New River depending on the characteristics of the FDA approved product labeling. A $5 million milestone payment is payable following the first commercial sale in specified European countries. An additional $100 million milestone would be payable upon achieving a significant sales target.
Shire may be entitled to refunds of amounts previously paid in the event of a delayed product approval.
In May 1994, TKT entered into a collaboration and development agreement with Marion Merrill Dow, Inc. focused on the development of DYNEPO. Marion Merrill Dow, Inc. was subsequently acquired by Aventis Pharmaceuticals, Inc. (Aventis), which is now a subsidiary of Sanofi-Aventis SA. Under the agreement, Aventis initially was responsible for obtaining regulatory approval and selling and marketing DYNEPO throughout the world. The agreement was amended on March 26, 2004, and TKT regained exclusive rights to make, use and sell DYNEPO outside the US. Aventis retains the exclusive rights to make, use and sell DYNEPO in the US. Under the amended agreement, TKT agreed to pay Aventis a single-digit percentage royalty on the Companys net sales of DYNEPO outside the US. Aventis is obligated to pay TKT a low double-digit percentage royalty on Aventis net sales of DYNEPO in the US. Aventis also has agreed to pay TKT $8 million upon the achievement of a specified commercial milestone. TKT and Aventis are involved in patent infringement actions in the US with Amgen Inc. See ITEM 3: Legal Proceedings for further information.
Manufacturing and distribution
Active pharmaceutical ingredient sourcing
ADDERALL: Boehringer-Ingelheim is currently the sole supplier of amphetamine salts from two separate facilities in Virginia, US.
CARBATROL: Orgamol SA (part of BASF) is currently the sole supplier of carbamazepine from two separate facilities located in Switzerland and in France.
PENTASA: Bayer is currently the sole supplier of mesalamine from a single site in Germany. The Company protects supply to the market by carrying significant inventories.
AGRYLIN/XAGRID: Cambridge Major Laboratories, Inc. is currently the sole supplier of anagrelide from its facility in Wisconsin, US. The Company protects supply to the market by carrying significant inventories.
REPLAGAL: The sole source of agalsidase alpha is the Companys protein manufacturing plant in Cambridge Massachusetts, US. Dual sourcing at this point would be prohibitively expensive and the Company protects supply to the market by carrying significant inventories.
ADDERALL XR: DSM Pharmaceuticals Inc. (DSM) is the primary manufacturer of ADDERALL XR, with Shires Owings Mills manufacturing facility being the secondary manufacturer.
CARBATROL: Owings Mills is the single manufacturer of the beads used in the delivery of CARBATROL and the primary manufacturer for encapsulation and packaging, with DSM being the secondary manufacturer for encapsulation and packaging.
PENTASA: Owings Mills is the primary manufacturer of PENTASA, with Aventis being the secondary manufacturer.
AGRYLIN/XAGRID: Tyco is the single supplier of AGRYLIN/XAGRID. The targeted inventory strategy (for XAGRID) is 26 weeks of bulk, unlabeled or labeled supply.
REPLAGAL: Shires HGT facility in Cambridge, Massachusetts is the single supplier of REPLAGAL. Duplication of this facility would be prohibitively expensive.
Other: Shires other products marketed in the US and Canada are manufactured and packaged by third party contract manufacturers.
All products marketed by the international sales and marketing operation are either manufactured and supplied by the originator of the product under supply arrangements or are manufactured for Shire by third parties under contract.
Shires US distribution center, which includes a large vault to house DEA-regulated Schedule II products, is located in Kentucky. From there, the Company distributes its products to all the wholesale distribution centers and the three major warehousing pharmacy chains that stock Schedule II drugs in the US, providing access to nearly all pharmacies in the US.
Physical distribution in the UK, Spain, Italy, France, Germany and the Republic of Ireland is contracted out to third parties and agency or distribution agreements are in place for other export territories where Shire does not have local operations.
The Companys three largest trade customers are Cardinal Health Inc., McKesson Corp., and Amerisource Bergen Corp., all of which are in the US. In 2005, these wholesale customers accounted for approximately 37%, 22%, and 10% of total product sales, respectively.
During 2005, the Company concluded new fee for service agreements with two of its three significant wholesale customers. These agreements, which are commonplace in the pharmaceutical industry, change the way wholesalers are compensated. Under the agreements, the wholesalers receive a distribution fee from pharmaceutical suppliers. These fee for service agreements eliminate wholesalers' incentives to acquire and hold excess inventories. The Company believes this will reduce the significant impact of wholesaler stocking and de-stocking on its product sales. Further, the wholesalers will provide data regarding their inventories of the Company's products it has on hand. The Company is negotiating a fee for service agreement with its remaining significant wholesale customer. Fees for service are treated as a sales deduction, thus affecting revenues rather than cost of sales.
An important part of the Companys business strategy is to protect its products and technologies through the use of patents and trademarks, to the extent available. The Company also relies on trade secrets, unpatented know-how, technological innovations and contractual arrangements with third parties to maintain and enhance its competitive position where it is unable to obtain patent protection or where marketed products are not covered by specific patents. Shires commercial success will depend, in part, upon its ability to obtain and enforce strong patents, to maintain trade secret protection, to operate without infringing the proprietary rights of others and to comply with the terms of licenses granted to it. The Companys policy is to seek patent protection for proprietary technology whenever possible in the US, Canada, major European countries and Japan. Where practicable, the Company seeks patent protection in other countries on a selective basis. In all cases the Company endeavors to either obtain patent protection itself or support applications by its licensors.
In the regular course of business, Shires patents may be challenged by third parties. Shire is a party to litigation or other proceedings relating to intellectual property rights. Details of ongoing litigation are provided in ITEM 3: Legal Proceedings.
The degree of patent protection afforded to pharmaceutical inventions around the world is uncertain. If patents are granted to other parties that contain claims having a scope that is interpreted by the relevant authorities to cover any of Shires products or technologies, there can be no guarantee that Shire will be able to obtain licenses to such patents or make other arrangements at reasonable cost, if at all.
The existence, scope and duration of patent protection varies among the Companys products and among the different countries where the Companys products may be sold. It may also change over the course of time as patents grant or expire, or become extended, modified or revoked. The following list sets forth details of the granted US patents pertaining to the Companys currently marketed products and major products under development, or technology relating to those products, which are owned by or licensed to the Company and that are material to an understanding of the Companys business taken as a whole. The Company also holds patents in other jurisdictions, such as the European Union, Canada and Japan and has patent applications pending in such jurisdictions, as well as in the US.
The expiration of patents or the loss of patent protection following a legal challenge may result in third parties commencing commercial sales of their own versions of the Companys products. The Companys sales of such product(s) may decrease in consequence. In many cases, however, the Companys products have more than one patent pertaining to them. In such cases, or where the Company enjoys trade secrets, manufacturing expertise, patient preference or regulatory exclusivity, the Company may continue to market its own products without its commercial sales of those products being adversely affected by the loss of any given patent.
Shire believes that competition in its markets is based on, among other things, product safety, efficacy, convenience of dosing, reliability, availability and price. Companies with more resources and larger R&D expenditures than Shire have a greater ability to fund the research and clinical trials necessary for regulatory applications, and consequently may have a better chance of obtaining approval of drugs that would then compete with Shires products. Other products now in use or being developed by others may be more effective or have fewer side effects than the Companys current or future products. The market share data provided below is sourced from IMS.
Competition in the US ADHD market has continued to increase as several products that do (or will) compete with the Companys products have been launched in recent years. Among the new entrants will be DAYTRANA, the Companys methylphenidate product, which is currently in registration.
Many of these products contain methylphenidate. In 2000, Johnson and Johnson (in conjunction with ALZA) launched CONCERTA, a once-daily formulation of methylphenidate. At December 31, 2005, CONCERTA had a 23% share of the US ADHD market. In 2001, UCB Pharma launched METADATE CD, a once-daily formulation of methylphenidate. At December 31, 2005, METADATE CD had a 3% share of the US ADHD market. In 2002, Novartis (in conjunction with Elan) launched RITALIN LA, an extended release formulation of methylphenidate, and in 2005 launched FOCALIN XR (in conjunction with Celgene Corporation (Celgene)), a long-acting formulation of dexmethylphenidate, the active ingredient of traditional methylphenidate preparations. At December 31, 2005 RITALIN and FOCALIN XR had a 4% and 3% share, respectively, of the US ADHD market.
In 2002, Barr Laboratories Inc. (Barr) launched a generic version of ADDERALL IR. Subsequently, five additional generic companies have launched generic versions. Total ADDERALL IR generic prescriptions account for about 10% of the market as at December 31, 2005.
In 2003, Eli Lilly launched STRATTERA, a non-stimulant, non-scheduled treatment for ADHD. At December 31, 2005, STRATTERA had a 13% share of the US ADHD market. The Companys non-stimulant product, SPD503, is in Phase 3.
In 2005, Cephalon Inc. (Cephalon) received an approvable letter from the FDA to market SPARLON for the treatment of ADHD in children and adolescents aged 6-17. Cephalon has announced that it expects to launch SPARLON during the second quarter of 2006, subject to final FDA approval. Also in 2005, Cephalon announced an agreement with the McNeil consumer and specialty pharmaceuticals division of McNeil-PPC, Inc., to co-promote SPARLON.
The Company is also aware of clinical development efforts by GSK, Gliatech Inc., Cortex Pharmaceuticals Inc., Boehringer-Ingelheim, Eisai Inc., Bristol-Myers Squibb (in collaboration with Elan) and Abbott Laboratories Inc. to develop additional indications and new non-stimulant treatment options for ADHD.
Generic and other possible competition to the Companys ADHD franchise is separately discussed in Intellectual Propertyabove, in Risk Factors below, and in ITEM 3: Legal Proceedings.
The HIV competitive landscape is becoming more crowded and complicated as treatment trends evolve.
In the Nucleoside/Nucleotide Reverse Transcriptase Inhibitor (NRTI) market of which 3TC/EPIVIR is a part, there are a number of anti-HIV drugs which are currently sold.
Of the branded drugs available, ZIAGEN (abacavir) and RETROVIR (zidovudine), each sold by GSK, ZERIT (stavudine, d4T) and VIDEX (didanosine) sold by Bristol-Myers Squibb (BMS), HIVID (zalcitabine) sold by Roche and VIREAD (tenofovir) and EMTRIVA (emtricitabine), each sold by Gilead Sciences Inc. (Gilead), represent the most direct competition.
In the Combined NRTI market of which TRIZIVIR, COMBIVIR and EPZICOM are a part, there is one major competitor – TRUVADA sold by Gilead.
Other HIV competition
In addition to the two NRTI HIV markets in which Shire operates, there is competition from:
Generic HIV competitors
BMSs VIDEX EC (didanosine) became the first generic HIV product in the United States in 2004. GSKs RETROVIR (AZT) came off patent in the US in September 2005 and its patent in Europe expires in March 2006. Although in September 2005 several generic formulations of zidovudine were approved by the FDA, these generic competitors have yet to fully ramp up production and distribution. As a result, the full effect of this on the overall market for HIV products is unknown, but price decreases for all HIV products may result.
The clinical development, manufacturing and marketing of Shires products are subject to governmental regulation in the US, the EU and other territories. The Federal Food, Drug, and Cosmetic Act and the Public Health Service Act in the US, and numerous directives and guidelines in the EU govern the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Companys products. Product development and approval within these regulatory frameworks takes a number of years and involves the expenditure of substantial resources.
Regulatory approval is required in all the major markets in which Shire, or its licensees, seek to test or market products. At a minimum, such approval requires the evaluation of data relating to the quality, safety and efficacy of a product for its proposed use. The specific types of data required and the regulations relating to this data will differ depending on the territory, the drug involved, the proposed indication and the stage of development.
In general, for a new chemical entity, the product needs to undergo rigorous preclinical testing. Clinical trials for new products are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the pharmaceutical compound into healthy human volunteers, the emphasis is on testing for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase II involves studies in a limited patient population to determine the initial efficacy of the pharmaceutical compound for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effects and safety risks. Once a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate more fully clinical outcomes.
It is the Companys responsibility to ensure that it conducts its business in accordance with the regulations of each relevant territory.
Information generated in this process is susceptible to varying interpretations that could delay, limit or prevent regulatory approval at any stage of the approval process. The failure to demonstrate adequately the quality, safety and efficacy of a therapeutic drug under development could delay or prevent regulatory approval of the product. There can be no assurance that, if clinical trials are completed, either the Company or its collaborative partners will submit applications for required authorizations to manufacture and/or market potential products (including a marketing authorization application, NDA or ANDA) or that any such application will be reviewed and approved by the appropriate regulatory authorities in a timely manner, if at all.
In order to gain marketing approval the Company must submit a dossier to the relevant regulatory authority for review. The format is usually specific and laid out by each authority, although in general it will include information on the quality (chemistry, manufacturing and pharmaceutical) aspects of the product as well as the non-clinical and clinical data. The FDA undertakes the review for the US; in Europe the review may be undertaken by members of the Committee for Medicinal Products for Human Use (CHMP) on behalf of the EMEA as part of a centralized procedure or by an individual country's agency, followed by mutual recognition of this review by a number of other countries' agencies, depending on the process applicable to the drug in question. Approval can take from several months to several years, or be denied. The approval process can be affected by a number of factors; additional studies or clinical trials may be requested during the review and may delay marketing approval and involve unbudgeted costs. The agency may conduct an inspection of relevant facilities or review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each drug manufacturing facility must be approved. Further inspections may occur over the life of the product. An inspection of the clinical investigation sites by a competent authority may be required as part of the regulatory approval procedure. As a condition of approval, the regulatory agency may require post-marketing surveillance to monitor for adverse effects, or other additional studies as deemed appropriate. After approval for the initial indication, further clinical studies are usually necessary to gain approval for any additional indications. The terms of any approval, including labeling content, may be more restrictive than expected and could affect the marketability of a product.
In the US, the Drug Price Competition and Patent Restoration Term Act of 1984, known as the US Hatch-Waxman Act, established a period of marketing exclusivity for brand name drugs as well as abbreviated application procedures for generic versions of those drugs. Approval to manufacture these drugs is obtained by filing an ANDA. As a substitute for conducting full-scale pre-clinical and clinical studies, the FDA will accept data establishing that the drug formulation, which is the subject of an abbreviated application, is bio-equivalent and has the same therapeutic effect as the previously approved drug, among other requirements. European guidelines also allow for the submission of abridged applications using similar criteria to the US system.
For both currently marketed and future products, failure to comply with applicable regulatory requirements after obtaining regulatory approval can, among other things, result in the suspension of regulatory approval, as well as possible civil and criminal sanctions. Periodic marketing authorization renewals in Europe may require additional data, which, if unfavorable, may result in an authoritization being withdrawn. In the US, the FDA has the authority to revoke or suspend approvals of previously approved products, to prevent companies and individuals from participating in the drug-approval process, to request recalls, to seize violative products, to obtain injunctions to close manufacturing plants not operating in conformity with regulatory requirements and to stop shipments of violative products. The branch of the FDA responsible for drug marketing oversight routinely reviews company marketing practices and also may impose pre-clearance requirements on materials intended for use in marketing of approved products. Changes in government regulation could have a material adverse effect on the Companys financial condition and results of operation.
In recent years, in the US, various legislative proposals at the federal and state levels could bring about major changes in the affected health care systems. Some states have passed such legislation, and further federal and state proposals are possible. Such proposals and legislation include, and future proposals could include, price controls or patient access constraints on medicines and increases in required rebates or discounts. Similar issues exist in Europe. The Company cannot predict the outcome of such initiatives, but will work to maintain patient access to its products and to oppose price constraints. Additionally, legislation is being debated at the federal level in the US that could allow patient access to drugs approved in other countries most notably Canada. This is generally referred to as drug re-importation. Although there is substantial opposition to this potential legislation within areas of the federal government, including the FDA, the Company cannot predict the outcome of such legislative activities pertaining to drug re-importation.
In the US, recent federal legislation has created substantial changes in the Medicare program, including the December 2003 enactment of the Medicare Prescription Drug Improvement and Modernization Act. Under this legislation, Medicare beneficiaries will be eligible to obtain a Medicare-endorsed, drug discount card from a private sector provider through 2005. Beginning in 2006, Medicare beneficiaries are able to purchase prescription drug coverage from a private sector provider. It is difficult to predict the long-term impact of this legislation on pharmaceutical companies. Usage of pharmaceutical products may increase as the result of expanded access to medications afforded by partial reimbursement under Medicare. However, such potential sales increases may be offset by increased pricing pressures due to enhanced purchasing power of the private sector that will negotiate on behalf of Medicare beneficiaries.
Additionally, federal and state proposals have called for substantial changes in the Medicaid program. US law requires the Company to give rebates to state Medicaid agencies based on each states reimbursement of pharmaceutical products under the Medicaid program. Rebates potentially could be viewed as price discounts without appreciable increases in Shires product sales volume as an offset. The Company must also give discounts or rebates on purchases or reimbursements of pharmaceutical products by certain other federal and state agencies and programs.
Similar regulatory and legislative issues are encountered in Europe and other international markets where governments regulate pharmaceutical prices and patient reimbursement levels. The differing approach to price regulation has led to some third party trade in Shires products from markets with lower prices. Exploitation of price differences between countries in this way can impact sales in those markets with higher prices.
The US DEA also controls the national production and distribution in the US of Scheduled drugs (i.e. those containing controlled substances) by allocating production quotas based, in part, upon the DEAs view of national demand. As Schedule II drugs, the production and sale of Shires ADHD products are strictly controlled.
New pharmaceutical legislation in the EU, enacted in November 2005, has an impact on the procedures for authorization of pharmaceutical products in the EU. A new decentralized drug review and authorization procedure has been added to the centralized and the mutual recognition procedures. The new procedure provides an alternative authorization procedure to the mutual recognition procedure for those drugs that are ineligible for a centralized review. Requirements for the innovation in a drug therapy that must be present to be submitted under the centralized" review procedure have been clarified as part of the revised regulation.
The new EU legislation also contains new data protection provisions. All products will be subject to an 8+2+1 exclusivity regime. A generic company may file a marketing authorization application for that product with the health authorities eight years after the innovator has received its first community authorization for a medicinal product. The generic company may not commercialize the product until after either ten (8+2) or eleven years (8+2+1) have elapsed from the date of grant of the initial marketing authorization. The one-year extension is available if the innovator obtains an additional indication during the first eight years of the marketing authorization that is of significant advancement in clinical benefit.
Third party reimbursement
The Companys revenue depends, in part, upon the price third parties, such as health care providers and governmental organizations, are willing to reimburse patients for the cost of our, or our competitors, similar products and related treatment. These third party payers are increasingly challenging the pricing of pharmaceutical products and/or seeking pharmaco-economic data to justify their negotiated reimbursement prices. In the US, several factors outside Shires control could significantly influence the sale prices of pharmaceutical products, including Medicare Part D, the ongoing trend toward managed healthcare, and the renewed focus on reducing costs in state Medicaid and other government insurance programs. For example, revisions or clarification from Centers for Medicare and Medicaid Services (CMS) related to state Medicaid and other government reimbursement programs may have retroactive application which may result in changes to managements estimated rebate liability reported in a prior period. At the time of sale, revenues from the Companys products are reasonably estimable with the aid of historical trend analysis and consideration of any current period changes in pricing practices. The rebates can be reasonably determinable at the time of sale to the initial customers. These factors would not impact our revenue recognition policy under generally accepted accounting principles.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 established a voluntary drug benefit for Medicare beneficiaries and created the new Medicare Part D. Medicare Part D gives elderly and disabled people, already on Medicare, access to prescription drug coverage starting in January 2006. The impact of Part D on Shires portfolio is not expected to be material but will be monitored closely as the program evolves.
Similar developments may take place in the EU markets, where the emphasis will likely be on price controls and non-reimbursement for new and highly priced medicines for which the economic as well as the therapeutic rationales are not established. Significant uncertainty exists about the reimbursement status of newly approved pharmaceutical products. There can be no assurance that reimbursement will be available for any of Shires future product launches. Limits on reimbursement available from third party payers may reduce the demand for the Companys products. Price applications in Europe have delayed product launches in some countries for up to two years and, as a consequence, dates for product launches and associated recognition of revenue cannot be predicted with accuracy.
Corporate Responsibility (CR)
The Company has further developed its approach to CR, with new members representing Human Resources, Facilities, Marketing, Risk Management and Environmental Health & Safety joining the CR Committee. The Committee, chaired by Angus Russell, the CFO, meets three times a year and sets and monitors CR objectives for each impact area.
In the pharmaceutical industry, the Companys employees are vital to its success. The Company believes that it has a good relationship with its employees. As at December 31, 2005 the Company had 2,403 employees.
The Company maintains a website on the World Wide Web at www.shire.com. The company makes available on its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Shire's reports filed with, or furnished to, the SEC are also available on the SEC's website at www.sec.gov. The information on the Companys website is neither part of nor incorporated by reference in this Annual Report on Form 10-K.
ITEM 1A: Risk Factors
The Company has adopted a risk management strategy that enables it to identify, assess and manage the significant risks that it faces. While the Company aims to identify and manage such risks, no risk management strategy can provide absolute assurance against loss.
Set out below are the key risk factors, generally associated with the business, that have been identified through the Company's approach to risk management. These risk factors apply equally to the Company and, therefore, they should all be carefully considered before any investment is made in Shire.
Any decrease in the sales of ADDERALL XR will significantly reduce revenues and earnings.
In 2005, sales of ADDERALL XR were $730.8 million, representing approximately 46% of the Company's revenues. Any factors that decrease sales of ADDERALL XR will significantly reduce revenues and earnings and have a material adverse effect on the Company's financial condition and results of operations. These include:
ITEM 3 of this Form 10-K for details of current patent litigation);
Any decrease in the sales of 3TC could significantly reduce revenues and earnings.
The Company receives royalties from GSK on the worldwide sales of 3TC. In 2005, the Company's royalty income for 3TC sales was $159.8 million, representing approximately 10% of total revenues. This income stream generates a larger proportion of net income relative to the Company's own product sales as there are minimal costs associated with this income.
Any factors that decrease sales of 3TC by GSK could significantly reduce the Company's revenues and earnings. These include:
Future revenues from product sales will be impacted by the commercial success of the Companys new products.
The commercial success of the Companys new products will depend on their approval and acceptance by physicians, patients and other key decision-makers, as well as the timing of the receipt of marketing approvals, the scope of marketing approval as reflected in the products label, the countries in which such approvals are obtained, the acceptance of price in those countries where price is negotiated, and safety, efficacy, convenience, and cost-effectiveness of the product as compared to competitive products. If the Company is unable to commercialize these products successfully, there may be an adverse effect on the Company's revenues, financial condition and results of operations.
The introduction of new products by competitors may impact future revenues.
The manufacture and sale of pharmaceuticals is highly competitive. Many of the Company's competitors are large, well-known pharmaceutical, biotechnology, chemical and healthcare companies with considerable resources. Companies with more resources and larger R&D expenditures have a greater ability to fund clinical trials and other development work necessary for regulatory applications. They may also be more successful than the Company in licensing new products for development and commercialization. Further, they may also have an improved likelihood of obtaining approval of drugs that may compete with those marketed or under development by the Company. If any product that competes with one of the Company's principal drugs is approved, the Company's sales of that drug could fall.
The pharmaceutical and biotechnology industries are also characterized by continuous product development and technological change. The Company's products could, therefore, be rendered obsolete or uneconomical, through the development of new products, technological advances in manufacturing, or production by its competitors.
The failure to obtain reimbursement, or an adequate level of reimbursement, by third-party payers in a timely manner for certain of the Companys products may impact future revenues.
The prices for certain of the Companys products when commercialized, including, in particular, products for the treatment of rare genetic diseases, may be high compared to other pharmaceutical products. The Company may encounter particular difficulty in obtaining satisfactory pricing and reimbursement for products likely to have a high
annual cost of therapy. The failure to obtain pricing and reimbursement at satisfactory levels for such products may adversely affect revenues.
A disruption to the product supply chain may result in the Company being unable to continue marketing or developing a product or may result in the Company being unable to do so on a commercially viable basis.
The Company has its own manufacturing capability for certain products and has also entered into supply agreements with third party contract manufacturers. In the event of either the Company's failure or the failure of any third party contract manufacturer to comply with mandatory manufacturing standards (cGMP) in the countries in which the Company intends to sell or have its products sold, the Company may experience a delay in supply or be unable to market or develop products.
The Company dual-sources certain key products and their active ingredients. This has been a key goal of the Company's supply chain function in recent years. However, there is currently reliance on a single source for production of the final drug product for each of REPLAGAL, CARBATROL, AGRYLIN, XAGRID, REMINYL, DYNEPO, GA-GCB and ELAPRASE and reliance on a single active ingredient source for each of PENTASA, REPLAGAL, FOSRENOL, AGRYLIN and REMINYL.
There is no assurance that suppliers will continue to supply on commercially viable terms, or be able to supply components that meet regulatory requirements. The Company is also subject to the risk that suppliers will not be able to meet the quantities needed to meet market requirements.
The Company also has its own warehousing and distribution capability for certain products and has entered into distribution agreements with third party distributors for certain services. The failure of either the Company's or a third party's service could result in the Company being unable to continue to distribute its products.
The development and approval of the Company's products depends on the ability to procure active ingredients and special packaging materials from sources approved by regulatory authorities. As the marketing approval process requires manufacturers to specify their own proposed suppliers of active ingredients and special packaging materials in their applications, regulatory approval of a new supplier would be required if active ingredients or such packaging materials were no longer available from the specified supplier. The need to qualify a new supplier could delay the Company's development and commercialization efforts.
The Company uses bovine-derived serum sourced from Canada and the United States in some of its manufacturing processes. The discovery of additional cattle in either Canada or the United States with bovine spongiform encephalopathy, or mad cow disease, could cause the regulatory agencies in some countries to impose restrictions on certain of the Companys products, or prohibit the Company from using its products at all in such countries.
Fluctuations in wholesale buying patterns may influence net sales and growth comparisons.
A significant portion of product sales are made to major pharmaceutical wholesale distributors as well as to large pharmacies in both the United States and Europe. Consequently, product sales and growth comparisons may be affected by fluctuations in the buying patterns of major distributors and other trade buyers. These fluctuations may result from seasonality, pricing, wholesaler buying decisions, or other factors.
In the event of financial failure of certain customers, the Company may suffer financial loss and a decline in revenues.
In the US, the Company's significant trade customers include McKesson Corp., Cardinal Health Inc., and Amerisource Bergen Corp. For the fiscal year to December 31, 2005, the three largest trade customers, McKesson Corp., Cardinal Health Inc, and Amerisource Bergen Corp., accounted for approximately 37%, 22%, and 10% of product sales, respectively. The loss of any one of these customers could have a material adverse effect on the Company's financial condition and results of operations.
The actions of certain customers can affect the Company's ability to sell or market products profitably.
A small number of large wholesale distributors control a significant share of the US and UK markets. In 2005, for example, approximately 69% of the Company's product sales were attributable to three customers. In addition, the number of independent drug stores and small chains has decreased as retail pharmacy consolidation has occurred. Consolidation or financial difficulties could cause customers to reduce their inventory levels, or otherwise reduce purchases of the Company's products. Such actions could have an adverse effect on the Company's revenues, financial condition and results of operations.
The actions of governments, industry regulators and the economic environments in which it operates, may adversely affect the Company's ability to develop and market its products profitably.
Changes to laws or regulations impacting the pharmaceutical industry, which are made in any country in which the Company conducts its business, may adversely impact the Company's sales, financial condition and results of operations. In particular, changes to the regulations relating to orphan drug status may affect the exclusivity granted
to products with such designation. Changes in the general economic conditions in any of the Company's major markets may also affect the Company's sales, financial condition and results of operations.
The Company's revenues are partly dependent on the level of reimbursement provided to the Company by governmental reimbursement schemes for pharmaceuticals. Changes to governmental policy or practices could adversely affect the Company's sales, financial condition and results of operations. In addition, the cost of treatment established by health care providers, private health insurers and other organizations, such as health maintenance organizations and managed care organizations are under downward pressure and this, in turn, could impact on the prices at which the Company can sell its products.
The market for pharmaceutical products could be significantly influenced by the following, which could result in lower prices for the Company's products and/or a reduced demand for the Company's products:
In the United States, a law reform proposal currently under consideration by the US Senate, the Pharmaceutical Market Access and Drug Safety Act of 2005, would allow the re-importation into the United States of prescription drugs from specified countries, including Canada and countries in the European Union, within a year of its enactment. Passage of this law reform proposal has the potential to increase greatly the rate of parallel importation into the United States. Parallel importation occurs when an importer finds a cheaper price for a product or equivalent product on the world market and imports that product from the lower price jurisdiction to the higher price jurisdiction. If the parallel importation of lower priced drugs is permitted in the United States, it could have the effect of reducing sales of equivalent drugs in the United States. To the extent that parallel importation increases, the Company may receive less revenue from its commercialized products. The enactment of the proposed legislation could accordingly have an adverse effect on the Companys financial condition and results of operations.
In Europe, the parallel importation of prescription drugs is permitted in some circumstances.
If the Company's projects or clinical trials for the development of products are unsuccessful, its products will not receive authorization for manufacture and sale.
Due to the complexity of the formulation and development of pharmaceuticals, the Company cannot be certain that it will successfully complete the development of new products, or, if successful, that such products will be commercially viable.
Before obtaining regulatory approvals for the commercial sale of each product under development, the Company must demonstrate through clinical and other studies that the product is of appropriate quality and is safe and effective for the claimed use. Clinical trials of any product under development may not demonstrate the quality, safety and efficacy required to result in an approvable or a marketable product. Failure to demonstrate adequately the quality, safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product. In addition, regulatory authorities in Europe, the United States, Canada or other countries (including the FDA in the United States, the EMEA in the European Union, the Medicines and Healthcare Products Regulatory Agency in the UK and Health Canada in Canada) may require additional studies, which could result in (a) increased costs and significant development delays, or (b) termination of a project if it would no longer be economically viable.
The completion rate of clinical trials is dependent upon, among other factors, obtaining adequate clinical supplies and recruiting patients. Delays in patient enrolment in clinical trials may also result in increased costs and program delays. Additional delays can occur in instances in which the Company shares control over the planning and execution of product development with collaborative partners. The Company cannot be certain that, if clinical trials are completed, either the Company or its collaborative partners will file for, or receive, required authorizations to manufacture and/or market potential products in a timely manner.
If the Company is unable to meet the requirements of regulators in relation to a particular product, it may be unable to develop the product or obtain or retain the necessary marketing approvals.
Drug companies are required to obtain regulatory approval before manufacturing and marketing most drug products. Regulatory approval is generally based on the results of:
The clinical development, manufacture, marketing and sale of pharmaceutical products is subject to extensive regulation, including separate regulation by each country in the European Union, the European Union itself and federal, state and local regulation in the United States. Unanticipated legislative and other regulatory actions and
developments concerning various aspects of the Company's operations and products may restrict its ability to sell one or more of its products or to sell those products at a profit.
The generation of data is regulated and any generated data is susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Required regulatory approvals may not be obtained in a timely manner, if at all. In addition, other regulatory requirements for any such proposed products may not be met.
Even if the Company obtains regulatory approvals, the terms of any product approval, including labeling, may be more restrictive than desired and could affect the marketability of its products. Regulatory authorities have the power to, amongst other things:
Such delays or actions could affect the Company's ability to manufacture and sell its products.
The failure of a strategic partner to develop and commercialize products could result in delays in approval or loss of revenue.
The Company enters into strategic partnerships with other companies in areas such as product development and sales and marketing. In these partnerships, the Company is dependent on its partner to deliver results. While these partnerships are supported by contracts, the Company does not exercise direct control. If a partner fails to perform or experiences financial difficulties, the Company may suffer a reduction in sales or royalties or may experience delays in approval of products.
The failure to secure new products or compounds for development, either through in-licensing, acquisition or internal research and development efforts, may have an adverse impact on the Company's future results.
The Company's future results will depend, to a significant extent, upon its ability to in-license, acquire or develop new products or compounds for development. The failure to in-license or acquire new products or compounds, on a commercially viable basis, could have a material adverse effect on the Company's financial position. The Company also expends significant resources on research and development. The failure of these efforts to result in the development of products appropriate for testing in human clinical trials could have a material adverse effect on the Companys revenues, financial condition and results of operations.
The Company may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business.
The Company's success depends upon its ability and the ability of its collaborators and licensors to protect their intellectual property rights. Where possible, the Companys strategy is to register intellectual property rights, such as patents and trademarks. The Company also relies variously on trade secrets, unpatented know-how and technological innovations and contractual arrangements with third parties to maintain its competitive position.
Patents and patent applications covering a number of the technologies and processes owned or licensed to the Company have been granted, or are pending in various countries, including the United States, Canada, major European countries and Japan. The Company intends to enforce vigorously its patent rights and believes that its collaborators intend to enforce vigorously patent rights they have licensed to the Company. However, patent rights may not prevent other entities from developing, using or commercializing products that are similar or functionally equivalent to the Company's products or technologies or processes for formulating or manufacturing similar or functionally equivalent products. The Company's patent rights may be successfully challenged in the future or laws providing such rights may be changed or withdrawn. The Company cannot assure investors that its patents and patent applications or those of its third party manufacturers will provide valid patent protection sufficiently broad to protect the Company's products and technology or that such patents will not be challenged, revoked, invalidated, infringed or circumvented by third parties. In the regular course of business, the Company is party to litigation or other proceedings relating to intellectual property rights. See ITEM 3: Legal Proceedings of this Form 10-K for further information.
Additionally, the Company's products, or the technologies or processes used to formulate or manufacture those products may, now, or in the future, infringe the patent rights of third parties. It is also possible that third parties will obtain patent or other proprietary rights that might be necessary or useful for the development, manufacture or sale of the Company's products. If third parties are the first to invent a particular product or technology, it is possible that those parties will obtain patent rights that will be sufficiently broad to prevent the Company or its strategic collaborators from developing, manufacturing or selling its products. The Company may need to obtain licences for intellectual property rights from others to develop, manufacture and market commercially viable products and may not be able to obtain these licences on commercially reasonable terms, if at all. In addition, any licensed patents or proprietary rights may not be valid and enforceable.
The Company also relies on trade secrets and other un-patented proprietary information, which it generally seeks to protect by confidentiality and nondisclosure agreements with its employees, consultants, advisors and collaborators. These agreements may not effectively prevent disclosure of confidential information and may not provide the Company with an adequate remedy in the event of unauthorized disclosure of such information. If the Company's employees, scientific consultants or collaborators develop inventions or processes that may be applicable to the Company's products under development, such inventions and processes will not necessarily become the Company's property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of the Company's proprietary rights. The failure to obtain or maintain patent and trade secret protection, for any reason, could allow other companies to make competing products and reduce the Company's product sales.
The Company has filed applications to register various trademarks for use in connection with pharmaceuticals and biologics in various countries including the United States and countries in Europe and Latin America and intends to trademark new product names as new pharmaceuticals and services are developed. In addition, with respect to certain products, the Company relies on the trademarks of third parties. These trademarks may not afford adequate protection or the Company or the third parties may not have the financial resources to enforce any rights under any of these trademarks. The Company's inability or the inability of these third parties to protect their trademarks because of successful third party claims to those trademarks could allow others to use the Company's trademarks and dilute their value.
If a marketed product fails to work effectively or causes adverse side effects, this could result in damage to the Company's reputation, the withdrawal of the product and legal action against the Company.
The Company's ability to sell any pharmaceutical products after the receipt of regulatory approval will depend on the acceptance of those products by physicians and patients. Unanticipated side effects or unfavorable publicity concerning any of the Company's products, or those of its competitors, could have an adverse effect on the Company's ability to obtain or maintain regulatory approvals or successfully market its products. Future results of operations will also depend on continued market acceptance of current products and the lack of substitutes that are cheaper or more effective.
The testing, manufacturing, marketing and selling of pharmaceutical products entails a risk of product liability claims, product recalls, litigation and associated adverse publicity. The cost of defending against such claims is expensive even when the claims are not merited. A successful product liability claim against the Company could require the Company to pay a substantial monetary award. If, in the absence of insurance, the Company does not have sufficient financial resources to satisfy a liability resulting from such a claim or to fund the legal defense of such a claim, it could become insolvent. Product liability insurance coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms. Although the Company carries product liability insurance, this coverage may not be adequate. In addition, it cannot be certain that insurance coverage for present or future products will continue to be available. Moreover, an adverse judgment in a product liability suit, even if insured or eventually overturned on appeal, could generate substantial negative publicity about the Company's products and business and inhibit or prevent commercialization of other products.
Monitoring or enforcement action by regulatory authorities or law enforcement agencies in the highly regulated markets in which the Company operates may result in the distraction of senior management, significant legal costs and the payment of substantial compensation or fines.
The Company engages in various marketing, promotional and educational activities pertaining to, as well the sale of, pharmaceutical products in a number of jurisdictions around the world. The promotion, marketing and sale of pharmaceutical products is highly regulated and the operations of market participants, such as the Company, are closely supervised by regulatory authorities and law enforcement agencies, including the FDA, the US Department of Justice and the DEA in the US. Any inquiries or investigations into the operations of, or enforcement or other regulatory action against, the Company by such regulatory authorities could result in the distraction of senior management for prolonged periods of time, significant defense costs and substantial monetary penalties.
The outsourcing of services can create a significant dependency on third parties, the failure of whom can affect the ability to operate the Company's business and to develop and market products.
The Company has entered into many agreements with third parties for the provision of services to enable it to operate its business. If the third party can no longer provide the service on the agreed basis, the Company may not be able to continue the development or commercialization of its products as planned or on a commercial basis. Additionally, it may not be able to establish or maintain good relationships with the suppliers.
The Company has also entered into licensing and co-development agreements with a number of parties. There is a risk that, upon expiration or termination of a third party agreement, the Company may not be able to renew or extend the agreement with the third party as commercial interests may no longer coincide. In such circumstances, the Company may be unable to continue to develop or market its products as planned and could be required to abandon or divest a product line.
Loss of highly qualified management and scientific personnel could cause the Company subsequent financial loss.
The Company faces intense competition for highly qualified management and scientific personnel from other companies, academic institutions, government entities and other organizations. It may not be able to successfully attract and retain such personnel. The Company has agreements with a number of its key scientific and management personnel for periods of one year or less. The loss of such personnel, or the inability to attract and retain the additional, highly skilled employees required for its activities, could have an adverse effect on the Company's business.
In the event of breakdown, failure or breach of security on any of the Companys IT systems, the Company may be unable to maintain its business operations.
The Company operates several complex information systems upon which it is dependent. The Company has backup procedures and disaster recovery plans in place to enable the business to continue its normal operations and to mitigate any loss in the event of a failure. However, in the event of breakdown, failure or breach of security of any of these systems or the associated suppliers, the Company may be unable to maintain its business operations. This could lead to loss of revenue and delay in product development. In addition, the Company is in the process of installing enterprise-wide information systems in its operations throughout the world. Any failure in the operation of this system could have an adverse effect on the Company's business operations.
The Company may incur unexpected expenditure in order to comply with US environmental laws.
The Company's manufacturing sites are situated in the US and are subject to national, state and local environmental laws. Compliance with environmental laws requires ongoing expenditure and any spillage or contamination found to be caused by the Company may result in clean up costs and financial penalties for the Company which could adversely affect the Company's revenues, financial condition and results of operations.
Contracts are used in all areas of operation of the business. They may contain conditions that do not protect the Company's position or with which it cannot comply.
Contracts form the basis of agreement in many key activities such as mergers and acquisitions, arrangements with suppliers and outsourcing, or product licensing and marketing. These contracts may contain conditions that impose duties on the parties involved or may fail to contain adequate conditions to protect the Company's position. The Company may be unable to meet these conditions or may be unable to enforce other parties to comply and, therefore, may suffer financial loss or penalty.
The Company has recently completed the acquisition of TKT. If the Company fails to integrate this acquisition successfully, it may impact on the Company's future growth.
The Company has recently completed the acquisition of TKT. The benefits of this acquisition depend on the successful integration of TKT with the Company. If this integration is not successful, it may result in the products and/or operations failing to deliver the anticipated benefits and could cause a diversion of management's time and resources.
ITEM 1B: Unresolved Staff Comments
ITEM 2: Properties
The following are the principal premises of the Company as at December 31, 2005:
The Company also has other smaller locations in some of the countries listed above and in several other countries around the world.
At December 31, 2005 all sites, with the exception of those at Newport, Kentucky; Rockville, Maryland; and Randolph, Massachusetts were utilized.
ITEM 3: Legal Proceedings
The Company accounts for litigation losses and insurance claims and provisions in accordance with SFAS No. 5, "Accounting for Contingencies" (SFAS No. 5). Under SFAS No. 5, loss contingency provisions are recorded for probable losses when management is able to reasonably estimate the loss. Where the estimated loss lies within a range and no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. In other cases management's best estimate of the loss is recorded. These estimates are developed substantially before the ultimate loss is known and the estimates are refined in each accounting period in light of additional information becoming known. In instances where the Company is unable to develop a reasonable estimate of loss, no litigation loss is recorded at that time. As information becomes known a loss provision is set up when a reasonable estimate can be made. The estimates are reviewed quarterly and the estimates are changed when expectations are revised. Any outcome upon settlement that deviates from the Companys estimate may result in an additional expense in a future accounting period.
Shire US Inc. (SUS), a wholly-owned subsidiary of Shire, is a defendant in 10 lawsuits still pending in both US federal and state courts which seek damages for, among other things, personal injury arising from phentermine products supplied for the treatment of obesity by SUS and several other pharmaceutical companies. SUS, formerly known as Shire Richwood Inc., has been sued as a manufacturer and distributor of phentermine, an anorectic used in the short-term treatment of obesity and one of the products addressed by the lawsuits. The suits relate to phentermine either alone or together with fenfluramine or dexenfluramine. The lawsuits generally allege the following claims: the defendants marketed phentermine and other products for the treatment of obesity and misled users about the products and dangers associated with them; the defendants failed adequately to test phentermine individually and when taken in combination with the other drugs; and the defendants knew or should have known about the negative effects of the drugs and should have informed the public about such risks and/or failed to provide appropriate warning labels. SUS has been named as a defendant in a total of 4,199 such phentermine lawsuits, in respect of which SUS has been dismissed as a defendant in 4,189 cases. Five of the 10 remaining cases name Shire as a defendant, but have not been served as required by state and federal rules of civil procedure. It is expected that Shire will be dismissed from the remaining cases based upon lack of product identification or agreement of the parties.
SUS became involved with phentermine through its acquisition of certain assets of Rexar Pharmacal Corporation (Rexar) in January 1994. In addition to SUS potentially incurring liability as a result of its own production of Oby-Cap, a phentermine product, the plaintiffs may additionally seek to impose liability on SUS as successor to Rexar. SUS intends to defend vigorously all the lawsuits. SUS denies liability on a number of grounds including lack of scientific evidence that phentermine, properly prescribed, causes the alleged side effects and that SUS did not promote phentermine for long-term combined use as part of the "fen/phen" diet. Accordingly, SUS intends to defend vigorously any and all claims made against the Company in respect of phentermine. Legal expenses to date have been paid by Eon Labs, Inc. (Eon), the supplier to SUS, or Eon's insurance carriers but such insurance is now exhausted. Eon has agreed to defend and indemnify SUS in this litigation pursuant to an agreement dated November 30, 2000 between Eon and SUS.
(i) Barr Laboratories, Inc.
Shires extended release "once daily" version of ADDERALL, ADDERALL XR is covered by US patent No. 6,322,819 (the 819 Patent) and US patent No. 6,605,300 (the 300 Patent). In January 2003 the Company was notified that Barr had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR (Barrs ANDA products) prior to the expiration date of the Companys 819 Patent, and alleging that the 819 Patent is not infringed by Barr's ANDA products. In August 2003 Shire was notified that Barr also was seeking permission to market its ANDA products prior to the expiration date of the 300 Patent and alleging that the 300 Patent is invalid. Shire Laboratories, Inc, (Shire Laboratories) filed suit against Barr for infringement of the 819 Patent in February 2003 and for infringement of the 300 Patent in September 2003. The schedules for the lawsuits against Barr with respect to the 819 and 300 Patents were consolidated in December 2003. The Company is seeking a ruling that Barrs ANDA and ANDA products infringe the 819 and 300 Patents and that its ANDA should not be approved before the expiration date of the patents. The Company is also seeking injunctions to prevent Barr from commercializing its ANDA products before the expiration of the 819 and 300 Patents, damages in the event that Barr should engage in such commercialization, and its attorneys fees and costs. On September 27, 2004 Barr filed an amended Answer, Affirmative Defense and Counterclaim in which Barr added the following counterclaims: invalidity of the 819 patent, non-infringement of the 300 Patent and unenforceability of the 819 and 300 Patents
due to inequitable conduct. Shire has asserted affirmative defenses, alleging, among other things, that Barr has waived its right to assert the counterclaims set forth in its September 27, 2004 Amended Answer. Under the Courts schedule summary judgment motions were to be filed and fully briefed by October 14, 2005. Neither Shire nor Barr filed summary judgment motions. On December 9, 2005 the Court continued the final pre-trial conference to March 10, 2006. A trial date has not yet been set.
Shires lawsuits triggered stays of final FDA approval of Barrs ANDA of up to 30 months from the date of the Companys receipt of Barrs notice letters. The second and final 30 month stay related to the lawsuit regarding the 300 Patent expired on February 18, 2006. As the stay has expired, the FDA may approve Barrs ANDA, subject to satisfaction by Barr of the FDAs requirements. Barr could be in a position to market its ANDA products upon receipt of final FDA approval.
On October 19, 2005 Shire brought another lawsuit against Barr in the Southern District of New York alleging infringement of US Patent No. 6,913,768 (the 768 Patent), which issued on July 5, 2005. The Company is seeking an injunction to prevent Barr from infringing the 768 Patent, damages in the event that Barr should commercialize its ANDA products, attorneys fees and costs. Barr has moved to dismiss this action asserting that there is no subject matter jurisdiction. A hearing on this motion was held on February 17, 2006. No decision on this motion has yet been made.
In November 2003, Shire was notified that Impax had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 30mg strength of ADDERALL XR (Impaxs ANDA product) prior to the expiration date of the 819 and 300 Patents. In December 2003, Shire Laboratories filed suit against Impax for infringement of the 819 and 300 Patents.
In December 2004, Shire received an additional notification from Impax advising of the filing of an amendment to its ANDA for a generic version of the 5mg, 10mg, 15mg, 20mg and 25mg strengths of ADDERALL XR in addition to the 30mg strength, the subject of Impaxs initial ANDA submission. In January 2005, Shire Laboratories filed suit against Impax for infringement of the 819 and 300 Patents.
As part of the October 19, 2005 lawsuit against Barr, Shire also brought suit in the Southern District of New York against Impax for infringing the 768 Patent. Impax filed a declaratory judgment action in Delaware alleging that the 768 Patent was invalid and that its ANDA did not infringe the 768 Patent.
On January 19, 2006, Shire and Impax announced that all pending litigation in connection with Impaxs ANDA had been settled. As part of the settlement, Impax confirmed that its proposed generic products infringe Shires 819, 300 and 768 Patents and that the three patents are valid and enforceable.
Under the terms of the settlement agreement, Impax will be permitted to market generic versions of ADDERALL XR in the United States no later than January 1, 2010 and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shires authorized generic. No payments to Impax are involved in the settlement agreement. The settlement agreement, which was effective immediately, has been submitted to the United States Federal Trade Commission for its review, as required by law.
(iii) Colony Pharmaceuticals, Inc.
In December 2004, Shire was notified that Colony Pharmaceuticals, Inc. (Colony) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Companys 819 and 300 Patents. Shire has chosen not to sue Colony.
(iv) Teva Pharmaceuticals USA, Inc.
In February 2005, Shire was notified that Teva Pharmaceuticals, Inc. (Teva) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic versions of the 10mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Companys 819 and 300 Patents. In June 2005, Shire was notified that Teva had amended its ANDA to seek permission to market additional strengths of 5mg, 15mg and 20mg of its generic ADDERALL XR prior to the expiration of the '819 and '300 Patents. In January 2006, Shire received a third notice letter that Teva had further amended its ANDA to seek permission to market the 25mg strength generic version of ADDERALL XR prior to the expiration of the 819 and 300 Patents. Shire has chosen not to sue Teva with respect to its amended ANDA for the 5mg, 10mg, 15mg, 20mg and 30mg strengths. Shire is currently reviewing the details of Tevas latest notice letter pertaining to the 25 mg strength.
None of Barr, Colony or Teva may launch their generic versions of ADDERALL XR before they receive final FDA approval of their respective ANDAs. The FDA may grant 180 days of generic market exclusivity to Barr as the first to file an ANDA for a generic version of ADDERALL XR.
Neither Colony nor Teva may market their ANDA products until FDA final approval of their ANDAs and upon the expiration of the first to files exclusivity rights.
In August 2003 the Company was notified that Nostrum Pharmaceuticals, Inc. (Nostrum) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market its generic version of the 300mg strength of CARBATROL (Nostrums ANDA product) prior to the expiration date of the Companys US patents for CARBATROL, US patent No. 5,912,013 (the 013 Patent) and US patent No. 5,326,570 (the 570 Patent). The notification alleges that the 013 and 570 Patents are not infringed by Nostrums ANDA product. On September 18, 2003 Shire Laboratories filed suit against Nostrum in the United States District Court for the District of New Jersey alleging infringement of these two patents by Nostrums ANDA and ANDA product. The Company was seeking a ruling that Nostrums ANDA infringes the 013 and 570 Patents and should not be approved before the expiration date of the 013 and 570 Patents. The Company was also seeking an injunction to prevent Nostrum from commercializing its ANDA product before the expiration of the 013 and 570 Patents, damages in the event that Nostrum should engage in such commercialization, as well as its attorneys fees and costs. On January 23, 2004 the Company amended the complaint to drop the allegations with respect to the 013 Patent while maintaining the suit with respect to the 570 Patent. By way of counterclaims Nostrum is seeking a declaration that the 570 and 013 Patents are not infringed by Nostrums ANDA product. Nostrum also was seeking actual and punitive damages for alleged abuse of process by Shire. On July 12, 2004 the Court dismissed Nostrums abuse of process counterclaim for failure to state a claim upon which relief can be granted. On December 10, 2004 Nostrum filed a summary judgment motion seeking a declaration of non-infringement of the 570 Patent. Shires opposition to this motion was filed on January 14, 2005. The Court heard arguments with respect to Nostrums motion on July 15, 2005. At the conclusion of the hearing the Court denied Nostrum's motion for summary judgment of non-infringement. The parties have been directed by the Court to propose a schedule for expert depositions and claim construction briefing. No trial date has been set.
Nostrum may not launch a generic version of CARBATROL before it receives final approval of its ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30 months from Shires receipt of Nostrums notice letter. The 30 month stay expired on February 6, 2006. Following expiry of the stay, Nostrum could be in a position to market its 300mg extended-release carbamazepine product upon FDA final approval of its ANDA.
In January 2005, Genzyme Corporation (Genzyme) filed suit against TKT in the District Court of Tel Aviv-Jaffa, Israel, claiming that TKT's Phase 1/2 clinical trial in Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one or more claims of Genzymes Israeli Patent No. 100,715. In addition, Genzyme filed a motion for preliminary injunction, including a request for an ex parte hearing and relief on the merits, to immediately seize and destroy all GA-GCB being used to treat patients and to prevent TKT from submitting data generated from the clinical trial to regulatory agencies. In March 2005 the District Court refused to grant Genzyme's motion for a preliminary injunction. The lawsuit was dismissed in January 2006.
In April 1997, Amgen Inc. (Amgen) commenced a patent infringement action against TKT and Sanofi-Aventis in the United States District Court of Massachusetts. In January 2001, the United States District Court of Massachusetts concluded that DYNEPO infringed eight of the 18 claims of five patents that Amgen had asserted. Amgen did not seek and was not awarded monetary damages. This decision was subsequently appealed to the United States Court of Appeals for the Federal Circuit.
In January 2003, the United States Court of Appeals for the Federal Circuit issued a decision affirming in part and reversing in part the decision of the United States District Court of Massachusetts, remanded the action to the United States District Court of Massachusetts for further proceedings and instructed the United States District Court of Massachusetts to reconsider the validity of Amgen's patents in the light of potentially invalidating prior art.
In October 2004, the United States District Court of Massachusetts issued a decision on the remanded issues, finding that certain claims related to four patents held by Amgen are infringed by TKT and Sanofi-Aventis. In December 2004, TKT and Sanofi-Aventis filed a notice of appeal of the decision of the United States District Court of Massachusetts to the United States Court of Appeals for the Federal Circuit. An oral hearing was held at the Federal Circuit in December 2005. No decision has been rendered at this time.
If TKT and Sanofi-Aventis are not successful in the DYNEPO litigation at the appellate level, TKT and Sanofi-Aventis would be precluded from making, using and selling DYNEPO in the United States until the expiration of the relevant patents. TKT is required to reimburse Sanofi-Aventis, which controls the litigation and is paying the litigation expenses, for 50% of the expenses incurred in connection with the litigation from and after March 26, 2004. In the event that Sanofi-Aventis launches DYNEPO in the US, Sanofi-Aventis is entitled to deduct up to 50% of any royalties that Sanofi-Aventis may otherwise owe to TKT with respect to the sale of DYNEPO until Sanofi-Aventis has recouped the full amount of TKT's share of the litigation expenses. TKT has the right to control any other litigation that might arise outside of the United States and is responsible for all litigation expenses incurred in connection with such litigation from and after March 26, 2004.
In 1996, Applied Research Systems Holding N.V., a wholly-owned subsidiary of Serono S.A. (Serono) and Cell Genesys became involved in a patent interference involving Seronos US Patent No. 5,272,071 (the 071 Patent), which purportedly covers certain methods of gene activation. In June 2004, the Board of Patent Appeals and Interferences of the US Patent and Trademark Office (PTO) held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and Serono and Cell Genesys each appealed the decision of the interference to the US District Court of Massachusetts and the US District Court of the District of Columbia, respectively. TKT was not a party to this interference.
In August 2004, Serono served TKT with an amended complaint in the appeal of the PTO decision that was filed in the US District Court of Massachusetts. The amended complaint alleges that TKT infringes Serono's '071 Patent. In August 2005, the US District Court of Massachusetts severed and stayed the infringement action pending resolution of the interference claim at the District Court level.
In connection with Shires merger with TKT, former holders of approximately 11.7 million shares of TKT common stock submitted written demands to the Delaware Court of Chancery for appraisal of these shares and, as a result, elected not to accept the $37 per share merger consideration. On October 10, 2005, at the request of one of the holders to tender 365,000 shares at the merger price of $37 per share, TKT filed a motion to dismiss the holders demand. On October 12, 2005, the Delaware Court of Chancery granted this motion, and the holder tendered the shares at the merger consideration of $37 per share. Therefore, as at December 31, 2005, former holders of approximately 11.3 million shares of TKT common stock maintained written demands for appraisal of these shares and have elected not to accept the $37 merger consideration. In November 2005, the Delaware Court of Chancery approved a consolidation order filed by TKT whereby actions brought by all petitioners have been consolidated as one case. To the extent that the remaining demands were validly asserted in accordance with the applicable requirements of Delaware law and the former holders perfect their rights thereunder, such former holders will be entitled to receive the fair value of the shares as determined by the Delaware Court of Chancery. The determination of fair value will be made excluding any element of value arising from the transaction, such as cost savings or business synergies. The Delaware Court of Chancery may ascribe a valuation to the shares that is greater than, less than or equal to $37 per share and may award interest on the amount determined in the appraisal process.
The total consideration for the acquisition of TKT, including amounts payable in respect of stock options and convertible securities, is approximately $1.6 billion at the merger price of $37 per share. This could change if Shire is required to pay a different amount of consideration in respect of the approximately 11.3 million shares for which holders have asserted appraisal rights. Until such time as the appraisal process is complete, the Company is unable to determine the extent of its liability.
Class Action Shareholder Suit
In January and February 2003, various parties filed purported class action lawsuits against TKT and Richard Selden, TKT's former Chief Executive Officer, in the United States District Court for the District of Massachusetts. The complaints generally allege securities fraud during the period from January 2001 through January 2003. Each of the complaints asserts claims under Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act, and alleges that TKT and its officers made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of TKT's REPLAGAL product to treat Fabry disease during that period.
In March 2003, various plaintiffs filed motions to consolidate, to appoint lead plaintiff, and to approve plaintiffs' selections of lead plaintiffs' counsel. In April 2003, various plaintiffs filed a Joint Stipulation and Proposed Order of Lead Plaintiff Applicants to Consolidate Actions, to Appoint Lead Plaintiffs and to Approve Lead Plaintiffs' Selection of Lead Counsel, Executive Committee and Liaison Counsel. In April 2003, the Court endorsed the Proposed Order, thereby consolidating the various matters under one matter: In re Transkaryotic Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ.
In July 2003, the plaintiffs filed a Consolidated and Amended Class Action Complaint (the "Amended Complaint") against TKT; Dr Selden; Daniel Geffken, TKT's former Chief Financial Officer; Walter Gilbert, Jonathan S. Leff, Rodman W. Moorhead, III, and Wayne P. Yetter, then members of TKT's board of directors; William R. Miller and James E. Thomas, former members of TKT's board of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc. and Leerink Swann & Company, underwriters of TKTs common stock in prior public offerings.
The Amended Complaint alleges securities fraud during the period from January 4, 2001 through January 10, 2003. The Amended Complaint alleges that the defendants made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of REPLAGAL during that period. The Amended Complaint asserts claims against Dr. Selden and TKT under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a) of the Exchange Act. The Amended Complaint also asserts claims based on TKT's public offerings of June 29, 2001, December 18, 2001 and December 26, 2001 against each of the defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden under Section 15 of the Securities Act; and against SG Cowen Securities
Corporation, Deutsche Bank Securities Inc., Pacific Growth Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The plaintiffs seek equitable and monetary relief, an unspecified amount of damages, with interest, and attorneys' fees and costs.
In September 2003, TKT filed a motion to dismiss the Amended Complaint. A hearing of the motion occurred in December 2003. In May 2004, the United States District Court for the District of Massachusetts issued a Memorandum of Decision and Order denying in part and granting in part TKT's motion to dismiss the purported class action lawsuit. In the Memorandum, the Court found several allegations against TKT arose out of forward-looking statements protected by the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA). The Court dismissed those statements as falling within the PSLRA's safe harbor provisions. The Court also dismissed claims based on the public offerings of June 29, 2001 and December 18, 2001 because no plaintiff had standing to bring such claims. The Court allowed all other allegations to remain.
In June 2004, TKT submitted an unopposed motion seeking clarification from the Court that the Memorandum dismissed claims based on the first two offerings as to all defendants. The Court granted the motion. In July 2004, the plaintiffs voluntarily dismissed all claims based on the third offering because no plaintiff had standing to bring such claims.
The plaintiffs subsequently filed a motion seeking permission to notify certain TKT investors of the dismissal of the claims based on the offerings, and to inform those investors of their opportunity to intervene in the lawsuit. TKT filed an opposition to this motion in July 2004. A hearing on this motion was held in September 2004. The Court denied this motion. TKT filed an answer to the Amended Complaint in July 2004. The plaintiffs then filed a motion for class certification in July 2004. TKT filed an opposition to this motion in March 2005, and the plaintiffs filed a reply in April 2005. A hearing on class certification was held in April 2005. Following that hearing, TKT filed a supplemental brief in opposition to the motion for class certification and the plaintiffs filed a supplemental brief in support of the motion. In November 2005, the court granted the plaintiffs motion for class certification On September 14, 2005, the plaintiffs filed a Notice of Related Case Pursuant to Local Rule 40.1(G), in which they appeared to seek reassignment of a matter filed on September 1, 2005, entitled Securities and Exchange Commission v. Richard B. Selden, Civil Action No. 05-11805-NMG (D. Mass.) (the SEC Action), to the court considering this matter. On September 15, 2005, the defendants filed a response to the notice, opposing reassignment of the SEC Action. On October 7, 2005, the plaintiffs filed a memorandum in response to the defendants' response. On October 21, 2005, the Court entered an Order which stated that it did not deem the cases related under Local Rule 40.1. The Company is obligated to indemnify Dr Selden for his costs incurred in connection with the SEC Action.
ITEM 4: Submission of matters to a vote of security holders
An Extraordinary General Meeting of Shareholders was held on October 28, 2005 to consider approving a scheme of arrangement whereby Shire would be established as the holding company of SPG. Resolutions proposing the adoption of new share schemes and the assumption by Shire of certain existing SPG share schemes were also considered at the meeting.
The resolutions were approved on a show of hands at the meeting. Had the resolutions been put to a poll, the proxy votes which would have been voted at the meeting are described below:
ITEM 5: Market for Registrants common equity, related stockholder matters and issuer purchases of equity securities
The Companys ordinary shares are traded on the London Stock Exchange (LSE). On November 25, 2005, a Scheme of Arrangement, approved by the High Court of Justice in England and Wales, became effective. Under the terms of the Scheme, holders of ordinary shares of SPG received one ordinary share of Shire for each ordinary share of SPG held at 5.30pm (GMT) on November 24, 2005.
Ordinary shares of Shire were admitted to the Official List and to trading on the LSE at 8.00am (GMT) on November 25, 2005. The listing of ordinary shares of SPG was cancelled at the same time.
The following table presents the per share closing mid-market quotation for ordinary shares of Shire (or, as applicable, prior to November 25, 2005, ordinary shares of SPG) as quoted in the Daily Official List of the LSE for the periods indicated.
The total number of holders of record of ordinary shares of Shire as at February 21, 2006 was 5,839. Since certain of the ordinary shares are held by broker nominees, the number of holders of record may not be representative of the number of beneficial owners.
American Depositary Shares
American Depositary Shares (ADSs) each represent three ordinary shares of Shire. An ADS is evidenced by an American Depositary Receipt (ADR) issued by Morgan Guaranty Trust Company of New York as depositary, and are quoted on the NASDAQ National Market. As at February 21, 2006, the proportion of ordinary shares represented by ADRs was 30% of the outstanding ordinary shares.
In consequence of the implementation of the Scheme of Arrangement, ADSs representing ordinary shares of SPG were replaced by ADSs representing ordinary shares of Shire on a one-for-one basis. Dealings in ADSs representing ordinary shares of Shire on NASDAQ commenced at 9.30am (EST) on November 25, 2005. ADSs representing ordinary shares of SPG were cancelled at the same time.
The following table presents the high and low market quotations for ADSs quoted on the NASDAQ National Market for the periods indicated (prior to November 25, 2005, the ADSs represented ordinary shares of SPG).
The number of holders of record of ADSs in the United States as at February 21, 2006 was 384. Since certain of the ADRs are held by broker nominees, the number of record holders may not be representative of the number of beneficial owners.
An interim dividend for the first half of 2005 of 1.8246 cents (1.0475 pence) per ordinary share equivalent to 5.4738 cents per ADS and 6.7629 Canadian cents per exchangeable share was paid in October 2005. The Board has resolved to pay a second interim dividend of 4.419 cents (2.5356 pence) per ordinary share equivalent to 13.257 cents per ADS and 15.2217 Canadian cents per exchangeable share for the six months to December 31, 2005. This is consistent with Shires stated policy of paying a dividend semi-annually, set in US cents per share / ADS, with the first interim payment in each year being maintained at a consistent level. Any growth will come through increasing the second interim dividend in a financial year. Shire intends to pursue a progressive dividend policy.
As a matter of English law, Shire may pay dividends only out of its distributable profits, which are the accumulated realized profits under generally accepted accounting principles in the United Kingdom (including reserves arising from a reduction of share capital), of Shire plc and not the consolidated Group, so far as not previously utilized by distribution or capitalization, less accumulated realized losses, so far as not previously written off in a reduction or reorganization of capital duly made.
On November 28, 2005, the High Court of Justice in England and Wales approved a reduction of Shires share capital to take effect on November 29, 2005, when the nominal value of each Shire ordinary share was reduced from £3.50 to £0.05. This reduction increased the distributable reserves available to Shire to approximately $2.95 billion, which the directors of Shire can utilize for future dividend payments at their discretion.
As a result of this capital reduction, as at December 31, 2005, Shire had distributable profits of $2,946 million. Future dividend policy will be dependent upon distributable profits, financial condition, the terms of any then existing debt facilities and other relevant factors existing at that time.
NASDAQ Corporate Governance Exemption
NASDAQ has granted Shire an exemption from the quorum requirement of its corporate governance standards in Marketplace Rule 4350 as Shire complies with the relevant quorum standards applicable to companies in the UK.
ITEM 6: Selected financial data
The selected consolidated financial data presented below as at December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 were derived from the audited consolidated financial statements of the Company, included herein. The selected consolidated financial data presented below as at December 31, 2003, 2002 and 2001 and for the two years to December 31, 2002 were derived from the audited consolidated financial statements of the Company, which are not included herein. Certain amounts reported in previous years have been reclassified to conform to the 2005 presentation.
The selected consolidated financial data should be read in conjunction with ITEM 7: Managements discussion and analysis of financial condition and results of operations and with the consolidated financial statements and related notes appearing elsewhere in this report.
ITEM 6: Selected financial data (continued)
ITEM 7: Managements discussion and analysis of financial condition and results of operation
The following discussion should be read in conjunction with the Companys consolidated financial statements contained in Part IV of this Annual Report.
Shires strategic goal is to become the leading specialty pharmaceutical company that focuses on meeting the needs of the specialist physician. Specifically, Shire focuses its business on CNS, GI, HGT and GP. The structure is sufficiently flexible to allow Shire to target new therapeutic areas to the extent opportunities arise through acquisitions. Shire believes that a carefully selected portfolio of products with strategically aligned and relatively small-scale sales forces will deliver strong results.
Shires focused strategy is to develop and market products for specialist physicians. Shires in-licensing, merger and acquisition efforts are focused on products in niche markets in the US or Europe with strong intellectual property protection.
In accordance with this strategy, the Company completed the acquisition of TKT on July 27, 2005. This acquisition added HGT to the Companys existing business.
Substantially all of the Companys revenues, expenditures, operating profits or losses and net assets are attributable to the R&D, manufacture, sale and distribution of pharmaceutical products within two operating segments: Pharmaceutical Products and Royalties.
Revenues are derived primarily from two sources - sales of the Companys own products and royalties (where Shire has out-licensed products to third parties):
Shires strategic objectives are set using a balanced scorecard approach. Objectives are also set at the functional, market and therapeutic area levels and are aligned with the Groupwide strategic objectives. The Company therefore takes a fully integrated approach to strategic management. Key performance indicators (KPIs) are used to measure achievement of the objectives. Strategic objectives are categorised into fields - financial, products & markets, people & capabilities and operational excellence. For 2005, Shires corporate objectives included: defined levels of revenue and EPS growth; forecasting accuracy to within defined margins; execution of defined therapeutic area and product plans; NDA and EMEA filing targets for new products; maintenance of a stable and effective supply chain; effective leadership, team and individual development across functions, markets and therapeutic areas; effective recruitment and retention policy; implementation of global health and safety practices; implementation of defined IT systems; maintenance of robust internal controls; and effective management of alliances and partnerships.
The markets in which the Company conducts its business are highly competitive and highly regulated. The health care industry is experiencing:
Shires strategy to become the leading specialty pharmaceutical company has been developed to address these industry-wide competitive pressures. This strategy has resulted in a series of initiatives in the following areas:
While the existing portfolio of approved products is heavily weighted towards the North American market, Shire remains committed to diversifying the risk associated with being reliant on one geographic market by continuing to expand its European operations. Shires expansion in Europe will be driven by the development of products with patent protection in both the North American and European markets wherever possible.
Acquiring REPLAGAL (which is presently sold only outside the US) and DYNEPO (to which the Company has exclusive marketing rights outside the US) as part of the acquisition of TKT, launching XAGRID in the UK, Germany, France and Spain and launching FOSRENOL in Ireland, Sweden, Denmark and Austria during 2005 are examples of Shires execution of this strategy.
In addition, Shires late stage development pipeline contains a number of products with global rights, including ELAPRASE, GA-GCB (both acquired as part of the TKT acquisition), MESAVANCE and NRP104. The Company intends to launch these products in both US and Europe, thus furthering the Companys European expansion.
The Company will continue to pursue opportunities for its products in Europe in 2006 and the first half of 2007, including:
In the US in 2006 and the first half of 2007, the Company plans to:
This program of new product launches will require significant investment at the outset causing SG&A costs as a proportion of product sales to increase in the short term.
As a result of Shires strategic intent to focus on North America and Europe, the Company has sought out-licensing partners to cover the Japanese market for products in development. In 2004, the Company successfully out-licensed the Japanese marketing and development rights for AGRYLIN and FOSRENOL to two companies with an established presence in this market. TKT is also party to an exclusive distribution agreement with Sumitomo Pharmaceutical Co., Ltd. (Sumitomo), for the commercialization of REPLAGAL in Japan, Korea, Taiwan, and China.
Over the last two years Shire has significantly refocused its R&D efforts on products in its core therapeutic areas, which meet the needs of the specialist physician. The Company has also concentrated its resources on obtaining regulatory approval of its later-stage pipeline products within its core therapeutic areas.
Evidence of the successful execution of this strategy can be seen from the progression of the Companys development pipeline over the last two years. Since January 2004, five products have received regulatory approval in the US and two in Europe and as at December 31, 2005, the Company had five products in registration.
These actions are aimed at delivering the benefit of increased returns from the development of later-stage product candidates that have a lower risk profile.
Shires acquisition of TKT was driven, in part, by the comparatively low risk profile of its product portfolio. The HGT product portfolio is viewed by Shire as relatively low risk as the diseases that the HGT products seek to treat are those caused by known human enzyme deficiencies. Using products with a known mechanism of action should reduce the risk of drug development.
R&D costs in 2006 will be affected by Shires planned regulatory filings, Phase 3(b) and Phase 4 studies to support new product launches, the commencement of Phase 3 trials on GA-GCB, the transfer of two HGT projects into clinical development and the $50 million milestone payment to New River paid upon acceptance of the NDA by the FDA.
Patents and Market Exclusivity
The loss or expiration of patent protection or market exclusivity with respect to any of the Companys major products could have a material adverse effect on future revenues and net income as generic manufacturers may produce similar drugs and generally be able to sell the Companys drugs at a lower price as their costs of development are significantly lower than Shires. As ADDERALL XR is, in revenue terms, Shires most significant product, representing 46% of total revenues (2004: 45%), the loss, expiration or circumvention of patent protection on this product in particular will be material to the Companys revenues and earnings.
Shire is engaged in legal proceedings with a generic manufacturer with respect to its ADDERALL XR patents and the patents for certain other products. These are discussed in more detail in ITEM 3: Legal Proceedings.
The potential impact of the introduction of generic products is illustrated by the approval of several generic versions of AGRYLIN, which, as expected, adversely affected Shires sales of this product in 2005.
In consequence of the issues associated with the loss or expiry of patent protection or market exclusivity, Shire seeks to focus its business development activity on the acquisition and in-licensing of products and projects which have the benefit of long-term patent protection and market exclusivity.
As part of its strategy of focusing on later-stage and hence lower-risk development projects, the Company embarked on a disposal program of non-core assets. In 2005, the Company divested its US drug formulation business operated by Shire Laboratories, Inc. and out-licensed SPD 754, a pipeline product for the treatment of HIV. In 2004, the Company sold its vaccines business and out-licensed its oncology product TROXATYL while in 2003, the early-stage research unit (Lead Optimization) was closed.
The Company remains active in seeking out opportunities to acquire new products or companies that fit its business model. In January 2005, the Company in-licensed NRP 104 from New River and in July 2005, completed the acquisition of TKT.
Organization and Structure
During 2005, the Company:
As a result of the scheme, distributable reserves available to the holding company of the Group increased to $2,946 million at December 31, 2005 (2004: $160 million). The distributable reserves will enable the Group to pursue a long-term dividend policy.
ADDERALL XR patent litigation
Third notice letter from Teva
On January 18, 2006, Shire received a third notice letter from Teva Pharmaceuticals USA, Inc. advising it of an amendment to Tevas existing ANDA for generic versions of ADDERALL XR. The amendment is directed to an additional strength of 25mg. As previously announced, Tevas February 2005 notice letter was directed only to 10mg and 30mg dosages and Tevas June 2005 notice letter was directed only to 5mg, 15mg and 20mg dosages. Shire is currently reviewing the details of Tevas latest notice letter.
Settlement of Impax litigations
On January 19, 2006, Shire settled its ADDERALL XR patent infringement lawsuits with Impax. The litigations involved Shire US patents, Nos. 6,322,819 (the 819 Patent), 6,605,300 (the 300 Patent) and 6,913,768 (the 768 Patent). As part of the settlement, Impax has confirmed that its proposed generic ADDERALL XR product infringes Shires 819, 300 and 768 Patents and that the three patents are valid and enforceable. Under the terms of the settlement, Impax will be permitted to market generic versions of ADDERALL XR in the US no later than January 1, 2010, and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shires authorized generic. No payments to Impax are involved in the settlement agreement.
On January 26, 2006, the FDA accepted New Rivers NDA for NRP104 for review. This has triggered a $50 million milestone payment by the Company to New River.
The Company has submitted applications for marketing approval to a number of European regulatory agencies and also filed a New Drug Submission for SPD476 with Health Canada.
IDB loan repayment
On February 10, 2006, the Company received notice from IDB that it intended to repay in full all of its loan drawings for injectable flu development of $70.6 million, together with accrued and capitalized interest of $8.1 million (see Note 6 to the Companys consolidated financial statements contained in Part IV of this Annual Report). The Company received the $78.7 million outstanding on February 14, 2006.
The amounts outstanding in respect of IDB drawings for pipeline development (principal drawings $29.4 million), are unaffected by this repayment.
Research and development
Shire focuses its development resources on late-stage development projects within its core therapeutic areas of CNS, GI, HGT and GP.
Products in pre-launch at December 31, 2005
Products in registration at December 31, 2005
Products in late stage development as at December 31, 2005
Products in early stage development as at December 31, 2005
Results of operations for the years to December 31, 2005 and 2004
For the year to December 31, 2005, the Companys total revenues increased by 17% to $1,599.3 million, compared to $1,363.2 million in 2004. Net loss for the year to December 31, 2005, was $410.8 million compared to net income of $269.0 million in 2004. The Companys net loss for 2005 was primarily attributable to the in-process R&D write-off of $673.0 million following the acquisition of TKT.
All product sales are reported in the Pharmaceutical Products segment, all royalties are reported in the Royalty segment.
* This represents REPLAGAL sales for the five-month period since the acquisition of TKT.
The following discussion includes references to prescription and market share data for key products. The source of this data is IMS Health, December 2005.
During 2005, the Company concluded new fee for service agreements with two of its three significant wholesale customers. These agreements, which are commonplace in the pharmaceutical industry, change the way wholesalers are compensated. Under the agreements, the wholesalers receive a distribution fee from
pharmaceutical suppliers. These fee for service agreements eliminate wholesalers' incentives to acquire and hold excess inventories. The Company believes this will reduce the significant impact of wholesaler stocking and de-stocking on its product sales. Further, the wholesalers will provide data regarding their inventories of the Company's products it has on hand. The Company is negotiating a fee for service agreement with its remaining significant wholesale customer. Fees for service are treated as a sales deduction, thus affecting revenues rather than cost of sales.
US prescriptions for ADDERALL XR for the year to December 31, 2005, were up 12%. ADDERALL XR, further strengthened its position as the leading brand in the US ADHD market with a 1% increase in market share to an all time high of 26% in December 2005 (December 2004: 25%). In addition, the US ADHD market grew 5% overall compared to the same period in 2004.
Product sales growth was higher than prescription growth for the year due mainly to the impact of price increases in December 2004 and August 2005, partially offset by a decrease in pipeline inventory and higher sales deductions.
FDA approval of the adolescent indication for ADDERALL XR was received on July 22, 2005.
On February 12, 2005, Shire announced that it had suspended sales of ADDERALL XR in Canada at the request of Health Canada. On August 24, 2005, Shire announced that Health Canada would reinstate the marketing authorization of ADDERALL XR in Canada effective August 26, 2005. This reinstatement follows the acceptance by Health Canada of the recommendations from the New Drug Committee, which was appointed by Health Canada at Shires request to review the suspension of ADDERALL XR in Canada.
During October 2005, Shire filed a Citizen Petition with the FDA requesting that the FDA require more rigorous bioequivalence testing or additional clinical testing for generic or follow-on drug products that reference ADDERALL XR before they can be approved. Shire believes that these requested criteria will ensure that generic formulations of ADDERALL XR or follow-on drug products will be clinically effective and safe. In January 2006, Shire chose to file a supplemental amendment to its original Citizen Petition, which included additional clinical data in support of the original filing. The FDA has six months to respond to Shires petition and while this petition is under review it will not grant final approval of generic or follow-on drug products referencing ADDERALL XR.
On February 9, 2006, an FDA Advisory Committee recommended to the FDA that risk information about cardiovascular events be included in a "black box warning" for all stimulant medicines used to treat ADHD. In making its recommendation, the Advisory Committee recognized that the reported incidence rates of the rare serious cardiovascular adverse events that were discussed by the Committee are generally within the rates that would be expected from the untreated general population. ADDERALL XR and ADDERALL already include a "black box warning" in their labels for safety concerns related to amphetamine abuse or misuse and also warn of the risk of sudden death in patients with structural cardiac abnormalities. Shire stands behind the current labeling and believes that further action is unwarranted. It is too early to tell at the time of filing of this Annual Report on Form 10-K what impact the actions of the FDA will have on consumer sentiment in the US ADHD market or on ADDERALL XRs US market share.
In January 2006, Shire settled its ADDERALL XR patent infringement lawsuits with Impax. The litigations involved Shire US patents, Nos. 6,322,819 (the 819 Patent), 6,605,300 (the 300 Patent) and 6,913,768 (the 768 Patent). As part of the settlement, Impax has confirmed that its proposed generic ADDERALL XR product infringes Shires 819, 300 and 768 Patents and that the three patents are valid and enforceable. Under the terms of the settlement, Impax will be permitted to market generic versions of ADDERALL XR in the US no later than January 1, 2010, and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shires authorized generic.
Shires ADDERALL XR patent infringement lawsuits with Barr continue. Shire is seeking a ruling that Barrs Abbreviated New Drug Application (ANDA) seeking permission to market its generic versions of ADDERALL XR infringes the 819, 300 and 768 Patents. Barrs 30-month stay under the Hatch-Waxman Act expired on February 18, 2006. Following the expiry of the 30 month stay, the FDA may approve Barrs ANDA. A final pre-trial conference in the 819 and 300 patent cases is set for March 10, 2006. No trial date has been set. Shire is continuing its discussions with Barr in connection with these lawsuits and the discussions are progressing. For further information see ITEM 3: Legal Proceedings. If the Company does not prevail in the lawsuits, the Companys sales of ADDERALL XR will decrease. Any decrease in the sales of ADDERALL XR would significantly reduce revenues and earnings.
US prescriptions for the year to December 31, 2005, were down 8% compared to the previous year. This was due primarily to supply constraints, a 4% decrease in Shires market share of the total US extended release carbamazepine prescription market to 42% in December 2005 (December 2004: 46%) and a 5% decrease in that
market as a whole. The supply constraints have now been resolved.
Product sales for the year to December 31, 2005, were up 33% compared to the previous year. The difference between sales growth and the lower level of prescriptions is due to price increases in August 2004 and October 2005 and to lower sales deductions than in 2004.
Patent litigation proceedings with Nostrum relating to CARBATROL are in progress. For further information see ITEM 3: Legal Proceedings.
US prescriptions for the year to December 31, 2005 were up 6% compared to the previous year. The increase was due to the success of the co-promotional agreement with Solvay Pharmaceuticals Inc., the impact of the 500mg dosage form launched in the third quarter of 2004 and a 2% increase in the total US oral mesalamine prescription market.
Product sales for the year to December 31, 2005 were up 18%, compared to the previous year. The difference between sales growth and prescription growth is due to the impact of the September 2004 price increase and a normalization of pipeline inventories compared to lower levels in 2004.
PENTASA had an 18% share of the total US oral mesalamine prescription market in December 2005 (December 2004: 18%).
AGRYLIN/XAGRID sales worldwide for the year to December 31, 2005 were $92.8 million, down 39% compared to the previous year (2004: $152.5 million).
North American sales were $46.0 million, down 61% compared to the previous year (2004: $119.1 million). This reduction was expected following the approval of generic versions of AGRYLIN in the US market in April 2005.
Rest of the World sales (all sales outside North America) were $46.8 million, up 40%, compared to the previous year (2004: $33.4 million). This was primarily due to the successful launch of XAGRID in the UK, Germany and France in the first quarter of 2005 and Spain in the third quarter of 2005. In accordance with current orphan drug legislation in the EU, XAGRID will have up to 10 years of marketing exclusivity in the EU.
FOSRENOL was launched in the US in January 2005. Product sales for the year to December 31, 2005 were $53.5 million, with US prescriptions for the year totaling 137,000.
FOSRENOL had an 8% share of the total US phosphate binding market in December 2005.
On November 28, 2005 the FDA approved new, higher dose formulations of FOSRENOL. New, higher dose strengths of 750 milligrams and 1000 milligrams were shipped to wholesalers in the US in December 2005. Higher dose strengths should help to reduce the number of pills that end-stage renal disease patients need to take to achieve target phosphorus levels.
Product sales in Q4 2005 were $29.0 million compared with $9.7 million in Q3 2005. The variance relates primarily to increased pipeline inventory sales to wholesalers of the new higher dose formulation during December.
FOSRENOL was launched in Austria in December 2005. Shire continues its discussions relating to FOSRENOL with regulatory authorities and reimbursement agencies across Europe and other regions and further launches are expected in European markets over the next few months, subject to obtaining national approvals and concluding pricing and reimbursement negotiations.
REPLAGAL was acquired by Shire as part of the TKT acquisition, which completed on July 27, 2005. Product sales for the period since acquisition were $41.3 million. The majority of REPLAGAL sales are in Europe. Total sales for the full year, including pre-acquisition sales, were $94.6 million (2004: $77.4 million). The increase in sales (including pre-acquisition sales) is primarily due to greater European coverage by an increased number of sales representatives.
Foreign exchange effect
As many of the Companys sales revenues are earned in currencies other than US dollars (primarily Canadian dollars, Pounds Sterling, Swedish Krona and Euros), revenue growth reported in US dollars includes the impact of translating the sales made in a local currency, into US dollars. With the US dollar strengthening against these currencies over the last 12 months, the translation of sales made in these currencies into US dollars has impacted
on the reported growth rates. The table below shows the effect of foreign exchange translations on the revenue growth of the key affected products as well as the underlying performance of key products in their local currency:
Royalty revenue increased 5% to $242.9 million for the year to December 31, 2005, (2004: $230.4 million) primarily as a result of strong sales growth.
Royalties from sales of 3TC for the year to December 31, 2005, were $159.8 million, an increase of 3% compared to 2004 ($155.8 million). This was due to the continued growth in the nucleoside analog market for HIV and a small positive impact of foreign exchange movements.
Shire receives royalties from GSK on worldwide 3TC sales. GSKs worldwide sales of 3TC for the year to December 31, 2005, were $1,211 million, an increase of 2% compared to prior year (2004: $1,184 million).
Royalties from sales of ZEFFIX for the year to December 31, 2005, were $30.5 million, an increase of 11% compared to 2004 ($27.4 million), due to strong growth in the Japanese market and a small positive impact of foreign exchange movements.
Shire receives royalties from GSK on worldwide ZEFFIX sales. GSKs worldwide sales of ZEFFIX for the year to December 31, 2005, were $266 million, an increase of 11% compared to prior year (2004: $240 million).
Other royalties are primarily in respect of REMINYL and REMINYL XL (now marketed as RAZADYNE and RAZADYNE ER in the US), a product marketed worldwide by Janssen Pharmaceutica N.V. (Janssen), an affiliate of Johnson and Johnson, with the exception of the UK and the Republic of Ireland where Shire acquired the exclusive marketing rights from May 2004.
Sales of the REMINYL/RAZADYNE range, for the symptomatic treatment of mild to moderately severe dementia of the Alzheimers type, are growing well in the Alzheimers market.
On April 11, 2005, Ortho-McNeil Neurologics Inc. (Janssen's US affiliate company) announced that REMINYL would be marketed in the US under the new product name of RAZADYNE. Subsequently, in the US, REMINYL XL was launched as RAZADYNE ER. Ortho-McNeil Neurologics Inc. worked closely with the FDA on a name change following dispensing errors in the US between REMINYL and the Type 2 diabetes mellitus drug known as AMARYL. Shire is only aware of one similar dispensing error outside the US.
On March 1, 2005, the National Institute for Health and Clinical Excellence (NICE) in England and Wales issued an Appraisal Consultation Document (ACD). This document included a recommendation that all existing approved products for the symptomatic treatment of mild to moderate Alzheimer's disease in England and Wales should no longer be reimbursed by the National Health Service (NHS) when used in the treatment of new patients. The recommendation potentially affected sales of REMINYL and of REMINYL XL in England and Wales. An amended ACD was issued by NICE on January 23, 2006. The new ACD recommends that REMINYL and REMINYL XL, together with other drugs in the same class, be reimbursed by the NHS when used for the treatment of either (i) patients with existing Alzheimer's disease already being treated with one of these drugs; or (ii) newly diagnosed patients once their disease has progressed to a moderate stage. Therefore the current recommendation excludes the reimbursement of treatment for patients presenting with mild symptoms of Alzheimers disease for which REMINYL and REMINYL XL are approved. A final appraisal document is expected from NICE in July 2006.
Cost of product sales
For the year to December 31, 2005, the cost of product sales amounted to 16% of product sales (2004: 13%). The decrease in gross margin is primarily due to the addition of REPLAGAL to Shires product portfolio following the acquisition of TKT. REPLAGALs cost of product sales relates entirely to the acquired inventories, which in accordance with US generally accepted accounting principles (GAAP), have been accounted for at fair value, estimated to be 97% of the expected sales price of REPLAGAL. Accordingly, little or no margin will be reflected for REPLAGAL sales until all acquired finished goods have been sold (anticipated Q3 2006). For the year to December 31, 2005 the cost of product sales for REPLAGAL includes a $41.9 million adjustment in respect of the acquired inventory of which $39.8 million related to sales of acquired finished goods and $2.1 million was a write-off of damaged work-in-process. In 2005, this fair value adjustment increased Shires cost of product sales by 3%.
Research and development (R&D)
R&D expenditure increased from $196.3 million in the year to December 31, 2004, to $336.2 million in 2005. Expressed as a percentage of total revenues, R&D expenditure was 21% for the year to December 31, 2005 (2004: 14%). The increase was primarily due to:
The New River payment and the R&D expenditure on ELAPRASE and GA-GCB represented 5% of R&D expenditure as a percentage of revenues.
Shires pipeline is now well advanced with seven projects in late stage development or registration.
Selling, general and administrative (SG&A) expenses
Total SG&A costs increased from $516.6 million in the year to December 31, 2004, to $705.6 million in the year to December 31, 2005, an increase of 37%. As a percentage of product sales, SG&A expenses were 53% (2004: 46%).
1. Excludes depreciation from manufacturing plants of $3.5 million (2004: $2.7 million) which is included in cost of product sales.
SG&A expenses increased from $458.1 million in the year to December 31, 2004, to $631.2 million in 2005, an increase of 38%. As a percentage of product sales, these expenses were 48% (2004: 41%).
This increase was expected, with additional costs attributable to four product launches during 2005, together with incremental costs in 2005 associated with the new FOSRENOL and EQUETRO sales forces, patent litigation and infrastructure, $24.5 million of SG&A costs related to the acquired TKT business and $4.5 million related to the set up of the new listed holding company for the Shire Group.
The depreciation charge for the year to December 31, 2005 was $29.2 million (2004: $19.8 million), which in 2005 included property, plant and equipment write-downs of $6.5 million (2004: $1.6 million). Amortization charges, including the amortization on acquired products, were $45.2 million for the year to December 31, 2005 (2004: $38.7 million).
Intangible asset impairments
The charge for intangible asset impairments for the year to December 31, 2005, was $5.6 million (2004: $13.5 million).
The approval of generic versions of AGRYLIN in April 2005 and the decision not to support and promote certain non-core products going forward resulted in changes to the estimate of the Companys future cash flows and, as a result, impairments were required in both 2005 and 2004.
As previously disclosed, the Company began a consolidation of its North American sites in 2004, with the aim of decreasing the number of sites from 16 to four, including the opening of a new US headquarters office in Wayne, Pennsylvania. The Company recorded costs of $9.3 million in 2005 and $48.5 million in 2004 primarily associated with:
Following the closure of the Newport site in July 2005, the site consolidation is now complete and no further reorganization costs are expected.
For the year to December 31, 2005, the Company incurred $9.7 million of costs associated with the integration of the TKT business into the Shire Group (2004: $nil). This included retention payments for key staff of $7.0 million, information technology costs of $1.0 million and other costs of $1.7 million.
In-process R&D write-off
During the year to December 31, 2005, as required by Financial Accounting Standards Board Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method" (FIN 4), the Company wrote off the portion of the TKT purchase price allocated to in-process research and development of $673.0 million. This amount represents the value of those intangible assets acquired as part of the TKT acquisition, which at the time of acquisition had not been approved by the FDA or other regulatory authorities, including ELAPRASE and GA-GCB. For the determination of the fair value of in-process research and development see Critical Accounting Estimates below.
For the year to December 31, 2005, the Company received interest income of $35.3 million (2004: $21.9 million). The increase compared to 2004 is due to higher interest rates on the Companys US cash deposits which were partially offset by the interest foregone by the Company on the net payments of $1.1 billion made to date in respect of the acquisition of TKT.
For the year to December 31, 2005, the Company incurred interest expense of $12.0 million (2004: $12.3 million).
In 2005, this expense included a $7.7 million provision for interest, which may be awarded by the court in respect of amounts due to former holders of approximately 11.3 million shares of TKT common stock who have submitted written demands for appraisal of these shares (see ITEM 3: Legal Proceedings and Note 27 to the Companys consolidated financial statements contained in Part IV of this Annual Report). In addition, interest expense includes $1.2 million, relating to the costs of a bridging loan to finance the TKT acquisition and other interest related expenses of $3.1 million.
In 2004, interest expense included the write-off of $7.4 million of deferred debt acquisition costs arising on the issue of convertible loan notes in August 2001. The write-off was required as a significant portion of the convertible loan notes were redeemed. The $7.4 million represented the balance of these fees at the date of redemption in August 2004. In addition, interest expense included a $4.2 million interest charge incurred prior to the redemption and $0.1 million of other interest related expenses.
Other income/(expense), net
For further details see Note 26 and Note 6 to the Companys consolidated financial statements contained in Part IV of this Annual Report.
The write-down in investments in 2005 and 2004 resulted from events and circumstances that indicated there was an other-than-temporary impairment of investments and, accordingly, management recorded an impairment based on its assessment of fair value. Further details are disclosed in Note 11 to the Companys consolidated financial statements contained in Part IV of this Annual Report.
Investment income for 2005 included a $3.9 million realized gain on the sale of a portfolio investment (2004: $14.8 million).
The Companys effective tax rate for 2005 was negative 29% (a tax charge of $92.1 million on losses from continuing operations before income taxes and equity method investees of $320.9 million). The significant difference from the prior year effective tax rate of 28% is due to the in-process research and development write-off of $673.0 million, which is not tax deductible.
As at December 31, 2005, the Company had deferred tax assets net of valuation allowances of $116.2 million (2004: $78.1 million). The increase in deferred tax is primarily attributable to the acquisition of TKT that resulted in a net deferred tax asset of $60.4 million being recorded in the opening day balance sheet, although part of the asset was subsequently realized in the post acquisition period. Realization of deferred tax assets is dependent upon generating sufficient taxable income to utilize such assets. Although realization of these assets is not assured, it is more likely than not that the amount recognized will be realized. See Note 29 to the Companys consolidated financial statements contained in Part IV of this Annual Report for expiry dates of these tax losses.
Equity in earnings/(losses) of equity method investees
Net losses of $1.0 million were recorded for the year to December 31, 2005 (2004: net earnings of $2.5 million). This comprised earnings of $5.3 million from the 50% share of the antiviral commercialization partnership with GSK in Canada (2004: $4.4 million), offset by the Companys share of losses in the GeneChem and EGS Healthcare Funds of $6.3 million (2004: $1.9 million).
During the year to December 31, 2005 gains on disposition of the discontinued operations totaled $3.1 million. This resulted from the finalization of the working capital agreement with ID Biomedical Inc. (IDB), which was part of the sale of Shires vaccines business to IDB in 2004. As a result, a disputed amount, which had previously been provided for, was received and the corresponding provision was released.
Results of operations for the years to December 31, 2004 and 2003
For the year to December 31, 2004, the Companys total revenues increased by 13% to $1,363.2 million, compared to $1,211.6 million in 2003. Net income for the year to December 31, 2004, was $269.0 million compared to $276.1 million in 2003, a decrease of 3%. The Companys net income for 2004 has been impacted by both the loss on disposition of the vaccines business and the $48.5 million of reorganization costs recorded in 2004.
The following table provides an analysis of the Companys total revenues by source:
Following a restructuring of operational management along therapeutic areas in 2005, management has re-evaluated and amended its internal reporting structures and as a result changed its reporting segments.
All product sales are reported in the Pharmaceutical Products segment, all royalties are reported in the Royalty segment.
The following discussion includes references to prescription and market share data for key products. The source of this data is IMS, December 2004.
US prescription growth for the year to December 31, 2004, was 21%, due primarily to a 17% increase in the US ADHD market. As at December 2004, ADDERALL XR had a 25% market share of the total US ADHD market (December 2003: 23%), despite increased competition and was the leading brand in the US ADHD market.
The difference between sales growth and prescription growth is due to the impact of price increases in November 2003, June 2004 and December 2004 which have been partially offset by higher sales deductions and allowances (primarily Medicaid rebates and promotional activities).
AGRYLIN / XAGRID
US sales were up 13% in the year to December 31, 2004, primarily due to increased prescription volumes (up 6% compared to 2003) and the effect of price increases in April and November 2003. AGRYLIN had a 28% share of the total US AGRYLIN, hydrea and generic hydroxyurea prescription market in December 2004, compared to 27% in December 2003.
International sales (all sales outside of the US) reported in US dollars were up 20%, due to strong growth in Canadian and European markets and, because these sales revenues are earned in currencies other than US dollars, the benefit of favorable translation effects. Sales outside the US for the year to December 31, 2004, were $46.8 million (2003: $38.9 million).
US prescription volumes increased by 2% in the year to December 31, 2004, in line with the oral mesalamine/olsalazine market growth.
The difference between sales growth and prescription growth was due to price increases in April and November 2003 and September 2004 and a moderate level of wholesaler stocking in 2004, primarily due to the launch of the 500mg formulation.
PENTASA had an 18% share of the total US oral mesalamine/olsalazine prescription market in December 2004, unchanged from December 2003.
US prescription volumes were up 11% in the year to December 31, 2004, due to the impact of renewed promotional efforts, despite an overall decline in the carbamazepine market of 5%. The difference between the sales growth and prescription growth was due to price increases in 2003 and August 2004 being more than offset by higher sales deductions.
CARBATROL had a 46% share of the total US extended release carbamazepine prescription market in 2004 (2003: 43%).
Foreign exchange effect
As many of the Companys sales revenues are earned in currencies other than US dollars (primarily Canadian dollars, Pounds Sterling and Euros), revenue growth reported in US dollars includes the impact of translating the sales made in a local currency, into US dollars. With the US dollar weakening against these currencies over the 12 months to December 31, 2004, the translation of sales made in these currencies into US dollars has had a beneficial impact on the reported growth rates. The table below shows the effect of foreign exchange translations on the revenue growth of the key affected products as well as the strong underlying performance of key products in their local currency:
The growth in 3TC royalties of 8% in 2004 was primarily due to continued sales growth in all markets. The sales increase includes the positive effect of foreign exchange translation in the year.
For 3TC Shire receives royalties from GSK on worldwide sales. GSKs worldwide sales of 3TC for the year to December 31, 2004, were $1,184 million, an increase of 8% compared to prior year (2003: $1,099 million).
The growth of ZEFFIX royalties of 11% in 2004 was due to continued growth in the UK, the US, China and Japan. Foreign exchange translation also positively impacted performance in the year.
For ZEFFIX Shire receives royalties from GSK on worldwide sales. GSKs worldwide sales of ZEFFIX, for the year to December 31, 2004, were $240 million, an increase of 12% compared to prior year (2003: $214 million).
Other royalties are primarily in respect of REMINYL, a product marketed worldwide by Janssen, with the exception of the UK and the Republic of Ireland where Shire acquired the exclusive marketing rights from May 2004.
Cost of product sales
For the year to December 31, 2004, cost of product sales represented 13% of product sales (2003: 14%). The decrease can be attributed to the change in product mix, with a greater proportion of sales coming from higher margin products.
Research and Development (R&D) expenses
R&D expenditure increased from $187.7 million in 2003 to $196.3 million in 2004, with savings from the closure of the Canada-based Lead Optimization business in 2003 partially re-invested to fund late stage Phase 3 trials. Expressed as a percentage of total revenues, R&D expenditure was 14% for the year to December 31, 2004 (2003: 15%).
Selling, general and administrative (SG&A) expenses
Sales costs increased from 11% of product sales in 2003 to 13% in 2004. The increase in costs was primarily due to the recruitment in Q4 2004 of a sales force of about 85 people exclusively to promote FOSRENOL in the US.
Marketing costs increased from 13% to 16% of product sales between 2003 and 2004 due primarily to the launch of new products including ADDERALL XR Adult (August 2004), FOSRENOL in the US (January 2005) and XAGRID and FOSRENOL in Europe (phased throughout 2005 and 2006).
The increase in the depreciation of tangible fixed assets in 2004 was primarily due to a shortening of the useful economic lives on certain property, plant and equipment as a result of the US site rationalization.
Amortization of intangible assets increased primarily due to the purchase of $49.2 million of intangible assets in 2004, and the reassessment of the useful economic lives of certain intangibles.
Other SG&A costs, fell from 13% of product sales to 12.6% .
Intangible asset impairments
During the year to December 31, 2004, the Company recorded impairments to intangible assets of $13.5 million (2003: $27.5 million).
In 2004 the impairments resulted from a change in operational management. Decisions were made not to support and promote certain non-core products going forward and this resulted in changes to the estimate of future cash flows and consequently impairments were made.
In 2003 there were asset impairments of $12.1 million resulting from a decline in product prices, which decreased estimated future cash flows. Additionally there were asset write-downs of $15.4 million resulting from a decision not to renew certain product licenses as they were not core to the business.
The Company began a consolidation of its North American sites in 2004. The Company recorded costs of $48.5 million in 2004 primarily associated with:
2003 Reorganization Costs
During 2003 the Company closed its early research center in Canada and exited certain properties as a result of a strategic review. The Company recorded costs of $23.9 million primarily associated with:
In the year to December 31, 2004, interest income of $21.9 million was received compared with $16.9 million in 2003. This increase was primarily due to rising interest rates in the US.
Interest expense increased to $12.3 million (2003: $9.5 million). This increase was due to the write-off of costs capitalized at the time the convertible loan notes were issued, offset by a decrease in interest expense in Q4. These costs were being amortized over the life of the notes but were written-off following the redemption of substantially all of the loan notes during the third quarter of 2004. The interest charged on the 2% convertible notes in 2004 was $4.8 million (2003: $8.0 million).
Other income/(expense), net
The increase in investment income in 2004 resulted from the sale of an investment valued at $11.9 million, realizing a gain of $14.8 million.
The write down in investments in 2004 and 2003 resulted from events and circumstances that indicated there was an other-than-temporary impairment of investments and accordingly management recorded an impairment based on its assessment of fair value.
For the year to December 31, 2004, income taxes increased by 20% to $129.1 million (2003: $107.4 million). The Companys effective tax rate was 28% for the year to December 31, 2004 (2003: 26%).
As at December 31, 2004, the Company had deferred tax assets net of valuation allowances of $78.1 million (2003: $63.1 million). The increase in deferred tax assets net of valuation allowances is primarily attributable to an increase this year in short-term temporary differences in sales related provisions.
Equity in earnings/(losses) of equity method investees
Earnings of $2.5 million were received for the year to December 31, 2004 (2003: $1.1 million loss). This primarily related to $4.4 million received from the Companys 50% share of earnings on its antiviral commercialization partnership with GSK in Canada (2003: $3.5 million). This was offset by Shires share of losses incurred in other investments. Included in the figure to December 31, 2003, was a loss of $4.6 million representing the Companys 50% share of the losses of its commercialization partnership with Qualia Computing Inc., which was sold in December 2003.
The vaccines business impacted net income with losses of $20.1 million and $21.9 million for the year to December 31, 2004 and 2003, respectively. In addition the Company recorded a loss on the disposition of the vaccines business of $44.2 million in the year to December 31, 2004.
Liquidity and capital resources
The Companys funding requirements depend on a number of factors, including its development programs; corporate, business and product acquisitions; the level of resources required for the expansion of manufacturing and marketing capabilities as the product base expands; increases in accounts receivable and inventory which may arise as sales levels increase; competitive and technological developments; the timing and cost of obtaining required regulatory approvals for new products; the timing and quantum of milestone payments on collaborative projects; the timing of and quantum of tax and dividend payments; the timing and quantum of purchases of Shire shares in the market to satisfy option exercises and the continuing cash generated from sales of Shires key products.
An important part of Shires business strategy is to protect its products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The Company intends to defend its intellectual property and as a result may need cash for funding litigation expenses incurred.
The Company ordinarily finances its activities through cash generated from operating activities, private and public offerings of equity and debt securities and the proceeds of asset or investment disposals.
Multicurrency Revolving Facilities Agreement
In connection with the acquisition of TKT, Shire and certain members of the Shire Group entered into a Multicurrency Revolving Facilities Agreement (the Facilities Agreement) with ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited, HSBC Bank plc and The Royal Bank of Scotland plc (the Lenders) on June 15, 2005. The Facilities Agreement comprises two credit facilities: (i) a committed multicurrency three year revolving loan facility in an aggregate amount of $500 million (Facility A) and (ii) a committed 364 day revolving loan facility in an aggregate amount of $300 million (Facility B and together with Facility A, the Facilities). Shire has agreed to act as guarantor for any of its subsidiaries that borrow under the Facilities Agreement.
Facility A may be used for general corporate purposes, including financing the purchase price and other costs with respect to the acquisition of TKT (including refinancing TKTs existing indebtedness). Facility B may be used only for financing certain milestone payments due under the agreement between Shire, and inter alia, New River Pharmaceuticals Inc. (New River), dated January 31, 2005.
Facility A terminates on June 15, 2008, and Facility B terminates on June 14, 2006. At Shires request, the Lenders may agree to successive annual extensions of Facility B, but not beyond the maturity date of Facility A. Alternatively, Shire has the right to draw Facility B or convert existing loans under Facility B into a term loan with the same maturity date as Facility A.
The availability of loans under each of the Facilities is subject to customary conditions, including the absence of any defaults thereunder and the accuracy (in all material respects) of Shires representations and warranties contained therein.
The Facilities include representations and warranties, covenants and events of default, including requirements that Shires ratio of Net Debt to EBITDA (as defined in the Facilities Agreement) not exceed 3.0 to 1 and that the ratio of EBITDA to Net Interest be not less than 4.0 to 1, both in respect of the most recently ended fiscal year, and limitations on the creation of liens, disposal of assets, incurrence of indebtedness, making of loans and giving of guarantees.
Interest on loans under the Facilities will be payable on the last day of each interest period, which period may be one, two, three or six months at the election of Shire (or as otherwise agreed with the Lenders). The interest rate on each loan for each interest period is the percentage rate per annum which is the aggregate of the applicable margin (ranging from 0.35 to 0.65 per cent per annum, depending on the ratio of Net Debt to EBITDA), LIBOR, and mandatory cost, if any (as calculated in accordance with Schedule 5 of the Facilities Agreement). Shire shall also pay fees equal to 35 per cent per annum of the applicable margin on available commitments under Facility A for the availability period applicable to Facility A and 20 per cent per annum of the applicable margin on available commitments under Facility B for the availability period applicable to Facility B in respect of the period prior to January 1, 2007, and 30 per cent per annum of the applicable margin thereafter. Interest on overdue amounts under the Facilities will accrue at a rate, which is one percent higher than the rates otherwise applicable to the loans under the Facilities.
Upon a change of control of Shire or upon the occurrence of an event of default and the expiration of any applicable cure period, the total commitments under the Facilities may be cancelled, all or part of the loans, together with accrued interest and all other amounts accrued or outstanding may be immediately due and payable and all or part of the loans may become payable on demand. Events of default under the Facilities include: (i) non-payment of any amounts due under the Facilities, (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of the group, (vii) certain ERISA breaches which would have a material adverse effect, (viii) change of control of a subsidiary of Shire that is a party to the Facilities Agreement, or (ix) if it becomes illegal for Shire or any of its subsidiaries that are parties to the Facility Agreement to perform their obligations or they repudiate the Facilities Agreement or any Finance Document (as defined in the Facilities Agreement). The Facilities Agreement is governed by English law.
As at December 31, 2005, the Company had not drawn-down on these Facilities.
Shire anticipates that its operating cash flow together with available cash, cash equivalents and short-term investments and the above mentioned debt facility will be sufficient to meet its anticipated future operating expenses, outstanding costs related to the acquisition of TKT, capital expenditures, dividends, share repurchases and debt service and lease obligations as they become due over the next twelve months.
If the Company decides to acquire other businesses, it expects to fund these acquisitions from existing cash resources, the debt facility discussed above and possibly through new borrowings and/or the issue of new equity if necessary.
Sources and uses of cash
The following table provides an analysis of the Companys gross and net cash funds as at December 31, 2005 and 2004:
Cash flow activity
Net cash provided by operating activities for the year to December 31, 2005, was $381.1 million, a decrease of $107.6 million compared to the previous year. The reduction in cash generation is primarily due to the operating losses of the acquired TKT business, the $50 million upfront payment to New River and the timing of working capital payments.
Net cash used in investing activities was $836.4 million in the year to December 31, 2005. Decreases in short-term investments of $366.7 million along with proceeds of $60.0 million from the redemption by IDB of its subscription receipts and the receipt from IDB of additional proceeds from the sale of the vaccines business of $32.2 million, offset cash paid on the purchase of TKT (net of cash and cash equivalents acquired) of $1,151.5 million, loans made to IDB of $43.2 million (see Note 6 to the Companys consolidated financial statements contained in Part IV of this Annual Report), capital expenditure on property, plant and equipment of $86.2 million and intangible assets of $20.5 million. Capital expenditure on property, plant and equipment included $23.3 million leasehold building improvements, $16.3 million on computer equipment and $3.1 million on furniture and fittings for the new Shire US headquarters at Wayne, Pennsylvania, $10.6 million on IT projects, $5.4 million on the expansion and refurbishment at the Basingstoke Head Office, $3.2 million of plant equipment and $15.9 million on the expansion and modification at Shire US Manufacturing Inc. in the US. Capital expenditure on intangible assets included the final payment for the acquisition of the exclusive commercialization rights to REMINYL in the UK and Republic of Ireland.
Net cash provided by financing activities was $9.6 million for the year to December 31, 2005. This was primarily due to inflows of $37.1 million from the exercise of employee stock options being offset by the dividend payments of $28.5 million in respect of the six months to December 31, 2004 and the six months to June 30, 2005.
The total cash consideration for the acquisition of TKT is expected to be approximately $1.6 billion, subject to change as may be required by the appraisal rights process. As at December 31, 2005, shareholders owning approximately 24.8 million TKT shares had accepted the offer and $916.9 million had been paid to them, $83.9 million was paid in connection with TKT stock options and $170.1 million in connection with convertible notes, outstanding at the date of acquisition. Following the exercise of appraisal rights by former holders of approximately 11.3 million shares of TKT common stock, the remaining $419.9 million, together with any interest that the Court may award, will be paid to them subject to the appraisal process outlined in ITEM 3: Legal Proceedings. For every $1 increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million.
As a result of the acquisition of TKT, cash balances have been significantly reduced. Interest receivable has increased as increases in US interest rates have more than offset the impact of the reduced cash balances. The average cash balances pre-acquisition and post-acquisition of TKT for 2005 were $1.5 billion and $0.6 billion respectively.
Outstanding Letters of credit
As at December 31, 2005, the Company had irrevocable standby letters of credit with Barclays Bank plc in the amount of $15 million providing security on the recoverability of insurance claims and Bank of America in the amount of $7.9 million, providing security on the payment of lease obligations.
Aggregate Contractual Obligations.
As at December 31, 2005, the Companys contractual obligations were as follows:
(iii) TKT shareholders asserting appraisal rights
As at December 31, 2005, appraisal rights had been asserted in respect of approximately 11.3 million shares of TKT common stock. For further information see ITEM 3: Legal proceedings. As at December 31, 2005, the Company recorded a liability of $419.9 million based on the merger consideration of $37 per share for the 11.3 million shares outstanding at that time plus a provision for interest of $7.7 million that may be awarded by the Court (see Note 26 to the Companys consolidated financial statements contained in Part IV of this Annual Report).
Until such time as the appraisal process is complete the Company is unable to determine the extent of its liability. For every $1 increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million.
The contractual obligations table above does not include payments yet to fall due upon the occurrence of certain milestones and other contractual commitments. The most significant payments are as follows:
In connection with the Companys acquisition in 2003 from Noven of the worldwide sales and marketing rights to DAYTRANA, Shire has an obligation to make certain payments on the achievement of the following milestones: $50 million upon FDA approval of the product, which will be capitalized and amortized over its useful economic life; and up to $75 million, linked to future sales performance. An approvable letter was received from the FDA on December 23, 2005. Final regulatory approval is currently expected to be in 2006.
In connection with the Companys collaboration with New River to commercialize NRP104, the Company has an obligation to make certain payments on the achievement of the following milestones: $50 million upon the FDAs acceptance of filing of the NDA; up to $300 million following the first commercial sale of the product, depending on the characteristics of the approved product labeling; $100 million on achieving a significant sales target; and $5 million following the first commercial sale in certain specified EU markets. An upfront payment of $50 million was expensed as an R&D cost during the first quarter of 2005. The NDA for NRP104 was filed on December 6, 2005 and accepted for review by the FDA on January 26, 2006, triggering the $50 million milestone payment, which has now been paid.
FOSRENOL patent rights
In connection with the Companys purchase of the global patents for FOSRENOL from AnorMed Inc. in 2004, the Company has outstanding commitments to pay AnorMED Inc. $6 million when FOSRENOL is approved in certain European countries and $6 million upon receipt of regulatory approval in Japan.
Other R&D commitments
As at December 31, 2005, the Company had commitments of $18.0 million on achievement of specified milestones from products under development in licensed from third parties of which $6.6 million is committed to be paid in 2006.
Off-balance sheet arrangements
There are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Companys financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Foreign currency fluctuations
A number of operating units in the Group have functional currencies other than the US Dollar. As such, the consolidated financial results are subject to fluctuations in exchange rates, particularly those between the US Dollar, Canadian Dollar, Pound Sterling, Euro and Swedish Krona. The accumulated foreign currency translation differences of $62.2 million are reported within accumulated other comprehensive income in the consolidated balance sheet and $1.4 million expense is reported in other income on the consolidated income statement.
As at December 31, 2005, the Company had five outstanding forward foreign exchange contracts with a total principal amount equivalent to $206 million to manage the currency risk associated with certain inter-company loans.
Concentration of credit risk
The Companys revenues from product sales are mainly derived from agreements with major pharmaceutical companies and relationships with pharmaceutical wholesale distributors and retail pharmacy chains. Such clients typically have significant cash resources and as such the risk is considered minimal. The Company has taken positive steps to manage any credit risk associated with these transactions. Shire operates clearly defined credit evaluation procedures. For the year to December 31, 2005, there were three customers in the US who accounted for 69% of the Companys total revenues.
Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments and trade accounts receivable. Excess cash is invested in short-term money market instruments, including bank and building society term deposits, commercial paper and other debt securities from a variety of companies with strong credit ratings. These investments typically bear minimal risk.
Although at reduced levels in recent years, inflation continues to apply upward pressure on the cost of goods and services which are used in the business. However, the Company believes that the net effect of inflation on its operations has been minimal during the past three years.
Critical accounting estimates
The preparation of consolidated financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to provisions for sales deductions, valuation of intangible assets and fixed asset investments, contingent liabilities, the valuation of tax assets and liabilities, the valuation of in-process research and development and inventory acquired with TKT and the amount payable to former holders of TKT common stock of approximately 11.3 million shares who have submitted written demands for appraisal of these shares in relation to the Companys acquisition of TKT on July 27, 2005.
The Company has a number of lawsuits pending that relate to product liability claims. Shire accounts for litigation losses in accordance with SFAS No. 5 Accounting for Contingencies (SFAS No 5). Under SFAS No. 5, loss contingency provisions are recorded for probable losses when management is able to reasonably estimate the loss. Where the estimated loss lies within a range and no particular amount within that range is a better estimate than any other amount the minimum amount is recorded. In other cases management's best estimate of the loss is recorded. These estimates are developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period, as additional information becomes known. Best estimates are reviewed quarterly and estimates are changed when expectations are revised. Any outcome upon settlement that deviates from Shires best estimate may result in an additional expense in a future accounting period. There were no significant changes in estimates in respect of product liability claim provisions in 2005.
(ii) Valuation of intangible assets
The Company has acquired and continues to acquire significant intangible assets, recorded at acquisition cost. As at December 31, 2005, the carrying value of such intangibles was $729.3 million, which primarily related to the Companys AGRYLIN, XAGRID, CARBATROL, COLAZIDE, DAYTRANA, DYNEPO, FOSRENOL, PENTASA, REMINYL, REPLAGAL, SOLARAZE and VANIQA products. Those assets which do not yet have a defined revenue stream and for which there are no alternative uses are expensed upon acquisition as acquired in-process R&D, and those that do have a defined revenue stream (namely commercial products or rights to products awaiting final regulatory approval) are capitalized and amortized over their estimated useful life. Managements estimate of the useful life considers, inter alia, the following factors: the expected use of the asset by the Company; any legal, regulatory, or contractual provisions that may limit the useful life and the effects of demand; competition; and other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels).
A prolonged general economic downturn, sustained government pressure on prices and, specifically, competitive pricing, could create an imbalance of industry supply and demand, or otherwise diminish volumes or profits. Such events, combined with changes in interest rates, could adversely affect Shires valuation of the estimated future net cash flows generated by its long-lived assets. As a result, future operating results could be materially and adversely affected by additional impairment charges related to the recoverability of long-lived assets.
In the year to December 31, 2005, changes to the estimated future net cash flows from certain products resulted in a $5.6 million impairment of intangible assets (2004: $13.5 million, 2003: $27.5 million). In the year to December 31, 2005, the Company has decreased the useful economic life of a product, which resulted in an addition amortization charge in 2005 of $1.7 million.
The Company reviews intangible assets for impairment periodically using an undiscounted net cash flows approach whenever events or circumstances suggest that the carrying value of the intangible asset is not recoverable. If the undiscounted cash flows of an intangible asset are less than its carrying value, the intangible asset is written down to its fair value, based on estimated discounted cash flows. When cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.
(b) Intangible assets acquired through the acquisition of TKT
The fair value of all of the identifiable intangible assets acquired through the acquisition of TKT has been determined using an income approach on a project-by-project basis, by independent valuation specialists. This method starts with a forecast of all of the expected future net cash flows either generated or saved as a result of ownership of the
intellectual property, the customer relationships and the other intangible assets. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.
The forecast of future cash flows requires various assumptions to be made, including:
The valuations are based on information at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by the Companys management. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows.
The Company reviews intangible assets for impairment periodically using an undiscounted net cash flow approach whenever events or circumstances suggest that the carrying value of the intangible asset is not recoverable. If the discounted cash flows of an intangible asset are less than its carrying value, the intangible asset is written down to its fair value, based on estimated discounted cash flows. When cash flows cannot be identified for an individual asset, the review is applied at the lowest group level for which cash flows are identifiable.
(iii) In-process R&D write-off
In-process R&D is defined by FIN 4 as being a development project that has been initiated and achieved material progress but has not yet resulted in a commercially viable product.
As required by FIN 4, the portion of the purchase price allocated to in-process R&D of $673 million, acquired as part of the TKT transaction, was immediately expensed.
In the identification of intangible assets, consideration is given to whether any technology that is identified is developed or in-process. The American Institute of Certified Public Accountants Practice Aid "Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries" gives guidance on the factors that should be considered when identifying in-process R&D.
The fair value of in-process R&D acquired with TKT was determined using the income approach on a project-by-project basis. This method is based on the present value of earnings attributable to the asset or costs avoided as a result of owning the assets. This method includes risk factors, which include applying an appropriate discount rate that reflects the project's stage of completion, the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.
The forecast of future cash flows required the following assumptions to be made:
The valuations are based on information at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by the Companys management. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows.
(iv) Valuation of Equity Investments
The Company has investments in certain public and private pharmaceutical and biotechnology companies. The carrying values of these investments are periodically reviewed for other-than-temporary impairments whenever certain events or circumstances suggest that the carrying value of an investment exceeds the fair market value of the investment. Indicators of other-than-temporary impairments include:
If the fair value appears to be below the carrying value the Company considers all available evidence in assessing whether there is an other-than-temporary impairment. This evidence would include:
In instances when the review indicates that there is an other-than-temporary impairment, the Company writes down the investment to the fair value of the investment, recording an impairment charge in the consolidated statements of operations. The determination of the fair value of private company investments and the determination of whether an unrealized loss on a publicly quoted investment is permanent requires significant judgment and can have a material impact on the reported results. During 2005, Shire recorded impairments on fixed asset investments of $2.0 million (2004: $15.4 million, 2003: $15.5 million).
(v) Sales Deductions
Sales deductions primarily consist of statutory rebates to state Medicaid and other government agencies, contractual rebates with health-maintenance organizations (HMOs), product returns, trade discounts, wholesaler chargebacks and allowances for the coupon sampling program. Statutory rebates to state Medicaid agencies and contractual rebates with HMOs are based on price differentials between a base price and the selling price. Rebates generally increase as a percentage of the selling price over the life of the product (as prices increase). Provision for rebates are recorded as reductions to revenue in the same period as the related sales with estimates of future utilization derived from historical trends. Revisions or clarification from Centers for Medicare and Medicaid Services (CMS) related to state Medicaid and other government program reimbursement practices with retroactive application can result in changes to managements estimates of the rebates reported in prior periods. However, at the time of sale, the prices of the Companys products are fixed and consequently the rebates can be reasonably determinable at the outset of each transaction it undertakes with its customers, and therefore these factors would not impact the recording of revenues in accordance with generally accepted accounting principles.
Provisions for product returns and sales deductions to customers are recorded as reductions to revenue in the same period as the related sales with estimates based upon:
Where such factors are relevant, Shire develops provisions for returns based on wholesaler customer channel checks for slow-moving product and a separate management review of estimated customer inventory levels, by product. To the extent that Shire is unable to estimate returns, recognition of revenue is deferred until either the product is sold to the pharmacy or until Shire receives payment from the wholesaler.
Shire accepts customer returns in the following circumstances: a) expiration of product, b) product damaged while in the possession of Shire, or c) specific sales terms, at product launch, that allow for unconditional return of product (guaranteed sales). Customer return periods range from one to twenty-four months with an average return period of six months.
In addition, Shire monitors customer inventory levels, based on estimated prescription demand, and limits the amount of product shipped to a customer when there appears to be a protracted pattern of customer ordering that exceeds Shires estimate of underlying demand. The practice of monitoring inventory levels allows Shire to more accurately predict customer returns.
The actual experience and the level of these deductions to revenue may deviate from the estimate. Shire revises its estimates every period and may be required to adjust the estimate in a subsequent period. There have been no material adjustments to the estimates recognized related to Shires provisions for sales rebates or returns, in any of the periods presented.
(vi) Income Taxes
Shire operates in numerous countries where its income tax returns are subject to audits and adjustments and because Shire operates globally, the nature of the audit items are often very complex. The Company employs internal and external tax professionals to minimize audit adjustment amounts where possible.
The Company has significant deferred assets due to net operating losses (NOLs) in the United States, UK and other countries. The realization of these assets is not assured and is dependent on the generation of sufficient taxable income in the future. Management has exercised judgment in determining the extent of the realization of these losses based upon estimates of future taxable income in the various jurisdictions in which these NOLs exist. Where there is an expectation that on the balance of probabilities there will not be sufficient taxable profits to utilize these NOLs a valuation allowance is held against these deferred tax assets. If actual events differ from managements estimates, or to the extent that these estimates are adjusted in the future, any changes to the valuation allowance could materially impact the Companys financial position and results.
The acquisition of TKT brings to Shire significant NOLs, and other tax reliefs, creating additional gross deferred tax assets of $346.1 million. A valuation allowance of $60.3 million has been established against these deferred tax assets, principally in respect of certain US State tax losses, because it is currently considered unlikely that there will be sufficient taxable profits in the relevant US States to utilize these tax losses.
At December 31, 2005, the Company had gross deferred tax assets of $579 million and had recorded a valuation allowance of $235 million against this amount.
At December 31, 2004, the Company had gross deferred tax assets of $268 million and had recorded a valuation allowance of $153 million against this amount.
Inventory acquired through the acquisition of TKT has been fair valued in accordance with Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations as follows:
The fair value of inventory is based on information at the date of acquisition and the expectations and assumptions that have been deemed reasonable by the Companys management. No assurance can be given, however, that the underlying assumptions or events associated with inventory will occur as projected. For these reasons, among others, the actual costs and proceeds associated with acquired inventory may vary from those forecasted.
Recent accounting pronouncements update
See note 2(y) to the consolidated financial statements contained in the Part IV of this Annual Report for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
ITEM 7A: Quantitative and qualitative disclosures about market risk
Treasury policies and organization
The Companys principal treasury operations are coordinated by its corporate treasury function, which is based in the UK. All treasury operations are conducted within a framework of policies and procedures approved by the Board. As a matter of policy, the Company does not undertake speculative transactions that would increase its currency or interest rate exposure.
The Board reviews and agrees policies for managing the risks in the following areas:
Interest rate risk
As at December 31, 2005, the Company has no material debt outstanding. Therefore, the Companys interest charge on its debt obligations is low and consequently the Companys interest expense charge has limited exposure to interest rate movements. The Company is exposed to movements in interest rates affecting interest income. This exposure is primarily to US Dollar interest rates. As the Company maintains all of its investments on a short term basis for liquidity purposes this risk is not actively managed.
In the year to December 31, 2005, the average interest rate received on cash and liquid investments was approximately 2.90% per annum. The largest proportion of investments was in US Dollar money market and liquidity funds.
Foreign exchange risk
The Company is exposed to movements in foreign exchange rates against the US Dollar for trading transactions and the translation of net assets, liabilities and earnings of non-US subsidiaries. The main trading currencies of the Company are the US Dollar, the Canadian Dollar, Pounds Sterling, the Euro and Swedish Krona. The consolidated financial statements of foreign entities are translated using the accounting policies described in note 3 to the Companys consolidated financial statements contained in Part IV of this Annual Report.
The exposure to foreign exchange risk is managed and monitored by the treasury function. Exposures are generally managed through natural hedging via the currency denomination of cash balances. As at December 31, 2005, the Company had five outstanding forward foreign exchange contracts with a total principal amount of $206 million equivalent to manage the currency risk associated with certain inter-company loans. As at December 31, 2005, there were net unrealized gains of $2.6 million on these contracts.
Market risk of investments
As at December 31, 2005, the Company has $50.2 million of investments comprising equity investment funds, private companies and publicly quoted equities. The public quoted companies are exposed to market risk. No financial instruments or derivatives have been employed to hedge this risk.
ITEM 8: Financial statements and supplementary data
The consolidated financial statements and supplementary data called for by this item are submitted as a separate section of this report.
ITEM 9: Changes in and disagreements with accountants on accounting and financial disclosure
ITEM 9A: Controls and procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Companys management, including the Chief Executive Officer and the Chief Financial Officer, has performed an evaluation of the effectiveness of the Companys disclosure controls and procedures, as at December 31, 2005. The Companys management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding managements control objectives. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective at a reasonable level of assurance for gathering, analyzing and disclosing the information that the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SECs rules and forms.
Managements Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as at December 31, 2005. In making this assessment, the Companys management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Based on its assessment, management believes that, as at December 31, 2005, the Companys internal control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an audit report on managements assessment of the Companys internal control over financial reporting. This report appears on page F-2 of the Company's consolidated financial statements contained in Part IV of this Annual Report.
Changes in Internal Control Over Financial Reporting
In 2004, the Company commenced the implementation of a new integrated information system covering financial processes, production, logistics and quality management. Further implementations were made in the fourth quarter of 2005 and more are planned for 2006 and 2007. The implementations have involved changes in the Companys information systems that included aspects of the Companys internal control over financial reporting and therefore changes to the Companys internal control over financial reporting. The Company has reviewed each system as it is being implemented and the controls affected by the implementation of the new systems and made appropriate changes to affected internal controls as it implemented the new systems. Management believes that the controls as modified are appropriate and functioning effectively.
During the period covered by this Annual Report, the Company concluded the acquisition of TKT. Significant material weaknesses in TKTs internal control over financial reporting were identified with respect to its sales and marketing subsidiary, TKT Europe A.B. (formerly TKT Europe-5S A.B.), or TKT Europe, as at December 31, 2004, as described in TKTs Annual Report on Form 10-K for 2004. The Company undertook a review of these material weaknesses following completion of the Companys acquisition of TKT and has undertaken appropriate remediation activities. Management believes that the controls as modified are appropriate and functioning effectively.
ITEM 9B: Other Information
ITEM 10: Directors and executive officers of the registrant
Directors of the Company
Executive Officers of the Company
For the purposes of the NASDAQ corporate governance rules, the independent directors are Dr James Cavanaugh, Dr Barry Price, Ronald Nordmann, the Hon. James Andrew Grant, Robin Buchanan, David Kappler and Patrick Langlois.
There is no family relationship between or among any of the directors or executive officers.
The Companys directors, including non-executive directors (NEDs), are subject to the "retirement by rotation" provisions of the Companys Articles of Association. These are designed to ensure that all directors are re-elected by shareholders at least every three years, a common practice for UK public companies.
In addition to the requirements of the Articles of Association, the non-executive directors are appointed to office pursuant to individual letters of appointment for a term of two years (with the exception of Dr Barry Price and Ronald Nordmann who have one-year terms), subject to invitation to serve further terms at the discretion of the Board. At the expiration of the term, the NEDs are not required to be re-elected by shareholders (unless the expiration of the term coincides with a particular NEDs turn to retire by rotation), but may be re-appointed by the Board. Non-executive directors who have served on the Board for nine or more years are appointed to office for a term of one year, subject to annual re-election by shareholders, and by invitation to serve further terms at the discretion of the Board. The current terms of the NEDs are as set out below:
Executive officers are appointed pursuant to service agreements, which are not limited in term.
Biographical details of directors and executive officers of the Company
Dr James Cavanaugh has been a member of Shires Board since March 24, 1997 and Chairman since May 11, 1999. He is a General Partner of HealthCare Partners, the General Partner of Healthcare Ventures, a venture capital fund devoted to healthcare, non-executive Chairman of Diversa Corporation, and a non-executive director of MedImmune Inc. and Advancis Pharmaceutical Corporation. He is a former President of SmithKline & French Laboratories, SmithKline Beecham Corporations clinical laboratory business, and Allergan International, and served as Deputy Assistant to the US President on the White House Staff. Dr. Cavanaugh is also Chairman of Shires Nomination Committee.
Matthew Emmens has been Shires Chief Executive Officer and a member of the Board since March 12, 2003. He also serves as a non-executive director of Vertex Pharmaceuticals Inc. He began his career in international pharmaceuticals with Merck & Co, Inc. in 1974, where he held a wide range of sales, marketing and administrative positions. In 1992, he helped to establish Astra Merck, a joint venture between Merck and Astra AB of Sweden, becoming President and Chief Executive Officer. In 1999, he joined Merck KGaA and established EMD Pharmaceuticals, the companys US prescription pharmaceutical business. He was later promoted to President of Merck KGaAs global prescription business, based in Germany. Mr. Emmens holds a degree in Business Management from Fairleigh Dickinson University. He is also Chairman of Shires Executive and Portfolio Review Committees.
Angus Russell has been Shires Chief Financial Officer and a member of the Board since December 13, 1999. He also serves as a non-executive director of the City of London Investment Trust plc. Between 1980 and 1999, Mr. Russell held a number of positions of increasing responsibility at ICI, Zeneca and AstraZeneca plc, including Vice President-Corporate Finance at AstraZeneca and Group Treasurer at Zeneca. Mr. Russell is a chartered accountant, having qualified with Coopers & Lybrand, and a fellow of the Association of Corporate Treasurers. He is also a member of Shires Executive Committee and is Chairman of the Corporate Responsibilities Committee. Dr Barry Price has been a member of Shires Board since January 16, 1996 and is the companys senior non-executive director. He also serves as Chairman of Antisoma plc and Biowisdom Ltd. Dr. Price worked for Glaxo for 28 years, where he held positions of increasing responsibility with the companys research group. Dr. Price is also Chairman of Shires Remuneration Committee and a member of the Audit and Nomination Committees.
Ronald Nordmann has been a member of Shires Board since December 23, 1999 and previously served as a non-executive director of Roberts Pharmaceutical Corporation. He is also a director of Neurochem Inc. and Par Pharmaceutical Companies, Inc. Mr. Nordmann is Co-President of Global Health Associates. He has been a financial analyst in healthcare equities since 1971, holding senior positions with Deerfield Management, PaineWebber, Oppenheimer & Co., F Eberstadt & Co., and Warner-Chilcott Laboratories. He holds a bachelors degree from Johns Hopkins University and an MBA from Fairleigh Dickinson University. Mr. Nordmann is also a member of Shires Audit, Nomination and Remuneration Committees.
The Hon James Grant has been a member of Shires Board since May 11, 2001 and previously served as a director of BioChem Pharma Inc. since 1986. He also sits on the boards of two Canadian public corporations and the boards of a number of other private corporations and not-for-profit foundations and councils. He is a partner and Chair Emeritus with the law firm Stikeman Elliott in Montreal. Mr. Grant holds degrees in Arts and Law from McGill University. He is also a member of Shires Nomination Committee.
Robin Buchanan has been a member of Shires Board since July 30, 2003. He also serves as a non-executive director of Liberty International plc. Mr. Buchanan is Senior Partner of the UK operations and director of the global business consultants Bain & Company Inc., and is a member of that firms worldwide management committee. He previously worked for American Express International Banking Corporation in New York, McKinsey & Company, and Deloitte & Touche, where he qualified as a chartered accountant (FCA). Mr. Buchanan holds an MBA with Distinction (Baker Scholar) from Harvard Business School. He is also a member of Shires Remuneration Committee.
David Kappler has been a member of Shires Board since April 5, 2004. He is currently also serving as non-executive Chairman of Premier Foods plc and as a non-executive director of Intercontinental Hotels Group plc and HMV Group plc. In addition, he was a director of Camelot Group plc from 1996-2002. Mr. Kappler retired from Cadbury Schweppes plc in April 2004 after serving as Chief Financial Officer since 1995. He worked for the Cadbury Schweppes group between 1965 and 1984 and rejoined the company in 1989 following its acquisition of Trebor Group, where he was Financial Director. Mr. Kappler is a fellow of the Chartered Institute of Management Accountants. He is also Chairman of Shires Audit Committee.
Patrick Langlois has been a member of Shires Board since November 11, 2005. He is also a non-executive director of Coley Pharmaceuticals Group, Inc. and was a non-executive director of Rhodia SA between December 2002 and April 2005. Mr. Langlois previously served as Vice Chairman of the Management Board of Aventis S.A., Strasbourg, having been Group Executive Vice President and Chief Financial Officer for several years. He also spent many years in senior financial roles with the Rhone-Poulenc Group, including three years as a member of the Executive Committee and Chief Financial Officer. Mr. Langlois holds a Ph.D. in Economics and a diploma in banking studies. He is also a member of Shires Audit Committee.
Tatjana May has been with Shire since May 2001. She was previously Assistant General Counsel at the corporate headquarters of AstraZeneca plc and prior to that she worked at the law firm Slaughter and May.
Dr. Eliseo Salinas has been with Shire since June 2004. Eliseo joined from Wyeth Research where he spent 11 years, most recently as Head of Global Central Nervous Systems (CNS) and Vice President for Regional Clinical Research and Development. Prior to that he was International Project Leader (CNS) with Synthélabo Recherche. Eliseo obtained his Medical Degree from the University of Buenos Aires and performed his residency in Psychiatry and a Master in Pharmacology in Paris.
John Lee has been with Shire since April 2000. He was previously Vice President, Operations at Schwarz Pharma, and also worked at Central Pharmaceuticals, The Vitarine Company (now Eon), and Glenwood Laboratories. He has over 31 years of experience in the pharmaceutical industry.
Joseph Rus has been with Shire since 1999. Following the merger of Shire Pharmaceuticals and BioChem Pharma in May 2001, he was appointed President and CEO of Shire BioChem Inc. He has more than 25 years of experience in the international pharmaceutical industry including European country management.
Greg Flexter has been with Shire since April 2001. He was previously Vice President and head of the neuroscience business unit of Novartis Pharmaceuticals, responsible for US Marketing, Sales and Medical Research. Mr. Flexter has more than 22 years of experience in global and domestic marketing, business development and R&D.
Anita Graham has been with Shire since January 2004. She was previously Vice President of Human Resources at Cytyc Corporation. She has also held senior HR positions at Serono, Inc. and Scudder Kemper Investments, Inc (now part of Deutsche Bank) and has extensive experience in all aspects of HR, both in Europe and the US .
Barbara Deptula has been with Shire since September 2004. She was previously President of the biotechnology division of Sicor Inc. and Senior Vice President for commercial and product development at Coley Pharmaceutical Group. She has also held senior management positions focused on licensing and business development at US Bioscience, Schering-Plough, American Cyanamid, and Genetics Institute.
Mike Cola has been with Shire since July 2005. He was previously President of the life sciences division of Safeguard Scientifics Inc. Mr. Cola also worked for AstraMerck/AstraZeneca and was responsible for developing AstraMerck's product development, medical affairs, business research, licensing and pharmaceutical business units.
Dr. David D. Pendergast has been with Shire since July 2005 and was previously Chief Executive Officer of Transkaryotic Therapies Inc. (TKT) until its acquisition by Shire. He also worked as Vice President of Product Development and Quality at Biogen, Inc, and held senior positions at Fisons Ltd.'s Pharmaceutical Division and The Upjohn Company. He has over 30 years of pharmaceutical and biotechnology experience.
Audit Committee and Audit Committee Financial Expert
The members of the Audit Committee as at December 31, 2005 were Mr David Kappler, Mr Ronald Nordmann, Dr. Barry Price and Mr Patrick Langlois.
The Board of Directors has determined that David Kappler is the serving member of the Audit Committee who is an Audit Committee financial expert and that he is independent as defined under applicable SEC rules. A description of Mr Kapplers relevant experience is provided above.
Code of Ethics
Shires Board of Directors has adopted a Code of Ethics that applies to all its directors, officers and employees, including its Chief Executive Officer, Chief Financial Officer and Group Financial Controller. The Code of Ethics is posted on Shires internet website at www.shire.com.
ITEM 11: Executive compensation
Directors and executive officers as a group
In respect of the financial year to December 31, 2005, the total compensation paid to the Companys directors and executive officers as a group for the periods during which they served in any capacity was $8.7 million. The total amounts set aside or accrued by the Company to provide pension, retirement or similar benefits for this group was $1.0 million. During 2005, members of the group were granted options over ordinary shares of the Company. All such holdings were issued pursuant to the various executive share option plans described in Note 31 to the Companys consolidated financial statements contained in Part IV of this Annual Report.
As the Company provides information on the individual compensation of its executive directors in its financial statements filed in the UK in accordance with the requirements of the UK Companies Act 1985, the following information is provided with respect to the compensation of the Companys Chief Executive Officer, Chief Financial Officer and its previous Chief Scientific Officer (who served on the Board for part of 2004), a portion of which information is supplemental to the requirements prescribed by this ITEM 11. These individuals will be referred to in this ITEM 11 as the Companys named executive officers.
Summary compensation table
Option grants in last fiscal year
The following table sets forth information with respect to grants of stock options to each of the named executive officers during the year to December 31, 2005. The Company has not granted any stock appreciation rights or performance share awards to the named executive officers.
Aggregated option exercises in last fiscal year and fiscal year end option values
The following table sets forth information with respect to option exercises during the year to December 31, 2005 and the value of unexercised options at such date, in each case with respect to the named executive officers.
The value of unexercised in-the-money options is a net amount, as the aggregate exercise price, translated at the rate of exchange at December 31, 2005, has been deducted from the unexercised value.
Long-term incentive plan (LTIP) awards in last fiscal year
The following table sets forth information with respect to grants of long-term incentive plan awards made to each of the named executive officers during the year to December 31, 2005(1):
The Companys amended and restated employment contract with Mr Emmens, dated March 12, 2004, is terminable by either party immediately on giving written notice. However, Mr Emmens must give six months notice to the Company if he terminates the agreement without good reason. Mr Emmens was entitled to an annual salary of $1,049,000 for the year to December 31, 2005 and is entitled to a performance related target bonus of up to 65% of salary. The Remuneration Committee also has the discretion to make further awards under the bonus plan, for exceptional achievement beyond the targets set out at the beginning of the year, with the maximum annual bonus capped at 115% of salary. Mr Emmens contract of employment was amended on November 21, 2005 to provide for Shire plc being established as the new parent company for the Group.
The Company entered into a new employment contract with Mr Russell on March 10, 2004, which is terminable by either party on the giving of twelve months notice. Mr Russell was paid a salary of $652,000 for the year to December 31, 2005 and is entitled to a performance related target bonus of up to 55% of salary. The Remuneration Committee also has the discretion to make further awards under the bonus plan, for exceptional achievement beyond the targets set out at the beginning of the year, with the maximum annual bonus capped at 100% of salary. Mr Russells contract of employment was amended on November 21, 2005 to provide for Shire plc being established as the new parent company for the Group.
In addition to basic salary, bonus, share options and long-term incentive plan awards, executive directors of the Company receive certain benefits-in-kind. The Company contributes 30% of the Chief Executive Officers annual salary to a pension plan in the US. In the UK, the Company operates a defined benefit contribution scheme to which the Company contributes 25% of salary for the Chief Financial Officer. The executive directors are also entitled to a car or car allowance and private medical insurance.
Non-executive directors fees
The Companys non-executive directors receive fees on an annual basis for their services. The Company also reimburses non-executive directors for out-of-pocket travel expenses relating to their service on the Board. During the year to December 31, 2005 each of the Companys non-executive directors received the following fees:
(1) Appointed November 11, 2005.
ITEM 12: Security ownership of certain beneficial owners and management and related stockholder matters
Set forth in the following table is the beneficial ownership of ordinary shares as at February 21, 2006 for (i) each person (or group of affiliated persons) known to the Company to be the beneficial owner of more than 5% of ordinary shares, (ii) all current directors, (iii) certain of the Companys executive officers in 2005, and (iv) all other current directors and executive officers as a group. Except as indicated by the notes to the following table, the holders listed below have sole voting power and investment power over the shares beneficially held by them. The address of each of the Companys directors and executive officers is that of the Company.
Equity Compensation Plan Information
Set forth in the following table are the details, for the year to December 31, 2005, in respect of compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
ITEM 13: Certain relationships and related transactions
The Company incurred professional fees with Stikeman Elliott, a law firm in which the Hon. James Grant, a non-executive director, is a partner, totaling $0.5 million for the year to December 31, 2005.
In April 2004, the Company contributed cash of $3.7 million (CAN$5.0 million) and equipment and intellectual property to the start-up of a new Canadian-based pharmaceutical research and development organization, ViroChem Pharma Inc. (ViroChem), in return for an equity interest and royalties on the sale of certain products subsequently launched by ViroChem. In April 2005, the Company contributed cash of $4.1 million (CAN$5.0 million) to ViroChem in return for an additional equity interest. Dr Bellini, a non-executive director of BioChem and, until May 10, 2003, a non-executive director of Shire, had, at the time of the transaction, an indirect substantial interest in a company, which is a co-investor of ViroChem. The Company has undertaken to invest an additional $4.3 million (CAN$5.0 million) in ViroChem.
In October 2005, the Company sub-leased its office premises in Newport to Xanodyne Pharmaceuticals Inc. Dr James Cavanaugh, the non-executive Chairman of the Company, is the Chairman of Xanodyne Pharmaceuticals Inc. As a result of the transaction the Company will receive $7.8 million (net of inducements) in lease income over the sub-lease period from Xanodyne Pharmaceuticals Inc.
ITEM 14: Principal accountant fees and services
The Audit Committee reviews the scope and results of the audit and non-audit services, including tax advisory and compliance services, provided by the Companys Independent Registered Public Accountants, Deloitte & Touche LLP, the cost effectiveness and the independence and objectivity of the Registered Public Accountants. In recognition of the importance of maintaining the independence of Deloitte & Touche LLP, a process for pre-approval has been in place since July 1, 2002 and has continued through to the end of the period covered by this Report.
The following table provides an analysis of the amount paid to the Companys Principal Accountant, Deloitte & Touche LLP, all fees having been pre-approved by the Audit Committee.
Policy on Audit Committee pre-approval of audit and permissable non-audit services of Independent Registered Public Accountant
Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the Independent Registered Public Accountant. In recognition of this responsibility, the Audit Committee pre-approves all audit and permissible non-audit services provided by the Independent Registered Public Accountant.
Certain services have been pre-approved by the Audit Committee as part of its pre-approval policy, including:
Where it is necessary to engage the Independent Registered Public Accountant for services not contemplated in the pre-approval policy, the Audit Committee must pre-approve the proposed service before engaging the Independent Registered Public Accountant. For this purpose, the Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee. The pre-approval policy is reviewed and updated periodically and was last updated on February 21, 2006. The Chairman must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
ITEM 15: Exhibits, financial statement schedules
The following documents are included as part of this Annual Report on Form 10-K
Index to the consolidated financial statements
Report of Independent Registered Public Accountants
Consolidated Balance Sheets as at December 31, 2005 and 2004
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2005
Consolidated Statements of Changes in Shareholders Equity for each of the three years in the period ended December 31, 2005
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2005
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2005
Notes to the Consolidated Financial Statements
Financial statement schedule
The following schedule is filed as part of this Form 10-K:
Schedule II Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2005.
All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Shire plc, Basingstoke, England
We have audited the accompanying consolidated balance sheets of Shire plc and subsidiaries (the Company) as at December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at ITEM 15. We also have audited managements assessment, included in the accompanying Management Report on Internal Controls Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and the financial statement schedule, an opinion on managements assessment, and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP