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Shire 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2015
 
Commission File Number: 0-29630
 
SHIRE PLC
(Exact name of registrant as specified in its charter)
 
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization)
98-0601486
(I.R.S. Employer Identification No.)
 
5 Riverwalk, Citywest Business Campus, Dublin 24, Republic of Ireland
 (Address of principal executive offices and zip code)
 
+353 1 429 7700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [X]
No [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  [X]
 No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
Large accelerated filer [X]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [  ]
No [X]
 
As at April 24, 2015 the number of outstanding ordinary shares of the Registrant was 600,292,756.
 

 
1

 

THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, that:
 
 
·
Shire’s products may not be a commercial success;
 
 
·
product sales from ADDERALL XR and INTUNIV are subject to generic competition;
 
 
·
the failure to obtain and maintain reimbursement, or an adequate level of reimbursement, by third-party payers in a timely manner for Shires products may affect future revenues, financial condition and results of operations;
 
 
·
Shire conducts its own manufacturing operations for certain of its products and is reliant on third party contract manufacturers to manufacture other products and to provide goods and services. Some of Shire’s products or ingredients are only available from a single approved source for manufacture. Any disruption to the supply chain for any of Shire’s products may result in Shire being unable to continue marketing or developing a product or may result in Shire being unable to do so on a commercially viable basis for some period of time;
 
 
·
the manufacture of Shire’s products is subject to extensive oversight by various regulatory agencies. Regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to significant delays, an increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches;
 
 
·
Shire has a portfolio of products in various stages of research and development. The successful development of these products is highly uncertain and requires significant expenditures and time, and there is no guarantee that these products will receive regulatory approval;
 
 
·
the actions of certain customers could affect Shires ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely affect Shire’s revenues, financial condition or results of operations;
 
 
·
investigations or enforcement action by regulatory authorities or law enforcement agencies relating to Shire’s activities in the highly regulated markets in which it operates may result in significant legal costs and the payment of substantial compensation or fines;
 
 
·
adverse outcomes in legal matters and other disputes, including Shire’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
 
 
·
Shire faces intense competition for highly qualified personnel from other companies and organizations. Shire is undergoing a corporate reorganization and was the subject of an unsuccessful acquisition proposal and the consequent uncertainty could adversely affect Shire’s ability to attract and/or retain the highly skilled personnel needed for Shire to meet its strategic objectives;
 
 
·
failure to achieve Shire’s strategic objectives with respect to the acquisition of NPS Pharmaceuticals Inc. (“NPS Pharma”) may adversely affect Shire’s financial condition and results of operations; and
 
other risks and uncertainties detailed from time to time in Shire’s filings with the Securities and Exchange Commission, including those risks outlined in “Item 1A: Risk Factors” in Shire’s Annual Report on Form 10-K for the year ended December 31, 2014.
 

 
2

 
 
The following are trademarks either owned or licensed by Shire plc or its subsidiaries, which are the subject of trademark registrations in certain territories, or which are owned by third parties as indicated and referred to in this Form 10-Q:
 
ADDERALL XR® (mixed salts of a single entity amphetamine)
AGRYLIN® (anagrelide hydrochloride)
BUCCOLAM® (midazolam hydrochloride oromucosal solution)
CALCICHEW® (trademark of Takeda Nycomed AS
CARBATROL® (carbamazepine extended-release capsules)
CEREZYME® (trademark of Genzyme)
CINRYZE® (C1 esterase inhibitor [human])
DAYTRANA® (trademark of Noven Pharmaceutical Inc. (“Noven”))
DERMAGRAFT® (trademark of Organogenesis Inc. (“Organogenesis”))
ELAPRASE® (idursulfase)
ELVANSE® (lisdexamfetamine dimesylate)
ELVANSE ADULT® (lisdexamfetamine dimesylate)
ELVANSE VUXEN® (lisdexamfetamine dimesylate)
ESTRACE® (trademark of Trimel Pharmaceuticals Inc.)
EQUASYM® (methylphenidate hydrochloride)
EQUASYM XL® (methylphenidate hydrochloride)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
GATTEX® (teduglutide [rDNA origin])
INTUNIV® (guanfacine extended release)
LIALDA® (trademark of Nogra International Limited)
MEZAVANT® (trademark of Giuliani International Limited)
MIMPARA® (cinacalcet HCl)
NATPAR® (parathyroid hormone)
NATPARA® (parathyroid hormone (rDNA))
PENTASA® (trademark of Ferring B.V. Corp (“Ferring”))
PLENADREN® (hydrocortisone, modified release tablet)
PREMIPLEX® (IGF-I/IGFBP-3)
REGPARA® (cinacalcet HCl)
REPLAGAL® (agalsidase alfa)
RESOLOR® (prucalopride)
REVESTIVE® (teduglutide)
SENSIPAR® (cinacalcet HCl)
TYVENSE® (lisdexamfetamine dimesylate)
VASCUGEL® (allogeneic aortic endothelial cells cultured in a porcine gelatin matrix [Gelfoam®] with cytokines, implanted)
VANCOCIN® (trademark of ANI Pharmaceuticals Inc.)
VENVANSE® (lisdexamfetamine dimesylate)
VPRIV® (velaglucerase alfa)
VYVANSE® (lisdexamfetamine dimesylate)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GSK)
3TC® (trademark of GSK)
 

 
3

 

SHIRE PLC
Form 10-Q for the three months to March 31, 2015

Table of contents
 
     
 Page
       
PART I          FINANCIAL INFORMATION
 
5
     
ITEM 1.  FINANCIAL STATEMENTS
   
     
 
Unaudited Consolidated Balance Sheets at March 31, 2015 and December 31, 2014
 
5
       
 
Unaudited Consolidated Statements of Income for the three months to March 31, 2015 and March 31, 2014
 
7
       
 
Unaudited Consolidated Statements of Comprehensive Income for the three months to March 31, 2015 and March 31, 2014
 
9
       
 
Unaudited Consolidated Statement of Changes in Equity for the three months to March 31, 2015
 
10
       
 
Unaudited Consolidated Statements of Cash Flows for the three months to March 31, 2015 and March 31, 2014
 
11
       
 
Notes to the Unaudited Consolidated Financial Statements
 
13
       
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
39
     
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
53
     
ITEM 4.  CONTROLS AND PROCEDURES
 
53
     
PART II  OTHER INFORMATION
 
53
     
ITEM 1.  LEGAL PROCEEDINGS
 
53
     
ITEM 1A.  RISK FACTORS
 
53
     
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
53
     
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
53
     
ITEM 4.  MINE SAFETY DISCLOSURES
 
53
     
ITEM 5.  OTHER INFORMATION
 
54
     
ITEM 6.  EXHIBITS
 
54

 
4

 

PART I: FINANCIAL INFORMATION
ITEM1: FINANCIAL STATEMENTS

SHIRE PLC
 
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
 
 
 
   
March 31,
   
     December 31,
 
 
 
 
   
2015
   
2014
 
 
 
Notes
      $’M       $’M  
ASSETS
 
 
                 
Current assets:
 
 
                 
Cash and cash equivalents
 
 
      74.3       2,982.4  
Restricted cash
 
 
      68.9       54.6  
Accounts receivable, net
  5       1,116.3       1,035.1  
Inventories
  6       588.7       544.8  
Deferred tax asset
          461.8       344.7  
Prepaid expenses and other current assets
  8       216.6       221.5  
                       
Total current assets
          2,526.6       5,183.1  
 
                     
Non-current assets:
                     
Investments
          45.7       43.7  
Property, plant and equipment, net (“PP&E”)
          821.9       837.5  
Goodwill
  9       4,178.7       2,474.9  
Other intangible assets, net
  10       9,980.0       4,934.4  
Deferred tax asset
          102.7       112.1  
Other non-current assets
          22.7       46.4  
                       
Total assets
          17,678.3       13,632.1  
                       
LIABILITIES AND EQUITY
                     
Current liabilities:
                     
Accounts payable and accrued expenses
  11       1,991.6       1,909.4  
Short-term borrowings
  13       2,570.2       850.0  
Other current liabilities
  12       303.2       262.5  
                       
Total current liabilities
          4,865.0       3,021.9  
 
                     
Non-current liabilities:
                     
Long-term borrowings
  13       78.7       -  
Deferred tax liability
          2,909.9       1,210.6  
Other non-current liabilities
  14       844.0       736.7  
                       
Total liabilities
          8,697.6       4,969.2  
 
       
 
   
 
 
Commitments and contingencies
  15       -       -  

 
5

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
 
 
 
 
   
 
   
 
 
 
 
 
   
March 31,
   
December 31,
 
 
 
 
   
2015
   
2014
 
 
 
Notes
      $’M       $’M  
 
 
 
                 
Equity:
 
 
                 
                       
Common stock of 5p par value; 1,000 million shares authorized; and 600.2 million shares issued and outstanding (2014: 1,000 million shares authorized; and 599.1 million shares issued and outstanding)
 
 
      58.9       58.7  
Additional paid-in capital
 
 
      4,373.2       4,338.0  
Treasury stock: 10.0 million shares (2014: 10.6 million shares)
 
 
      (330.1 )     (345.9 )
Accumulated other comprehensive loss
  16       (160.3 )     (31.5 )
Retained earnings
          5,039.0       4,643.6  
                       
Total equity
          8,980.7       8,662.9  
                       
Total liabilities and equity
          17,678.3       13,632.1  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6

 

SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
   
 
   
3 months to
   
3 months to
 
   
 
   
March 31,
   
March 31,
 
   
 
   
2015
   
2014
 
   
Notes
      $’M       $’M  
Revenues:                      
  Product sales
 
 
      1,423.2       1,308.1  
  Royalties
 
 
      62.8       32.3  
  Other revenues
 
 
      2.4       6.4  
                       
Total revenues
 
 
      1,488.4       1,346.8  
                       
Costs and expenses:
 
 
                 
  Cost of product sales
 
 
      227.8       229.5  
  Research and development(1)
 
 
      193.7       360.5  
  Selling, general and administrative(1)
 
 
      506.6       430.3  
  Gain on sale of product rights
 
 
      (5.2 )     (36.4 )
  Reorganization costs
  3       15.2       49.4  
  Integration and acquisition costs
  4       75.7       6.6  
                       
Total operating expenses
          1,013.8       1,039.9  
                       
Operating income from continuing operations
          474.6       306.9  
                       
Interest income
          2.0       0.5  
Interest expense
          (9.6 )     (7.8 )
Other income, net
          4.3       4.7  
                       
Total other expense, net
          (3.3 )     (2.6 )
                       
Income from continuing operations before income taxes and equity in losses of equity method investees
          471.3       304.3  
Income taxes
          (57.4 )     (50.6 )
                       
Equity in losses of equity method investees, net of taxes
          (1.0 )     (0.6 )
                       
Income from continuing operations, net of taxes
          412.9       253.1  
Loss from discontinued operations, net of  taxes
  7       (2.5 )     (22.7 )
                       
Net income
          410.4       230.4  

 
(1)
Research and development (“R&D”) includes intangible asset impairment charges of $nil for the three months to March 31, 2015 (2014: $166.0 million). Selling, general and administrative (“SG&A”) costs include amortization of intangible assets relating to intellectual property rights acquired of $88.3 million for the three months to March 31, 2015 (2014: $57.8 million).

 
7

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (continued)

 
 
 
   
3 months to
   
3 months to
 
 
 
 
   
March 31,
   
March 31,
 
 
 
Notes
   
2015
   
2014
 
Earnings per ordinary share - basic
 
 
   
 
   
 
 
 
 
 
   
 
   
 
 
Earnings from continuing operations
 
 
      70.1c       43.3c  
Loss from discontinued operations
  1       (0.4c)       (3.9c)  
 
                     
Earnings per ordinary share - basic
          69.7c       39.4c  
                       
Earnings per ordinary share - diluted
                     
 
                     
Earnings from continuing operations
          69.7c       43.0c  
Loss from discontinued operations
  1       (0.4c)       (3.9c)  
                       
Earnings per ordinary share - diluted
          69.3c       39.1c  
                       
Weighted average number of shares (millions):
                 
Basic
  19       589.1       584.3  
Diluted
  19       592.7       588.8  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
8

 

SHIRE PLC
 UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
3 months to
   
3 months to
 
 
 
March 31,
   
March 31,
 
 
 
2015
   
2014
 
 
 
$M
   
$M
 
Net income
    410.4       230.4  
Other comprehensive income:
               
Foreign currency translation adjustments
    (129.5 )     (1.7 )
Unrealized holding gain on available-for-sale securities (net of taxes of $nil and $2.5 million)
    0.7       4.3  
                 
Comprehensive income
    281.6       233.0  

The components of accumulated other comprehensive income as at March 31, 2015 and December 31, 2014 are as follows:
 

 
 
March 31,
   
December 31,
 
 
 
2015
   
2014
 
 
    $’M       $’M  
Foreign currency translation adjustments
    (155.2 )     (25.7 )
Unrealized holding loss on available-for-sale securities, net of taxes
    (5.1 )     (5.8 )
                 
Accumulated other comprehensive loss
    (160.3 )     (31.5 )

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

 
9

 

SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In millions of US dollars except share data)

 
 
Shire plc shareholders equity
 
 
 
Common stock Number of shares
Ms
   
Common stock
$M
   
Additional paid-in capital
$’M
   
Treasury stock
$M
   
Accumulated other comprehensive loss
$M
   
Retained earnings
$M
   
Total equity
$M
 
As at January 1, 2015
    599.1       58.7       4,338.0       (345.9 )     (31.5 )     4,643.6       8,662.9  
Net income
    -       -       -       -       -       410.4       410.4  
Other comprehensive loss, net of tax
    -       -       -       -       (128.8 )     -       (128.8 )
Options exercised
    1.1       0.2       -       -       -       -       0.2  
 
                                                       
Share-based compensation
    -       -       15.3       -       -       -       15.3  
 
                                                       
Tax benefit associated with exercise of stock options
    -       -       19.9       -       -       -       19.9  
 
                                                       
Shares released by employee benefit trust to satisfy exercise of stock options
    -       -       -       15.8       -       (15.0 )     0.8  
 
                                                       
As at March 31, 2015
    600.2       58.9       4,373.2       (330.1 )     (160.3 )     5,039.0       8,980.7  

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

 
10

 

SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
3 months to March 31,
 
2015
   
2014
 
      $’M       $’M  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
    410.4       230.4  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    120.6       94.6  
Share-based compensation
    15.3       26.2  
Change in fair value of contingent consideration
    2.4       (59.2 )
Unwind of inventory fair value step-ups
    11.2       38.8  
Impairment of IPR&D intangible assets
    -       166.0  
Impairment of PP&E
    -       12.1  
Gain on sale of product rights
    (5.2 )     (36.4 )
Other, net
    1.1       (0.3 )
Movement in deferred taxes
    16.6       18.5  
Equity in losses of equity method investees
    1.0       0.6  
                 
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (85.1 )     (77.3 )
(Decrease)/increase in sales deduction accruals
    (24.6 )     70.8  
Increase in inventory
    (22.0 )     (18.6 )
Decrease/(increase) in prepayments and other assets
    42.4       (74.6 )
Increase/(decrease) in accounts and notes payable and other liabilities
    77.5       (145.5 )
                 
Net cash provided by operating activities (A)
    561.6       246.1  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Movements in restricted cash
    (14.5 )     (10.1 )
Purchases of subsidiary undertakings and businesses, net of cash acquired
    (5,199.7 )     (3,764.4 )
Purchases of non-current investments and PP&E
    (22.3 )     (15.6 )
Proceeds from short-term investments
    54.5       46.8  
Proceeds received on sale of product rights
    3.9       48.0  
Proceeds from disposal of non-current investments and PP&E
    0.9       8.0  
Other, net
    -       (2.9 )
                 
Net cash used in investing activities (B)
    (5,177.2 )     (3,690.2 )

 
11

 


SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
3 months to March 31,
 
2015
   
2014
 
      $’M       $’M  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from revolving line of credit, long-term and short-term borrowings
    2,230.0       2,170.0  
Repayment of revolving line of credit
    (535.2 )     (650.2 )
Repayment of debt acquired with ViroPharma Inc. (“ViroPharma”)
    -       (533.9 )
Proceeds from ViroPharma call options
    -       346.7  
Excess tax benefit associated with exercise of stock options
    19.9       20.5  
Contingent consideration payments
    (2.4 )     (7.8 )
Other, net
    (3.2 )     0.2  
                 
Net cash provided by financing activities(C)
    1,709.1       1,345.5  
                 
Effect of foreign exchange rate changes on cash and cash equivalents (D)
    (1.6 )     (1.7 )
                 
Net decrease in cash and cash equivalents(A+B+C+D)
    (2,908.1 )     (2,100.3 )
Cash and cash equivalents at beginning of period
    2,982.4       2,239.4  
                 
Cash and cash equivalents at end of period
    74.3       139.1  

Supplemental information associated with continuing
 
 
   
 
 
operations:
 
 
   
 
 
 
 
 
   
 
 
3 months to March 31,
 
2015
   
2014
 
 
    $’M       $’M  
 
               
Interest paid
    (5.0 )     (2.6 )
Income taxes repaid/(paid), net
    48.8       (82.6 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
12

 

SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.    Summary of Significant Accounting Policies

(a)    Basis of preparation
 
These interim financial statements of Shire plc and its subsidiaries (collectively “Shire” or the “Company”) and other financial information included in this Form 10-Q, are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and US Securities and Exchange Commission (“SEC”) regulations for interim reporting.
 
The balance sheet as at December 31, 2014 was derived from audited financial statements but does not include all disclosures required by US GAAP.
 
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year to December 31, 2014.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.
 
(b)    Use of estimates in interim financial statements
 
The preparation of interim financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, contingent consideration receivable from product divestments and contingent consideration payable in respect of business combinations and asset purchases. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.
 
(c)    New accounting pronouncements

Adopted during the period

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
 
In April 2014 the Financial Accounting Standard Board (“FASB”) issued guidance on the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments in this update revise the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The guidance requires expanded disclosures for discontinued operations which provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. The guidance also requires an entity to disclose the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting.
 
Shire adopted this guidance in the period, which will be effective for discontinued operations occurring after January 1, 2015. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
 
To be adopted in future periods

Revenue from Contracts with Customers
 
In May 2014 the FASB and the International Accounting Standards Board (together the “Accounting Standards Boards”) issued a new accounting standard that is intended to clarify and converge the financial reporting requirements for revenue
 

 
13

 
 
from contracts with customers. The core principle of the standard is that an “entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”. To achieve that core principle the Accounting Standard Boards developed a five-step model (as presented below) and related application guidance, which will replace most existing revenue recognition guidance in US GAAP.
 
Five-step model:

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
 
The Accounting Standards Boards also issued new qualitative and quantitative disclosure requirements as part of the new accounting standard which aims to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
 
In April 2015 the FASB proposed to defer the effective date of the guidance by one year. Based on this proposal, public entities would need to apply the new guidance for annual reporting periods beginning after December 15, 2017, and interim periods therein. The Company is currently evaluating the impact of adopting this guidance.

Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities (“VIEs”) Guidance in Topic 810, Consolidation
 
In June 2014 the FASB issued guidance on the reporting requirements for development stage entities. The amendments in this update simplify the existing guidance by removing all incremental financial reporting requirements for development stage entities. The amendments also eliminate an exception provided with respect to development stage entities in Topic 810, Consolidation, for determining whether an entity is a VIE on the basis of the amount of equity that is at risk. The elimination of the exception may change the consolidation analysis, consolidation decision, and disclosure requirements for a reporting entity that has an interest in an entity in the development stage. The guidance to eliminate the exception to the sufficiency-of-equity-at-risk criterion for development stage entities should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application of both of these amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company is currently evaluating the impact of adopting this guidance.
 
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
 
In August 2014 the FASB issued guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. An entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or available to be issued). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
 
Amendments to the Consolidation Analysis
 
In February 2015 the FASB issued guidance to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities. Financial statement users asserted that in certain situations in which consolidation is ultimately required, deconsolidated financial statements are necessary to better analyze the reporting entity’s economic and operational results. Previously, the FASB issued an indefinite deferral for certain entities to partially address those concerns. However, the amendments in this guidance rescind that deferral and address those concerns by making changes to the consolidation guidance.

 
14

 
 
Under the amendments, all reporting entities are within the scope of Subtopic 810-10, Consolidation, including limited partnerships and similar legal entities, unless a scope exception applies. The presumption that a general partner controls a limited partnership has been eliminated. In addition, fees paid to decision makers that meet certain conditions no longer cause decision makers to consolidate a VIE in certain instances. The amendments place more emphasis in the consolidation evaluation on variable interests other than fee arrangements such as principal investment risk (for example, debt or equity interests), guarantees of the value of the assets or liabilities of the VIE, written put options on the assets of the VIE, or similar obligations, including some liquidity commitments or agreements (explicit or implicit). Additionally, the amendments reduce the extent to which related party arrangements cause an entity to be considered a primary beneficiary.

The amendments are effective for public business entities for fiscal years, and for interim periods therein, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
 
Simplifying the Presentation of Debt Issuance Costs
 
In April 2015 the FASB issued guidance to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods therein.

Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.

2.    Business combinations
 
Acquisition of NPS Pharmaceuticals Inc. (“NPS Pharma”)
 
On February 21, 2015 Shire completed its acquisition of 100% of the outstanding share capital of NPS Pharma. The acquisition-date fair value of cash consideration paid on closing was $5,218 million.
 
The acquisition of NPS Pharma added GATTEX/REVESTIVE, approved in the US and EU for the treatment of adults with short bowel syndrome (“SBS”), a rare and potentially fatal gastrointestinal disorder and NATPARA/NATPAR approved in the US for the treatment of hypoparathyroidism (“HPT”), a rare endocrine disease, to Shire’s portfolio of currently marketed products.
 
The acquisition of NPS Pharma has been accounted for as a business combination using the acquisition method. The assets acquired and the liabilities assumed from NPS Pharma have been recorded at their preliminary fair values at the date of acquisition, being February 21, 2015. The Company’s consolidated financial statements include the results of NPS Pharma from February 21, 2015.
 
The amount of NPS Pharma’s post-acquisition revenues and pre-tax losses included in the Company’s consolidated statement of income for the three months to March 31, 2015 were $26.2 million and $51.2 million respectively. The pre-tax loss includes charges on the unwind of inventory fair value adjustments of $9.9 million, intangible asset amortization of $30.1 million and integration costs of $17.4 million.
 

 
15

 
 
The Company’s preliminary allocation of the purchase price to the assets acquired and liabilities assumed is outlined below:
 
 
 
Preliminary
 
 
 
Fair value
 
 
    $’M  
 
       
ASSETS
       
Current assets:
       
Cash and cash equivalents
    41.6  
Short-term investments
    67.0  
Accounts receivable
    31.7  
Inventories
    51.1  
Deferred tax assets
    151.5  
Other current assets
    10.1  
         
Total current assets
    353.0  
 
       
Non-current assets:
       
PPE
    4.2  
Goodwill
    1,691.6  
Other intangible assets
       
 - currently marketed products
    4,670.0  
 - royalty rights (categorized as "Other amortized intangible assets")
    353.0  
         
Total assets
    7,071.8  
         
LIABILITIES
       
Current liabilities:
       
Accounts payable and other current liabilities
    72.5  
Short-term debt
    27.4  
 
       
Non-current liabilities:
       
Long-term debt, less current portion
    78.9  
Deferred tax liabilities
    1,671.0  
Other non-current liabilities
    4.2  
         
Total liabilities
    1,854.0  
 
       
Fair value of identifiable assets acquired and liabilities assumed
    5,217.8  
         
Consideration
       
Cash consideration paid
    5,217.8  

The purchase price allocation is preliminary pending final determination of the fair values of certain assets and liabilities. In particular the fair values of inventories, intangible assets, assumed non-recourse debt obligations and current and deferred taxes are preliminary pending receipt of the final valuations for those items. The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date.
 
(a) Other intangible assets – currently marketed products
 
Other intangible assets totaling $4,670.0 million relate to intellectual property rights acquired for NPS Pharma’s currently marketed products, primarily attributed to NATPARA/NATPAR, and GATTEX/REVESTIVE. The fair value of the currently marketed products is preliminary and has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each separately identifiable intangible asset.
 

 
16

 
 
The estimated useful lives of the NATPARA/NATPAR and GATTEX/REVESTIVE intangible assets are 24 years, with amortization being recorded on a straight-line basis.
 
(b) Other intangible assets – Royalty rights
 
Other intangibles totaling $353.0 million relate to the royalty rights arising from the collaboration agreements with Amgen, Janssen and Kyowa Hakko Kirin. Amgen markets cinacalcet HCl as Sensipar in the US and as Mimpara in the EU; Janssen Pharmaceuticals markets tapentadol as Nucynta in the US; and Kyowa Hakko Kirin markets cinacalcet HCI as Regpara in Japan, Hong Kong, Malaysia, Macau, Singapore, and Taiwan. NPS Pharma is entitled to royalties from the relevant net sales of these products.
 
The fair value of these royalty rights is preliminary and has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each royalty right.
 
The estimated useful lives of these royalty rights range from 4 to 5 years (weighted average 4 years), with amortization being recorded on a straight-line basis.
 
 (c) Goodwill
 
Goodwill arising of $1,691.6 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of NPS Pharma with the operations of Shire; particularly those synergies expected to be realized due to Shire’s structure; intangible assets that do not qualify for separate recognition at the time of the acquisition; and the value of the assembled workforce.
 
In the three months to March 31, 2015 the Company expensed costs of $69.9 million relating to the acquisition and post-acquisition integration of NPS Pharma, which have been recorded within Integration and acquisition costs in the Company’s consolidated statement of income.
 
Supplemental disclosure of pro forma information

The following unaudited pro forma financial information presents the combined results of the operations of Shire and NPS Pharma as if the acquisition of NPS Pharma had occurred as at January 1, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the acquisition been completed at the date indicated. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.
 
 
 
3 months to
   
3 months to
 
 
 
March 31,
   
March 31,
 
 
 
2015
   
2014
 
 
    $’M       $’M  
Revenues
    1,518.3       1,390.8  
 
               
Net income from continuing operations
    358.8       85.8  
 
               
Per share amounts:
               
Net income from continuing operations per share - basic
    60.9 c     14.7 c
 
               
Net income from continuing operations per share - diluted
    60.5 c     14.6 c

The unaudited pro forma financial information above reflects the following pro forma adjustments:
 
 
(i)
an adjustment to decrease net income by $106.8 million for the period to March 31, 2014 to reflect acquisition costs incurred by Shire and NPS Pharma, and increase net income by $106.8 million for the period to March 31, 2015,  to eliminate acquisition costs incurred;
 
 
(ii)
an adjustment to decrease net income by $6.1 million for the period to March 31 2014, to reflect charges on the unwind of inventory fair value adjustments as acquisition date inventory is sold, and a corresponding increase in net income for the period to March 31, 2015;
 

 
17

 
 
 
(iii)
an adjustment of $5.6 million in the period to March 31, 2014 to reflect additional interest expense associated with the drawdown of debt to partially finance the acquisition of NPS Pharma and the amortization of related deferred debt issuance costs;
 
 
(iv)
an adjustment to increase amortization expense by approximately $21.1 million in the period to March 31, 2015 and $42.3 million in the period March 31, 2014 related to amortization of the fair value of identifiable intangible assets acquired and the elimination of NPS Pharma’s historical intangible asset amortization expense; and
 
 
(v)
the tax effect of the above adjustments, where applicable.
 
Acquisition of Meritage Pharma Inc. (“Meritage”)
 
Prior to the acquisition of ViroPharma by Shire (see below), ViroPharma had entered into an exclusive development and option agreement with Meritage, a privately owned US company focusing on developing oral budesonide suspension (“OBS”) as a treatment for eosinophilic esophagitis. Under the terms of this agreement Meritage controlled and conducted all related research up to achievement of pre-defined development success criteria at which point ViroPharma had the option to acquire Meritage.
 
On February 18, 2015, following the exercise of the purchase option, Shire acquired all the outstanding equity of Meritage. The acquisition date fair value of the consideration totaled $166.9 million, comprising cash consideration paid on closing of $74.8 million and the fair value of contingent consideration payable of $92.1 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $175.0 million dependent upon achievement of certain clinical development and regulatory milestones.
 
With the Meritage acquisition, Shire has acquired the global rights to Meritage’s Phase 3-ready compound, OBS, for the treatment of adolescents and adults with eosinophilic esophagitis.
 
The acquisition of Meritage has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Meritage have been recorded at their preliminary fair values at the date of acquisition, being February 18, 2015. The Company’s consolidated financial statements and results of operations include the results of Meritage from February 18, 2015.
 
The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities. The purchase price has been allocated on a preliminary basis to the OBS IPR&D intangible asset ($175 million), net current assets assumed ($5.5 million), net non-current liabilities assumed (including deferred tax liabilities) ($54.7 million) and goodwill ($41.1 million). Goodwill arising of $41.1 million is not deductible for tax purposes.
 
Unaudited pro forma financial information to present the combined results of operations of Shire and Meritage are not provided as the impact of this acquisition is not material to the Company’s results of operations for any period presented.
 
Acquisition of ViroPharma Incorporated
 
On January 24, 2014, Shire completed its acquisition of 100% of the outstanding share capital of ViroPharma. The acquisition-date fair value of cash consideration paid on closing was $3,997 million.
 
The acquisition of ViroPharma added CINRYZE to Shire’s portfolio of currently marketed products. CINRYZE is a leading brand for the prophylactic treatment of Hereditary Angioedema (“HAE”) in adolescents and adults.
 
The acquisition of ViroPharma has been accounted for as a business combination using the acquisition method. The assets acquired and the liabilities assumed from ViroPharma have been recorded at their fair values at the date of acquisition, being January 24, 2014. The Company’s consolidated financial statements include the results of ViroPharma from January 24, 2014.
 
The purchase price allocation was finalized in the fourth quarter of 2014. The Company’s allocation of the purchase price to the fair value of assets acquired and liabilities assumed is outlined below:
 

 
18

 
 
 
 
 
 
 
 
Acquisition date fair value
 
 
    $’M  
Identifiable assets acquired and liabilities assumed
       
 
       
ASSETS
       
Current assets:
       
Cash and cash equivalents
    232.6  
Short-term investments
    57.8  
Accounts receivable
    52.2  
Inventories
    203.6  
Deferred tax assets
    100.7  
Purchased call option
    346.7  
Other current assets
    50.9  
         
Total current assets
    1,044.5  
 
       
Non-current assets:
       
PPE
    24.7  
Goodwill
    1,655.5  
Other intangible assets
       
 - Currently marketed products
    2,320.0  
 - In-Process Research and Development (“IPR&D”)
    315.0  
Other non-current assets
    10.4  
         
Total assets
    5,370.1  
         
LIABILITIES
       
Current liabilities:
       
Accounts payable and other current liabilities
    122.7  
Convertible bond
    551.4  
 
       
Non-current liabilities:
       
Deferred tax liabilities
    603.5  
Other non-current liabilities
    95.5  
         
 Total liabilities
    1,373.1  
         
Fair value of identifiable assets acquired and liabilities assumed
    3,997.0  
 
       
Consideration
       
Cash consideration paid
    3,997.0  

(a) Other intangible assets – currently marketed products
 
Other intangible assets totaled $2,320.0 million at the date of acquisition, relating to intellectual property rights acquired for ViroPharma’s then currently marketed products, primarily attributed to CINRYZE, for the routine prophylaxis against HAE attacks in adolescent and adult patients. Shire also obtained intellectual property rights to three other commercialized products, PLENADREN, an orphan drug for the treatment of adrenal insufficiency in adults, BUCCOLAM, an oromucosal solution for the treatment of prolonged, acute, and convulsive seizures in infants, toddlers, children and adolescents and VANCOCIN, an oral capsule formulation for the treatment of C. difficile-associated diarrhea (“CDAD”), which was divested by Shire in the third quarter of 2014. The fair value of currently marketed products has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each separately identifiable intangible asset.
 

 
19

 
 
The estimated useful lives of the CINRYZE, PLENADREN and BUCCOLAM intangible assets range from 10 to 23 years (weighted average 22 years), with amortization being recorded on a straight-line basis.
 
(b) Other intangible assets – IPR&D
 
The IPR&D asset of $315.0 million relates to maribavir (now SHP620), an investigational antiviral product for cytomegalovirus. The fair value of this IPR&D asset was estimated based on an income approach, using the present value of incremental after tax cash flows expected to be generated by this development project after the deduction of contributory asset charges for other assets employed in this project. The estimated cash flows have been probability adjusted to take into account the stage of completion and the remaining risks and uncertainties surrounding the future development and commercialization.
 
The major risks and uncertainties associated with the timely completion of the acquired IPR&D project include  the ability to confirm the efficacy of the technology based on the data from clinical trials, and obtaining the relevant regulatory approvals as well as other risks as described in the Company’s Annual Report on Form 10-K. The valuation of IPR&D has been based on information available at the time of the acquisition (and information obtained during the measurement period) and on expectations and assumptions that (i) have been deemed reasonable by the Company’s management and (ii) are based on information, expectations and assumptions that would be available to a market participant. However, no assurance can be given that the assumptions and events associated with such assets will occur as projected. For these reasons, the actual cash flows may vary from forecast future cash flows.
 
The estimated probability adjusted after tax cash flows used in fair valuing other intangible assets have been discounted at rates ranging from 9.5% to 10.0%.
 
(c) Goodwill
 
Goodwill arising of $1,655.5 million, which is not deductible for tax purposes, includes the expected operational synergies that will result from combining the commercial operations of ViroPharma with those of Shire (valued at approximately $400 million); other synergies expected to be realized due to Shire’s structure; intangible assets that do not qualify for separate recognition at the time of the acquisition; and the value of the assembled workforce.
 
In the three months to March 31, 2015 the Company expensed costs of $3.3 million (2014: $65.8 million) relating to the acquisition and post-acquisition integration of ViroPharma, which have been recorded within Integration and acquisition costs in the Company’s consolidated statement of income.
 
3.    Reorganization costs

One Shire business reorganization
 
On May 2, 2013, the Company initiated the reorganization of its business to integrate the three divisions into a simplified One Shire organization in order to drive future growth and innovation.
 
In 2014 certain aspects of the One Shire program were temporarily put on hold due to AbbVie’s offer for Shire, which was terminated in October 2014. Subsequent to the termination of AbbVie’s offer, Shire announced on November 10, 2014 its plans to relocate over 500 positions to Lexington Massachusetts from its Chesterbrook, Pennsylvania, site and establish Lexington as the Company’s US operational headquarters in continuation of the One Shire efficiency program. This relocation will streamline business globally through two principal locations, Massachusetts and Switzerland, with support from regional and country-based offices around the world.

In the three months to March 31, 2015 the Company incurred reorganization costs totaling $15.2 million, relating to employee involuntary termination benefits and other reorganization costs. Reorganization costs of $260.7 million have been incurred since May 2013. The One Shire reorganization is expected to be substantially completed by the first quarter of 2016. Currently, the Company estimates that further costs in respect of the One Shire reorganization of approximately $115 million will be expensed as incurred during 2015 and 2016.


 
20

 
 
The liability for reorganization costs arising from the One Shire business reorganization at March 31, 2015 is as follows:

 
 
 
   
 
   
 
   
 
 
 
 
 
   
 
   
 
   
 
 
 
 
Opening liability
   
Amount
   
 
   
Closing liability at
 
 
 
at January 1,
   
charged to re-
   
 
   
March 31,
 
 
 
2015
   
organization
   
Paid/Utilized
   
2015
 
 
 
$M
   
$M
   
$M
   
$M
 
 
 
 
   
 
   
 
   
 
 
Involuntary termination benefits
    38.0       9.4       (5.1 )     42.3  
Other reorganization costs
    -       5.8       (5.0 )     0.8  
 
    38.0       15.2       (10.1 )     43.1  

At March 31, 2015 the closing reorganization cost liability was recorded within accounts payable and accrued expenses.

4.    Integration and acquisition costs
 
For the three months to March 31, 2015 Shire recorded integration and acquisition costs of $75.7 million primarily related to the acquisition and integration of NPS Pharma.
 
In the three months to March 31, 2014 integration and acquisition costs of $6.6 million primarily related to the acquisition and integration of ViroPharma ($65.8 million), offset by a net credit related to the change in fair values of contingent consideration liabilities ($59.2 million). The net credit arose principally due to the re-measurement of contingent consideration payable on the acquisition of FerroKin Biosciences, Inc. following the decision to place the ongoing Phase 2 clinical trial for SHP602 on hold.
 
5.    Accounts receivable, net

Accounts receivable at March 31, 2015 of $1,116.3 million (December 31, 2014: $1,035.1 million), are stated net of a provision for discounts and doubtful accounts of $46.7 million (December 31, 2014: $48.5 million).

Provision for discounts and doubtful accounts:

 
 
2015
   
2014
 
 
    $’M       $’M  
As at January 1,
    48.5       47.9  
Provision charged to operations
    80.8       80.7  
Provision utilization
    (82.6 )     (81.2 )
                 
As at March 31,
    46.7       47.4  

At March 31, 2015 accounts receivable included $57.2 million (December 31, 2014: $59.0 million) related to royalty income.


 
21

 
 
6.    Inventories

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

 
 
March 31,
   
December 31,
 
 
 
2015
   
2014
 
 
    $’M       $’M  
Finished goods
    137.8       136.0  
Work-in-progress
    307.4       305.3  
Raw materials
    143.5       103.5  
 
    588.7       544.8  

7.    Results of discontinued operations
 
Following the divestment of the Company’s DERMAGRAFT business in January 2014, the operating results associated with the DERMAGRAFT business have been classified as discontinued operations in the consolidated statements of income for all periods presented. In the three months to March 31, 2015 the Company recorded a loss of $2.5 million, primarily relating to costs associated with the divestment. The components of discontinued operations which relate to the DERMAGRAFT business are as follows:
 
   
3 months to
   
3 months to
 
   
March 31,
   
March 31,
 
   
2015
   
2014
 
Revenues:     $’M       $’M  
Product revenues
    -       1.9  
                 
Loss from discontinued operations before income taxes
    (3.9 )     (35.8 )
Income taxes
    1.4       13.1  
                 
Loss from discontinued operations, net of taxes
    (2.5 )     (22.7 )

8.    Prepaid expenses and other current assets
 
 
 
March 31,
   
December 31,
 
 
 
2015
   
2014
 
 
    $’M       $’M  
Prepaid expenses
    72.9       36.9  
Income tax receivable
    68.8       121.5  
Value added taxes receivable
    15.0       13.8  
Other current assets
    59.9       49.3  
 
    216.6       221.5  


 
22

 
 
9.    Goodwill
 
 
 
March 31,
   
December 31,
 
 
 
2015
   
2014
 
 
    $’M       $’M  
Goodwill arising on businesses acquired
    4,178.7       2,474.9  

In the three months to March 31, 2015 the Company completed the acquisitions of NPS Pharma and Meritage, which resulted in aggregate goodwill with a preliminary value of $1,732.7 million (see Note 2 for details).

 
 
2015
   
2014
 
 
    $’M       $’M  
As at January 1,
    2,474.9       624.6  
Acquisitions
    1,732.7       1,536.6  
Foreign currency translation
    (28.9 )     -  
                 
As at March 31,
    4,178.7