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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29630
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SHIRE PHARMACEUTICALS GROUP PLC
(Exact name of registrant as specified in its charter)
ENGLAND AND WALES
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
N.A.
EAST ANTON, ANDOVER, HAMPSHIRE SP10 5RG ENGLAND
(Address of principal executive offices) (Zip Code)
44 1264 333455
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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American Depository Shares, each representing Nasdaq National Market
3 Ordinary Shares, 5 pence nominal value
per share
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Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
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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 Registrant's 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. / /
As of March 24, 2000, the aggregate market value of the ordinary shares,
L0.05 par value per share of the Registrant held by non-affiliates was
approximately $3,950,000,000.
As of March 24, 2000, the number of outstanding ordinary shares was
250,868,396.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Shire Pharmaceuticals Group plc's definitive Proxy Statement for
its Annual Meeting of Shareholders to be held in May 2000 are incorporated into
Part III.
THE "SAFE HARBOR" STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included herein which are not historical facts are forward
looking statements. The 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, our 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 and
commercialization, the impact of competitive products, government regulation and
approval, product liability litigation and other risks and uncertainties
detailed from time to time in our filings with the Securities and Exchange
Commission including this annual report on Form 10-K for the year ended
December 31, 1999.
ITEM 1: BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
We are an international specialty pharmaceutical company with a strategic
focus on four therapeutic areas: central nervous system disorders, metabolic
diseases, cancer and gastrointestinal disorders. We operate and manage our
business in three geographic areas--the United States, Europe and the rest of
the world. Within these geographical segments, revenues are derived from three
sources: sales of products by our own sales and marketing operations, licensing
and development fees, and royalties. Sales and marketing operations are
principally in the U.S., the U.K. and Ireland and Canada.
We have expanded our business both organically and through acquisitions,
including a merger with Roberts Pharmaceutical Corporation in December 1999. The
merger with Roberts has provided an enhanced product pipeline, a strengthened
geographical presence and the critical mass and financial resources necessary to
capitalize on worldwide opportunities.
We were incorporated under the laws of England and Wales on January 1, 1994.
As part of a recapitalization, we acquired the entire share capital of Shire
Holdings Ltd on December 19, 1994, including the operations of Rybar
Laboratories Ltd, a U.K. based sales and marketing company acquired by our
predecessor in July 1992. In September 1995, we acquired Imperial Pharmaceutical
Services Ltd (subsequently renamed Shire Pharmaceutical Contracts Ltd), a
company specializing in the development of oral hormone replacement therapy
products for licensees. We acquired Pharmavene, Inc. (subsequently renamed Shire
Laboratories Inc.) in March 1997 and Richwood Pharmaceutical Company, Inc.
(subsequently renamed Shire Richwood Inc.) in August 1997. In October 1999, we
acquired the German, French and Italian sales and marketing subsidiaries of
Fuisz Technologies Ltd.
We are a public limited company organized under the laws of England and
Wales. Our principal executive offices are located at East Anton, Andover,
Hampshire, SP10 5RG, England and the telephone number is 44 1264 333455.
In this report, the term the "Company" refers to Shire Pharmaceuticals Group
plc and its subsidiaries unless the context indicates otherwise.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Substantially all of our revenues, operating profits or losses and assets
are attributable to one line of business, the acquisition, development and sale
of pharmaceutical products in three geographical segments, the United States,
Europe and the rest of the world.
(C) DESCRIPTION OF BUSINESS
STRATEGY AND APPROACH
Our strategy is to develop products primarily for our own specialty
marketing in the major countries of the world. The key elements of our operating
strategy are described below:
- MARKET PROPRIETARY PRODUCTS THROUGH OUR OWN SALES FORCE.
We believe that higher financial returns can be achieved by marketing our
products directly, as opposed to receiving royalties on licensees' sales. The
1999 acquisition of marketing subsidiaries from Fuisz Technologies Ltd in
Germany, France and Italy represents the first step towards building expanded
direct sales and marketing capability in continental Europe.
- FOCUS ON CNS DISORDERS, METABOLIC DISEASES, GASTROINTESTINAL DISORDERS AND
CANCER
1
The merger with Roberts Pharmaceutical Corporation broadens our therapeutic
focus from central nervous system disorders and metabolic diseases to include
cancer and gastrointestinal disorders. We believe that due to the specialized
nature of these diseases, our focused sales force can effectively market to high
volume prescribers.
- MANAGE OPERATING AND FINANCIAL RISK BY MAINTAINING A BROAD AND BALANCED
PORTFOLIO AND SELECTIVELY INVOLVING MULTINATIONAL PARTNERS IN RETURN FOR
OUT-LICENSING PRODUCT MARKETING RIGHTS.
We have a portfolio of six key U.S. marketed products, each with significant
potential. The development pipeline has 13 projects, one of which is in
registration and nine of which are post Phase II. As the Company increases in
size there are likely to be fewer occasions where out-licensing of marketing
rights will be appropriate. However, we remain committed to ongoing
collaborations such as that with Janssen, the co-development and licensing
partner for galantamine (Reminyl) in the treatment of Alzheimer's disease.
- SALES AND MARKETING
We intend to use our existing sales and marketing infrastructure to sell and
market most of our internally developed products. Our sales and marketing
operations in the U.S., U.K., Ireland, continental Europe and Canada presently
consist of 432 sales representatives. We believe that our sales and marketing
infrastructure can be expanded rapidly to meet product opportunities.
CURRENTLY MARKETED PRODUCTS
The table below lists our key currently marketed products by therapeutic
areas, indicating the owner or licenser of the product, the marketer of the
product and the territory where the product is being marketed.
MARKETED
PRINCIPAL BY/RELEVANT
PRODUCTS INDICATION(S) OWNER/LICENSER TERRITORY
- -------- ------------------------ -------------- --------------
TREATMENTS FOR CENTRAL NERVOUS SYSTEM DISORDERS
Adderall ADHD Shire Shire/U.S.
DextroStat ADHD Shire Shire/U.S.
Carbatrol Epilepsy Shire Shire/U.S.
TREATMENTS FOR METABOLIC DISEASES
Calcichew range Osteoporosis adjunct Nycomed Shire/U.K. and
Ireland
TREATMENTS FOR CANCER
Agrylin Elevated blood platelets Shire Shire/U.S. and
Canada
ProAmatine Low blood pressure Nycomed Shire/U.S. and
Canada
TREATMENTS FOR GASTROINTESTINAL DISORDERS
Pentasa Ulcerative colitis Ferring Shire/U.S.
TREATMENTS FOR CENTRAL NERVOUS SYSTEM DISORDERS
- ADDERALL AND DEXTROSTAT. Attention deficit hyperactivity disorder is a
central nervous system disorder of unknown cause and is characterized by varying
degrees of inattention, impulsivity and hyperactivity. ADHD is primarily a
childhood disorder, although it is increasingly being recognized as continuing
through adolescence and into adulthood. According to IMS America, the U.S.
market for treatments for ADHD was approximately $614 million for the year ended
December 31, 1999. It is
2
estimated that between three and five percent of children in the U.S. suffer
from the condition. U.S. Drug Enforcement Agency Schedule II products,
specifically methylphenidate and amphetamines, are currently the only approved
first line treatments for ADHD available. Our approved ADHD products, Adderall
and DextroStat, are branded psychostimulants. DextroStat is a branded generic
formulation of dextroamphetamine. We believe that Adderall, a unique combination
of four amphetamine salts, is generally administered in fewer daily doses than
its major competitors, eliminating the need for a dose during school hours.
According to IMS America, retail sales of Adderall and DextroStat represented
approximately 25% of the aggregate ADHD market for the year ended December 31,
1999 with our percentage of the market increasing from 20.4% in December 1998 to
30.5% in December 1999.
In the year ended December 31, 1999, sales of Adderall were $142.0 million,
representing approximately 35% of our total revenues. As a result, factors
adversely affecting the sale or production of Adderall would have a material
adverse effect on our financial condition and results of operation.
An incident in August 1998 at Arenol Corporation, our previous supplier of
the active ingredients for Adderall halted production for a total of 84 days.
The manufacture of these ingredients was transferred to the premises of B.I.
Chemicals, Inc. In July 1999, we purchased certain assets related to the
production of Adderall's active ingredients. In addition, production of the raw
materials for Adderall was transferred from Arenol to B.I. If a similar incident
were to occur at B.I., sales of Adderall would be adversely affected.
Other factors which could adversely affect sales of Adderall include:
- development of competitive pharmaceuticals;
- technological advances;
- increased production costs;
- marketing or pricing actions by Shire's competitors;
- changes in prescription writing practices;
- the occurrence of adverse reactions to Adderall;
- changes in reimbursement policies of third-party payers; and
- product liability claims
- CARBATROL. Approximately 2.5 million people in the U.S. suffer from
epilepsy. Epilepsy is characterized by an episodic disturbance of consciousness
during which seizure activity occurs in the brain. Carbatrol is an extended
release formulation of carbamazepine, an approved compound for the treatment of
epilepsy. Carbatrol is designed to improve compliance by delivering steady blood
levels of drug over 24 hours, when taken twice daily. It can be administered as
a capsule or sprinkled on food and can be taken with or without meals.
Carbamazepine is one of the most widely prescribed antiepilectic drugs
accounting for approximately 23% of total prescriptions written in 1999 for
antiepilectic drugs dispensed in the U.S. Prescription numbers for Carbatrol
increased from 16,000 in January 1999 to 46,000 in December 1999.
The FDA approved Carbatrol on September 30, 1997 for marketing in the U.S.
Carbatrol was originally out-licensed to Athena, a subsidiary of Elan
Corporation plc. In December 1997, we reacquired the worldwide rights to
Carbatrol, together with inventory and certain plant and equipment for
$25 million. We launched Carbatrol in the U.S. in June 1998. Effective
March 31, 1999, we terminated our promotion agreement with Athena, and now
promote the product on our own.
In 1994, we obtained a patent in the U.S. covering the formulation of
Carbatrol with an expiration date of 2011. Patent applications covering this
technology are pending in other countries.
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In the year ended December 31, 1999, sales of Carbatrol were $16.0 million
representing 4% of our total revenues.
TREATMENTS FOR METABOLIC DISEASES
Osteoporosis is characterized by a progressive loss of bone mass which
renders bone fragile and liable to fracture. More than three million people in
the U.K. are estimated to suffer from this condition. Osteoporosis affects both
sexes but is more rapid and profound in women, largely as a result of the
decline in estrogen production following menopause. Our principal products for
the treatment of osteoporosis are the Calcichew range of calcium and
calcium/vitamin D supplements which are sold mainly in the U.K. and Ireland,
although certain of the ClimaRange and BetaRange products include osteoporosis
as an indication in their licenses. Our Calcichew range includes, among others,
Calcichew, Calcichew D(3) and Calcichew D(3) Forte, which are used as adjuncts
to other therapies and which we believe are more palatable than alternative
products. We held a leading position in the L15 million (approximately
$24.5 million) U.K. prescription calcium market with a market share of
approximately 73% for the year ended December 31, 1999.
TREATMENTS FOR CANCER
- AGRYLIN. In 1991, we obtained an exclusive worldwide license from
Bristol-Myers Squibb to develop, market and sell Agrylin (anagrelide), which has
been developed as an oral treatment for thrombocythemia, a blood disorder
characterized by high blood platelet counts which could result in abnormally
high incidence of adverse blood clotting events, including heart attack and
stroke. There is evidence that some patients with increased platelet counts have
thrombosis or hemorrhage which can be treated successfully by lowering the
platelet count. Agrylin is intended to inhibit excessive platelet production and
reduce the morbidity and mortality of heart attack and stroke in thrombocytosis
patients.
In March 1997, we received notification from the FDA that the NDA for
Agrylin was approved. Active marketing and sales activities commenced in the
second quarter of 1997. There is no other FDA approved treatment available for
thrombocythemia. Other current therapies used to reduce excessive platelet
production have distinct disadvantages, such as leukemogenesis, leukopenia and
anemia. Further, Agrylin has been designated by the FDA as an Orphan Drug, a
status which entitles us to seven years of market exclusivity. In
December 1997, we filed an application with the FDA to expand the indications of
Agrylin to include polycythemia vera. In December 1998, we received approval for
the expanded indication for Agrylin for thrombocytosis secondary to
myeloproliferative diseases, including polycythemia vera and chronic myelogenous
leukemia.
In June 1998, the U.S. Department of Commerce, Patent and Trademark office
issued a patent covering an improved process for manufacturing anagrelide HCl,
the active ingredient in Agrylin. Currently, anagrelide is commercially prepared
utilizing a time consuming and difficult synthesis involving a starting material
possessing environmentally unfriendly properties. The new process, which
eliminates this precursor material and greatly simplifies the synthesis,
represents both an environmentally sound and a significantly more economical
method of manufacture. The patent for this new process expires in 2017.
In the year ended December 31, 1999, sales of Agrylin were $32.6 million,
representing 8.1% of our total revenues.
- PROAMATINE. In 1996, ProAmatine was given accelerated approval by the
FDA as a new drug for life-threatening illnesses and is currently the only FDA
approved treatment available in the U.S. for orthostatic hypotension. This is a
condition involving low blood pressure upon assuming an upright posture,
resulting in dizziness, weakness or unconsciousness. ProAmatine has been
designated as an
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Orphan Drug by the FDA, giving a seven year period of market exclusivity in the
U.S. Sales of ProAmatine in 1999 were $19.8 million, representing 4.9% of our
total revenues.
TREATMENTS FOR GASTROINTESTINAL DISORDERS
- PENTASA. In April 1998, exclusive U.S. marketing rights to Pentasa were
acquired from Hoechst Marion Roussel for $125 million. Pentasa is a patented
gastrointestinal drug for the treatment of ulcerative colitis. This drug
addresses a market of over 2 million patients in the U.S. Sales of Pentasa in
1999 were $51.8 million, representing 12.9% of our total revenues.
PRODUCTS UNDER DEVELOPMENT
We seek to maintain a broad and balanced approach to our development of new
products and have historically leveraged third-party research and development
expertise. This strategy has declined over time and we now focus primarily on
independently developing projects for our own marketing. We have entered into
collaborative arrangements with, among others, Janssen Pharmaceutica NV, a
subsidiary of Johnson & Johnson, and Novartis. Recognizing the inherent risks in
drug development, our policy is to manage this risk by maintaining a broad range
of products in different development phases. We aim to optimize the level of
fixed overhead by using contract research organizations to manage multi-center
and/or international clinical trials on a day-to-day basis. In the year ended
December 31, 1999, we spent approximately $77.5 million on research and
development.
The table below lists our key products under development by therapeutic
area, indicating their development status, their territorial rights and
licenses, if any.
PRINCIPAL TERRITORIAL
PRODUCTS INDICATION(S) STATUS RIGHTS LICENSEE(S)
- -------- ------------------- --------------------- -------------- -----------
TREATMENTS FOR CENTRAL NERVOUS SYSTEM
DISORDERS
Reminyl (galantamine) Alzheimer's disease In registration Global Janssen
(approved in Sweden)
Dirame Moderate/mod- Phase III Global
erately severe pain
SLI381 ADHD pre Phase III Global
SPD417 Bipolar disorder pre Phase III Global
SPD503 ADHD Pre-clinical Global
SPD412 Epilepsy Phase I Global
SPD418 Epilepsy Pre-clinical Global
SPD421 Epilepsy Phase I Global
SPD502 Stroke Phase I Global excl.
Nordic and
Baltic
countries
TREATMENTS FOR METABOLIC DISEASES
Lambda High blood Phase III Global
phosphate levels in
patients with
kidney failure
5
PRINCIPAL TERRITORIAL
PRODUCTS INDICATION(S) STATUS RIGHTS LICENSEE(S)
- -------- ------------------- --------------------- -------------- -----------
TREATMENTS FOR GASTROINTESTINAL DISORDERS
Pentasa Ulcerative colitis Phase III U.S.
Emitasol Nausea and vomiting pre Phase III U.S., Canada
and Mexico
TREATMENTS FOR CANCER
SPD424 Prostate cancer Phase III North America,
Europe
TREATMENTS FOR CENTRAL NERVOUS SYSTEM DISORDERS
- REMINYL (GALANTAMINE) FOR ALZHEIMER'S DISEASE. Alzheimer's disease is
characterized by loss of memory, particularly for recent events, confusion and
disorientation, followed by gross intellectual disturbances, personality changes
and emotional disintegration. It is progressive, with death usually occurring
within five to nine years following the onset of symptoms. Patients with
Alzheimer's disease have been shown to have reduced levels of the
neurotransmitter acetylcholine ("ACh"), which is broken down by
acetylcholinesterase. Improvements in cognition have been achieved in patients
using acetylcholinesterase inhibitors. Galantamine, a naturally occurring
alkaloid, is an inhibitor of acetylcholinesterase, which in turn increases the
level of ACh. We are co-developing Reminyl for the treatment of Alzheimer's
disease with Janssen. It is estimated that eight million people in the U.S. and
Western Europe suffer from Alzheimer's disease.
In July 1998, Phase III results for galantamine were announced at the 6(th)
International Conference on Alzheimer's Disease and Related Disorders in
Amsterdam. Results presented were for two pivotal six month Phase III studies
conducted by Janssen Research Foundation, an affiliate of Johnson & Johnson,
which is co-developing galantamine with us. An in vitro study of nicotinic
effects of the drug was also presented.
In a double-blind, placebo-controlled U.S. trial involving 636 patients with
mild to moderate Alzheimer's disease, study participants were tested using the
cognitive portion of Alzheimer's Disease Assessment Scale (ADAS-cog). This scale
is commonly used to assess memory and learning skills such as word recall and
recognition, ability to remember test instructions, and accuracy in naming
objects and figures. Among those who completed the study, patients who took
galantamine achieved cognitive scores that were an average of 3.7 to 3.8 points
higher than individuals who received placebo. In a second study carried out
across eight European countries and involving 653 patients, those who were
treated with galantamine and completed the study had average ADAS-cog scores
after treatment that were up to 4.1 points higher than patients on placebo. As
expected, adverse events in both studies were typically cholinergicin in nature
with nausea, vomiting and other gastrointestinal side effects occurring at
approximately two to four times placebo rate. These side effects were usually
transient, generally subsiding within one week.
Unlike other agents, galantamine appears to act on the brain's nicotinic
receptors. The "modulation" of these receptors could lead to an increase in
release of several neuro-transmitters, including ACh. Further investigation is
required to determine the clinical significance and potential impact of this
additional mechanism of action.
On March 31, 1999, we announced the first European regulatory submission for
galantamine. Reminyl received its first regulatory approval within the European
Union from Sweden on March 3, 2000. Reminyl will subsequently be submitted
through the EU Mutual Recognition Procedure for marketing approval in the E.U.
It is anticipated that Reminyl will be launched using natural galantamine
extracted from daffodil bulbs. Although the necessary supply agreements are in
place, there can be no assurance that adequate
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supplies of daffodil bulbs of a suitable quality will be available or that the
supplier will be able to supply sufficient galantamine of the required quality.
We also expect, along with Janssen, to seek regulatory approval for the
synthetic manufacture of galantamine, which may be delayed or withheld. We will
be relying on Janssen and Waldheim Pharmaceutica for the supply of synthetic
galantamine of suitable quality and there can be no assurance that adequate
supplies will be available.
- DIRAME. Dirame is an orally administered centrally-acting analegesic for
treating moderate to moderately severe pain. In total, over 4000 patients have
been treated with Dirame. We believe that Dirame could have a favorable
side-effect profile especially in terms of low addiction potential. Exclusive
worldwide rights to Dirame were acquired from Bayer. The analgesic market is
approximately $3.5 billion in the U.S. The compound could have applications in
several therapeutic categories including pain associated with cancer, advanced
arthritis and post-surgical pain.
- ADHD PRODUCTS. We have initiated two development programs focused on
products for the treatment of ADHD.
- SPD 502. In February 1998, we in-licensed from NeuroSearch A/S a series
of AMPA antagonists for CNS disorders including the acute treatment of stroke.
Primary focus will be on the development of the lead compound SPD 502, which is
in early clinical development.
There are two types of strokes: ischemic and the less common hemorrhagic. An
ischemic stroke occurs after a blood clot starves the brain of oxygen. During
periods of ischemia (resulting from stroke or other causes), glutamate, a potent
cell toxin is released in the brain. In animal models of ischemia, AMPA
antagonists inhibit toxic effects of glutamate and reduce the amount of brain
damage. Stroke is the leading cause of adult disability in the western world,
with a prevalence of 500-800 per 100,000. It accounts for 10% of all deaths in
men and 17% of deaths in women. Around three-quarters of patients who survive a
stroke will suffer some sort of disability, and contribute significantly to
healthcare costs. It is estimated that the yearly costs to treat stroke victims
in the U.S. are $30 billion.
TREATMENTS FOR METABOLIC DISEASES
- LAMBDA. Lambda (lanthanum carbonate) is being developed for the
prevention and treatment of hyperphosphataemia in patients with chronic kidney
failure. Hyperphosphatemia, meaning high levels of phosphate in the blood, is a
condition arising from the inability of damaged kidneys to eliminate the excess
dietary phosphate which is widespread in food. Renal dialysis and a restricted
diet are generally unable to reduce these phosphate levels sufficiently. If left
untreated, hyperphosphatemia can result in renal osteodystrophy, a painful
condition with similarities to osteoporosis, in which there are abnormalities in
the formation and structure of bone. Lambda is designed to be administered with
food and act as a "phosphate binder," forming an insoluble phosphate salt in the
intestine, causing the phosphate salt to be eliminated in the faeces.
It is estimated that there are 650,000 patients worldwide with end-stage
renal disease. We believe that the market for Lambda could grow because of its
potential to be used predialysis. In addition, we believe that current therapies
are not ideal: aluminium salts can cause neural toxicity and are no longer
widely used; calcium salts are inefficient binders requiring large doses and
often cause hypercalcemia, which among other things, can result in calcification
of blood vessels.
Lambda is currently undergoing Phase III clinical trials in Europe and the
U.S. following positive interim Phase II results. The pre-planned interim
analysis of Phase II showed that of the 28 patients treated, 26 re-established
control of their blood phosphate concentrations below the target level set for
the study. Adverse events were generally mild and transient. Phase I trials of
Lambda have also commenced in Japan under the "In-Country Caretaker Scheme".
7
TREATMENTS FOR GASTROINTESTINAL DISORDERS
- PENTASA. Pentasa 250mg, which is currently licensed in the U.S., is used
to treat ulcerative colitis. As part of the acquisition of Pentasa from Hoechst
Marion Roussel, we received U.S. rights to a 500mg tablet, which is currently in
Phase III development. The new 500mg tablet formulation will aid the compliance
of patients who often need to take large doses.
- EMITASOL. Emitasol is an intranasal form of metoclopramide, an existing
anti-nausea drug currently available in oral and injectable forms. Emitasol will
shortly enter Phase III clinical trials. We have been contracted by
RiboGene, Inc. to develop this product and RiboGene, Inc. will provide up to
$7 million in funding for the development of the product.
TREATMENTS FOR CANCER
- SPD424. We are developing a compound to treat prostate cancer designated
SPD424. This compound in a patented delivery system has been licensed
exclusively to us for use in North America and Europe and has completed Phase II
clinical trials. We acquired the rights from Hydro Med Sciences to a patented
hydrogel implant delivery technology for use in the development of SPD424 for
the hormonal treatment of prostate cancer. SPD424 is a synthetic gonadotropic
hormone releasing factor agonist that, due to its long-term inhibition of
pituitary release of gonodatrophins, can block both ovarian and testicular
function. The hydrogel implant employs a proprietary technology that delivers
therapeutic agents at a controlled, constant release rate for more than one
year. It is a retrievable subcutaneous implant that can be inserted in a
physician's office using a local anesthetic.
DRUG DELIVERY TECHNOLOGIES
We have a platform of five drug delivery technologies that can be applied to
drugs in order to enhance their effectiveness or their convenience to patients
in terms of dosage regimen. Generally, this involves reformulating the drug into
a new delivery system designed either to enhance the absorption of the drug into
the blood stream or, alternatively, to delay absorption of the drug into the
bloodstream, thereby requiring the patient to take fewer daily doses.
Our portfolio of drug delivery technologies includes a number of
technologies designed to improve the oral delivery of drugs, a technology
designed to provide an extended release drug delivery profile and a system to
provide enhanced solubility and extended release delivery. These technologies
can be made available to third parties in return for development fees,
milestones and royalties. We also intend to employ these technologies
selectively to products being developed internally where the characteristics of
the product can be improved or modified to secure a competitive advantage.
MANUFACTURING AND DISTRIBUTION
We manufacture finished product and package our Schedule II drugs at our
9,700 square foot facility in Valley Stream, New York. Due to control and
capacity issues that arose during the previous ownership, we undertook a
complete renovation of the facility in 1995. This included hiring new
management, replacing virtually all of the manufacturing equipment and
modernizing the laboratory.
Adderall is manufactured solely by us in compliance with specifications and
quality standards that were developed internally and reviewed by the FDA. Until
August 1998, raw materials for Adderall were manufactured solely by
Arenol, Inc. Arenol's factory was destroyed following an explosion in
August 1998 and raw material manufacturing was transferred to B.I.'s plant in
Petersburg, Virginia. At the current time, the Company believes that B.I. is the
only manufacturer available for three out of the four active ingredients in
Adderall and that potential additional manufacturers are few due to the very
limited number of FDA and DEA manufacturers for the class of active ingredients
in Adderall. If B.I. suffered a similar incident to that which occurred at
Arenol, sales of Adderall would be adversely affected.
In July 1999, we purchased certain assets from Arenol related to the
production of Adderall's active ingredients.
8
In July 1997, we concluded the purchase of a 100,000 square foot
pharmaceutical manufacturing facility previously operated by Monsanto's Searle
Division located in Oakville, Ontario, Canada. The facility is approved by the
Health Protection Branch of the Canadian Ministry of Health. We expect to
receive FDA accreditation within the next twelve months.
In January 1999, we sold our 17,000 square foot Indianapolis, Indiana plant,
together with the products manufactured at that facility. All other products are
either manufactured and/or packaged in Valley Stream, New York or by third party
contract manufacturers.
Our 5,900 square foot distribution center, which includes a large vault to
house DEA regulated Schedule II products, is located in Florence, Kentucky. From
there, we distribute our ADHD products to nearly all the wholesale distribution
centers and the three major warehousing pharmacy chains that stock Schedule II
drugs in the U.S., providing access to nearly all pharmacies in the U.S.
In October 1997, we completed the acquisition of an approximately 70,000
square foot distribution facility located in a suburb of Chicago. Distribution
from this facility commenced in the second quarter of 1998.
All products marketed by the U.K. based 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.
Distribution in the U.K. and Ireland and to export territories is also
contracted out to third parties. We have access to all principal drug wholesale
chains in the U.K. and Ireland and their respective distribution centers.
In both the U.S. and the U.K., a small number of large wholesale
distributors control a significant share of each market. In recent years the
number of independent drug stores and small chains has decreased as a result of
consolidation. Consolidation or financial difficulties could cause customers to
reduce their inventory levels, or otherwise reduce purchases of our products.
In the U.S., our customers include McKesson Corp., Bergen Brunswig Corp. and
Cardinal Health Inc. In the U.K., our customers include The Boots Company PLC,
AAH Pharmaceuticals Ltd and Unichem Plc. For the fiscal year ended December 31,
1999, our two largest customers accounted for approximately 25% and 14% of total
revenues, respectively. The loss of either of these customer accounts could have
a material adverse effect on our financial condition and results of operations.
INTELLECTUAL PROPERTY
An important part of our business strategy is to protect our products and
technologies through the use of patents, proprietary technologies and
trademarks, to the extent available. Our policy is to seek patent protection
whenever possible in the U.S., major European countries and Japan. Where
practicable, we seek patent protection in other countries on a selective basis.
In all cases, we will either obtain patent protection ourselves or support
applications by our licensers. Our largest marketed product is not protected by
patent; however, the formulation and manufacturing controls associated with the
product require certain technical information, which we believe are only
available to us and to certain of our suppliers that have signed confidentiality
agreements.
Our licensers have obtained patent protection or made applications for
patent protection for the use of galantamine for the treatment of Alzheimer's
disease. Generally this protection will be by either method of treatment claims
in the U.S. or by Swiss-type use patents directed to the use of the
pharmaceutical agent in connection with the manufacture of a product for use
with the new medical indication. The patents and patent applications relating to
the phosphate binder under development by Shire for use in the treatment of
hyperphosphatemia contain both Swiss-type use claims and formulation claims
directed to the phosphate binder under development. The patent and patent
applications for our product relating to the use of hyaluronic acid and its
salts in improving the effectiveness of certain therapeutic agents in the
treatment of acne contain both Swiss-type use claims and formulation claims.
9
Patents have been issued or applications made in relation to our process
technologies and, where appropriate, in respect of the formulation of products
made by those processes or incorporating those technologies.
We also rely on trade secrets, unpatented know-how and technological
innovations, trademarks and contractual arrangements with third parties to
maintain and enhance our competitive position in situations where we are unable
to obtain patent protection or our marketed products are not covered by specific
patents.
In the regular course of business, we are a party to litigation or other
proceedings relating to intellectual property rights. We cannot assure you that
our patents or patent applications or those of our third party manufacturers
will provide valid patent protection and will not be revoked as a result of
proceedings by third parties. If patents are granted to other parties that
contain claims having a scope that is interpreted by the relevant authorities to
cover any of our products or technologies, there can be no guarantee that we
will be able to obtain licenses to such patents or make other arrangements at
reasonable cost, if at all. Competitors or potential competitors may have filed
applications for, been granted patents for, or obtained additional patents and
proprietary rights that may relate to products and/or technologies competitive
with our products or those of our licensees.
We cannot assure you that our patents or those of our licensers will
ultimately be held valid or that efforts to defend any patents or know-how or
other intellectual property rights would be successful. An adverse outcome in
any litigation or proceeding could have a material adverse effect on the sale or
development of the product or technology in question and lead to the abandonment
or delay in development or sale of that product or technology and lead to
additional expenses.
COMPETITION
The manufacture and sale of pharmaceuticals is highly competitive. Many of
our competitors are large, well known pharmaceutical, chemical and health care
companies that have considerably greater financial, sales, marketing and
technical resources. Additionally, many of our present and potential competitors
have research and development capabilities that may allow them to develop new or
improved products that compete with our products. The pharmaceutical industry is
characterized by rapid product development and technological change. Our
pharmaceutical products may be rendered obsolete or uneconomical by the
development of new pharmaceuticals to treat the conditions addressed by our
products or as the result of either technological advances affecting the cost of
production or marketing or pricing action by competitors.
We believe that competition in our markets is based on, among other things,
product safety, efficacy, convenience of dosing, reliability, availability and
price. Companies with greater resources and larger research and development
expenditures have a greater ability to fund research and clinical trials
necessary for regulatory applications, and may have an improved likelihood of
obtaining approval of drugs that would compete with our drugs. Prior regulatory
approvals for competing products would force our development products to compete
with an established drug. Other products now in use or under development by
others may be more effective or have fewer side effects than our current or
future products. For example, we are aware of a number of products which may
compete with Reminyl, including: Aricept by Pfizer Inc.; Exelon by Novartis
Pharma A.G., and propentofylline by Hoechst Marion Rousell Ltd. Of these,
Aricept and Exelon have been launched in certain countries, while
propentofylline is still in development or registration. Lambda's principal
competitor is likely to be RenaGel, which was launched in 1998. The product was
developed by GelTex Pharmaceuticals, Inc. and is marketed by Genzyme Corporation
General Division.
In addition, we are aware of efforts by competitors to develop both improved
formulations of existing Schedule II drugs and new, non-Schedule II drugs, for
the treatment of ADHD. For example, Alza Corporation, Novartis (in collaboration
with Elan Corporation plc), Medeva plc (in collaboration
10
with Eurand Group) and Noven Pharmaceuticals, Inc. are believed to be developing
extended release, once-a-day formulations of methylphenidate while Celgene
Corporation and Medeva plc (believed to be collaborating with Chiroscience
Group plc) are both working to develop a single isomer version of
methylphenidate. Glaxo Wellcome plc, Eli Lilly and Company, Bristol-Myers Squibb
(in collaboration with Sano Corporation) and Abbott Laboratories are believed to
be developing non Schedule II products for ADHD. Should any of these products be
approved by the FDA, they could have a material adverse effect on the sales of
Adderall, which represented approximately 35% of our total revenues for the year
ended December 31, 1999.
PRINCIPAL LICENSING AND COLLABORATIVE AGREEMENTS
- - NEUROSEARCH A/S--CNS DISORDERS
In February 1998, we entered into a development and license agreement with
NeuroSearch A/S by which NeuroSearch granted us an exclusive license to certain
of its information and patent rights with respect to treatment for CNS disorders
in exchange for milestone and royalty payments. Our marketing rights to the
products extend throughout the world excluding Denmark, Norway, Sweden, Finland,
Iceland, Lithuania, Estonia and Latvia. The agreement remains in effect so long
as any royalty payments are due to NeuroSearch under the agreement.
- - NYCOMED--CALCIUM PRODUCTS
We entered into two principal agreements with Nycomed in January 1987 and
May 1992 by which Nycomed granted to us distribution rights for its calcium
range of products in the U.K. and Ireland and certain export territories. The
agreements, which remain in force until 2004 and 2002, respectively, will
continue after these dates for further periods of three years unless terminated
by 12 months written notice. Under the agreements, Nycomed undertakes to supply
exclusively us with the products for the U.K. and Ireland.
- - NOVARTIS--ORAL HRT PRODUCTS
In August 1995, we entered into a license agreement with Novartis, under
which we granted Novartis an exclusive license for the manufacture, marketing
and sale of all the ClimaRange products throughout the world excluding the U.S.,
Japan, South Africa, certain other African countries, the U.K. and Ireland for
an initial period of 10 years commencing on the issue of the first product
license. Novartis has an option, subject to certain limitations, to extend its
rights to the ClimaRange products in these countries. We also granted to
Novartis a first option to purchase (on terms to be agreed between the parties)
the exclusive rights to manufacture and sell any products developed by us which
are similar to or derived from the ClimaRange products. We have obtained
approval for product license applications for each of the first five ClimaRange
products under the decentralized application procedure for the European
Community. Under the license agreement, Novartis has made milestone payments to
us upon the completion of studies, submission of product license applications
and grant of product licenses in identified territories. Novartis will also pay
royalties on sales of the ClimaRange products in the licensed territories.
Novartis has launched ClimaRange products in seven countries. In those countries
where Novartis indicates that it does not intend to launch the products, we
intend to negotiate with Novartis for the return of the rights to these products
in such territories.
- - VARIOUS GALANTAMINE AGREEMENTS
Pursuant to an agreement with Synaptech Inc., the owner of the patents on
galantamine for use in the treatment of Alzheimer's disease, we have undertaken
technical, pre-clinical and clinical work on the use of Reminyl in Alzheimer's
disease. We initially paid Synaptech an up front payment of L1 million
(approximately $1.6 million) which was accounted for as a development cost, and
have agreed to pay royalties on sales of Reminyl. We have also entered into a
co-development agreement with Janssen under which we licensed to Janssen all of
our clinical data and know-how relating to the
11
use of galantamine in Alzheimer's disease worldwide, except for the U.K. and
Ireland. The agreement provides for a one-time upfront payment, a milestone
payment and the reimbursement of development costs. The upfront and milestone
payments were recognized as licensing and development income when they became
due. Under these arrangements, Janssen undertook to finance substantially all
the future research and development costs of Reminyl as a treatment for
Alzheimer's disease and to conduct clinical trials, obtain regulatory approvals
and manufacture and market Reminyl. As a result, we are dependent on Janssen for
any revenues derived from Reminyl. Moreover, there can be no assurance that our
interests will continue to coincide with Janssen.
Our rights to develop, manufacture and sell Reminyl for use in the treatment
of Alzheimer's disease under the patents of Synaptech extend throughout the
world but exclude North America, Korea, Taiwan, Thailand and Singapore. We have,
in turn, entered into a sub-license with Janssen under which we granted Janssen
exclusive rights to develop, manufacture and sell Reminyl for use in Alzheimer's
disease in all territories licensed to us except the U.K. and Ireland. We also
have the right to reacquire the rights to sell Reminyl in one of a specified
group of major European countries. Janssen has entered into a separate license
agreement with Synaptech covering North America, Korea, Taiwan, Thailand and
Singapore. Synaptech authorized us to enter into the above co-development
agreement and the above sub-license agreement with Janssen, under which, among
other things, we will receive royalties on sales of Reminyl by Janssen in the
U.S.
The co-development agreement and sub-license granted to Janssen may be
terminated by Janssen on 90 days' notice. If Janssen exercises its right to
terminate the license and co-development agreement under this provision, the
licenses granted to Janssen terminate and Janssen is also obligated to transfer
to us data and other information and responsibility for the management of
continuing development and registrations of the product. The costs of ongoing
studies will be shared by us and Janssen in the relevant proportions in the
agreement for three months after the date of termination except for the costs
payable for clinical trials, which will be shared until they can be properly
terminated. Under the agreement, we have the right to complete the registration
of the products and seek alternative partners.
We have had a continuing relationship with MacFarlan Smith Limited ("MS"), a
subsidiary of Meconic plc, since October 1991 under which MS produces
galantamine for use in our clinical trials. In June 1997, we concluded
agreements with MS and Janssen for the procurement of daffodil bulbs by MS and
the extraction from those bulbs of galantamine for use in the production of
galantamine for commercial launch of the product. Under these arrangements, it
is anticipated that MS will arrange for the production, planting and harvesting
of daffodil bulbs in sufficient quantities to provide the worldwide launch stock
for the product and will also construct a plant to undertake the extraction of
galantamine with an agreed maximum plant cost of L7 million (approximately
$11.2 million). Reciprocal arrangements have been concluded with Janssen, which
will bear the entire cost other than a proportion relative to the supply of
bulbs and product for sale by us in the U.K. and Ireland. These arrangements
with MS may be terminated by us and Janssen.
- - JOHNSON MATTHEY--LAMBDA
Johnson Matthey plc has applied in the U.S., Europe and elsewhere for
patents for the use of lanthanum carbonate for the treatment or prevention of
hyperphosphatemia. In February 1996, we entered into an agreement with Johnson
Matthey under which Johnson Matthey granted to us an exclusive license agreement
to develop, manufacture, use and sell Lambda worldwide. Under the license
agreement, in return for an exclusive license expiring on the expiration of the
relevant patent, we will pay an upfront payment and a royalty on sales of
Lambda. We have consented to the assignment by Johnson Matthey of its patents to
AnorMed Inc., a Canadian company, which is partially owned by Johnson Matthey.
As part of these arrangements, we amended the agreement and received an
exclusive worldwide license to use Johnson Matthey's manufacturing know-how in
return for upfront payments and royalties.
12
GOVERNMENT REGULATION
The clinical development, manufacturing and marketing of our products are
subject to regulation by various authorities in the U.S. and the E.U., including
the FDA, the DEA and the Occupational Safety and Health Administration and in
the U.K., principally the Medicines Control Agency. The Federal Food, Drug, and
Cosmetic Act, the Public Health Service Act in the U.S. and numerous directives
and guidelines in the E.U. govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of our
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 the major markets in which we or our
licensees seek to test or market products. At a minimum, 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 differ depending on the territory, the drug involved and
the stage of development.
In general, for a new chemical entity, a product needs to undergo rigorous
preclinical testing before it can be used in humans, both in the laboratory and,
until suitable alternative tests are found, in animals. Clinical trials for new
products are typically conducted in three sequential phases that may overlap. In
Phase I, the initial introduction of the pharmaceutical 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 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 more fully evaluate clinical outcomes.
In the U.S., data need to be submitted to the FDA as part of an Initial New
Drug submission which, unless the FDA objects, will become effective 30 days
following receipt by the FDA; Phase I studies in human volunteers may commence
only after this lack of objection. Prior regulatory approval for human volunteer
studies is not required in the U.K., although the same level of testing will
need to have been completed before we decide it is safe to proceed. Following
successful completion of Phase I studies, data are then submitted in summarized
format to the Medicines Control Agency as a clinical trial exemption application
in support of a specific Phase II clinical study or program, and provided no
objection has been received within a maximum of 63 days after receipt, the Phase
II studies may commence. For any additional studies, Phase II and/or Phase III,
further submissions to regulatory authorities are necessary, detailing results
of previous trials, updating ongoing preclinical studies and describing full
details of the proposed studies. Authorities may require additional data before
allowing the studies to commence and could demand the studies be discontinued at
any time if there are significant safety issues. In addition to the regulatory
review, the study must often be approved by an independent body. The exact
composition and responsibilities of this body differs from territory to
territory. In the U.S., for example, each study is conducted under the auspices
of an independent Institutional Review Board at the institution at which the
study is conducted. This board considers among other things, the design of the
study, ethical factors, the safety of the human subjects and the possible
liability risk for the institution. The U.K. equivalent of this body, the Ethics
Committee, has a very similar approach. Other authorities around Europe and the
rest of the world have slightly differing requirements involving both the
execution of clinical trials and the import/ export of pharmaceutical products.
It is our responsibility to ensure we conduct our 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 adequately demonstrate the
quality, safety and efficacy of a therapeutic drug under development would delay
or
13
prevent regulatory approval of the product. There can be no assurance that if
clinical trials are completed, either we or our collaborative partners will
submit applications for required authorizations to manufacture and/or market
potential products (including a marketing authorization, New Drug Applications
or Abbreviated New Drug Applications) or that appropriate regulatory authorities
will review and approve any application in a timely manner, if at all.
In order to gain marketing approval, we must submit a dossier to the
relevant authority for review. The format is usually specific and laid out by
each authority, although in general it will include information on the chemistry
and pharmaceutical aspects of the product as well as the pre-clinical and
clinical data. The FDA undertakes the review for the U.S.; in Europe the review
may be undertaken by the European Medicines Evaluation Agency or 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 several months to several years or can be denied
altogether. The approval process can be affected by a number of factors;
additional animal 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 the facility, 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. As a
condition of approval, the regulatory agency may require post-marketing
surveillance to monitor for adverse effects. After approval for the initial
indication, further clinical studies are 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.
We believe that the approval process for certain of our drug/delivery
combinations now under development including ClimaRange and BetaRange may be
shorter than the full process described above because the safety and efficacy of
the compounds have already been established in currently marketed formulations.
In the U.S., the Drug Price Competition and Patent Restoration Term Act of 1984,
known as the Waxman-Hatch Act, established abbreviated application procedures
for obtaining FDA approval for many brand name drugs that are off-patent and
whose marketing exclusivity has expired. Approval to manufacture these drugs is
obtained by filing abbreviated drug applications. As a substitute for conducting
full-scale preclinical and clinical studies of the brand name drug, the FDA
requires data establishing that the drug formulation, which is the subject of an
abbreviated application, is either bio-equivalent or has the same therapeutic
effect as the previously approved drug, among other requirements. The European
guidelines also allow for the submission of abridged applications using similar
criteria to the U.S. 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. Renewals in Europe may require additional
data, which may result in a license being withdrawn. In the U.S., 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 and to obtain
injunctions to close manufacturing plants not operating in conformity with
regulatory requirements and to stop shipments of violative products. The FDA
also may impose pre-clearance requirements on products currently being marketed
without FDA approval. Some of our products are being marketed as "old drugs"
without New Drug Application clearance. The FDA's position is that essentially
all prescription drugs should ultimately be subject to "new drug" status. It is
possible that the FDA will seek in the future to regulate these "old" products
as "new drugs", subject to premarket clearance requirements. In addition,
changes in regulation could have a material adverse effect on our financial
condition and results of operation.
14
The DEA also controls the national production and distribution of
Schedule II drugs in the U.S. by allocating production quotas based, in part,
upon the DEAs view of national demand. As Schedule II drugs, the production and
sale of our ADHD products are strictly controlled.
THIRD PARTY REIMBURSEMENT
Our ability to market products depends in part on the extent to which
healthcare providers pay at appropriate reimbursement levels for the cost of the
products and related treatment. Third-party payers are increasingly challenging
the pricing of pharmaceutical products and/or seeking pharmacoeconomic data to
justify reimbursement practices. In the U.S., several factors outside of our
control could significantly influence the purchase of pharmaceutical products
including the trend toward managed health care, the growth of organizations such
as health maintenance organizations and managed care organizations and
legislative proposals to reform health care and government insurance programs.
These factors could result in lower prices or a reduction in demand for our
products.
Similar developments may take place in the E.U. 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 our products. Limits on reimbursement
available from third-party payers may reduce the demand for our products.
EMPLOYEES
On December 31, 1999, we employed 1,010 individuals, 533 of whom were in
sales and marketing, 137 of whom were in research and development, 192 of whom
were in manufacturing and distribution, and 148 of whom were in general and
administrative. In addition to our full and part time staff, we engage
professional personnel on a consultancy basis and, from time to time,
consultants and others on a per day or hourly basis. We believe that relations
with our employees are satisfactory. None of our employees is represented by a
labor union.
Our success is dependent on our ability to attract and retain highly
qualified management and scientific personnel. We face intense competition for
personnel from other companies, academic institutions, government entities and
other organizations. There can be no assurance that we will be successful in
attracting and retaining such personnel. In general, we have agreements with our
key scientific and management personnel for periods of one year or less.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about Foreign and Domestic Operations is presented in
Note 20 to the Company's consolidated financial statements. See "Notes to the
Consolidated Financial Statements--Note 20."
15
RISK FACTORS
ANY DECREASE IN THE SALE OF ADDERALL COULD SIGNIFICANTLY REDUCE REVENUES.
In 1999, sales of Adderall were approximately $142 million, representing
approximately 35% of our revenues. Any factors which decrease sales or reduce
production of Adderall would significantly reduce our revenues. An explosion in
August 1998 at our then supplier of the active ingredients for Adderall halted
its production for a total of 84 days. If a similar incident were to occur
again, we would experience a substantial decrease in revenues. Other factors
which could adversely affect sales of Adderall include:
- development of competitive pharmaceuticals;
- technological advances;
- increased production costs;
- marketing or pricing actions by our competitors;
- changes in prescription writing practices;
- the occurrence of adverse reactions to Adderall;
- changes in reimbursement policies of third party payers; or
- product liability claims.
WE ARE NAMED AS A DEFENDANT IN A LARGE NUMBER OF LAWSUITS INVOLVING PHENTERMINE
AND IF WE ARE FOUND LIABLE IN SOME OR ALL OF THOSE LAWSUITS FOR DAMAGES IN
EXCESS OF OUR ASSETS, WE WOULD BE REQUIRED TO REORGANIZE OR SEEK BANKRUPTCY
PROTECTION.
We are currently a defendant in approximately 3,500 lawsuits, in both
federal and state courts, which seek damages for, among other things, personal
injury arising from phentermine products supplied for the treatment of obesity
by us and several other pharmaceutical companies. We have 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. If we
are found liable in some or all of these lawsuits for damages in excess of its
assets, we would be required to consider reorganizing and seeking protection in
bankruptcy or initiating insolvency proceedings. The suits relate to phentermine
either alone or together with fenfluramine or dexfenfluramine. In 127 of these
suits, the plaintiffs have specifically alleged in the complaint or subsequent
discovery that they used Oby-Cap or Oby-Trim, phentermine products produced by
us. The lawsuits generally allege the following claims:
- the defendants marketed phentermine and the other products for the
treatment of obesity and misled users about the products and the dangers
associated with them;
- the defendants failed to adequately 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.
We became involved with phentermine through our acquisition of certain
assets of Rexar Pharmacal Corp. in January 1994. In addition to liability as a
result of our own production of Oby-Cap, plaintiffs may seek to impose liability
on us as a successor to Rexar. Class certification has been sought for certain
of the claims made against us and the other defendants. In addition, pending
federal lawsuits have been consolidated as a multidistrict litigation in the
Eastern District of Pennsylvania.
We intend to vigorously defend all the lawsuits and pursue all available
reasonable defenses. Legal expenses have thus far been paid by the insurers of
our supplier, Eon Labs Manufacturing Inc.
16
Through approximately March 2000, Eon and its distributors, including us, had
exhausted approximately $39 million in insurance proceeds defending the
lawsuits. Additional insurance is available to us and the other Eon distributors
through Eon's carriers in the amount of approximately $12 million in the
aggregate. In addition, we have our own insurance up to a maximum of $3 million
for lawsuits filed in the period to April 28, 1998, an unlimited indemnity given
by Eon and a limited indemnity from the former shareholders of Shire Richwood
given at the time of our acquisition of Shire Richwood. We have already spent a
substantial amount of resources in managing these lawsuits and will continue to
do so.
WE MAY NOT ACHIEVE SUSTAINED PROFITABILITY DUE TO A NUMBER OF FACTORS, SOME OF
WHICH ARE BEYOND OUR CONTROL.
We have experienced net losses in four out of the past five fiscal years and
may not achieve sustained profitability. Our results of operations have varied,
and will vary in the future, from period to period, due to a variety of factors,
including:
- costs incurred to acquire, license, develop and market pharmaceutical
products;
- spending on research and development of products;
- the introduction of new products by us or its competitors;
- cost increases from our third-party manufacturers;
- supply interruptions;
- the expiration of intellectual property protection;
- the mix of products sold;
- changes in marketing and sales expenditures; and
- market acceptance of our products.
A CHANGE IN THE VALUE OF THE U.S. DOLLAR COULD ADVERSELY AFFECT OUR RESULTS.
Changes in exchange rates, particularly those between the U.S. dollar and
pound sterling will affect our results of operations. For the year ended
December 31, 1999, approximately 22% of our revenue was earned in currencies
other than U.S. dollars compared to approximately 31% of our expenses.
IF WE ARE UNABLE TO SUCCESSFULLY COMPLETE CLINICAL TRIALS, OUR PRODUCTS WILL NOT
RECEIVE AUTHORIZATION FOR MANUFACTURE AND SALE.
Before obtaining regulatory approvals for the commercial sale of each
product under development, we must demonstrate through clinical trials 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 or the U.S.
(including the U.K. Medicines Control Agency and the U.S. FDA) may require
additional clinical trials, which could result in increased costs and
significant development delays.
The completion rate of clinical trials is dependent upon, among other
factors, obtaining adequate clinical supplies and recruiting patients. Delays in
patient enrollment in clinical trials may also result in increased costs and
program delays. Additional delays can occur in instances in which we share
control over the planning and execution of product development with
collaborative partners. We intend to continue to out-license a number of
products and the clinical development of such out-licensed products would then
be the responsibility of the licensee. We cannot assure you that if clinical
trials are
17
completed, either we or our collaborative partners will file for or receive
required authorizations to manufacture and/or market potential products in a
timely manner.
BECAUSE THE PHARMACEUTICAL INDUSTRY IS HIGHLY REGULATED, WE MUST UTILIZE A LARGE
AMOUNT OF RESOURCES BEFORE WE CAN PRODUCE AND SELL OUR PRODUCTS.
The clinical development, manufacture, marketing and sale of pharmaceutical
products are subject to extensive regulation, including separate regulation by
each country in the E.U., the E.U. itself, and federal, state and local
regulation in the U.S. Unanticipated legislative and other regulatory actions
and developments concerning various aspects of our operations and products may
restrict our ability to sell one or more of its products or to sell those
products at a profit. The primary regulatory authorities which regulate our
ability to manufacture and sell pharmaceutical products include the Medicines
Control Agency in the U.K., the FDA and the DEA in the U.S. and the Health
Protection Branch of the Ministry of Health in Canada.
Drug companies that manufacture or market drugs are required to obtain
regulatory approval before marketing most drug products. Regulatory approval is
generally based on the results of:
- preclinical testing;
- clinical data;
- manufacturing, chemistry and control data; and
- bioavailability.
The generation of data is regulated and any generated data are 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 be met. Even if we obtain regulatory approvals, the terms of any
product approval, including labeling, may be more restrictive than desired and
could affect the marketability of our products. Regulatory authorities have the
power to:
- revoke or suspend approvals of previously approved products;
- require the recall of products that fail to meet regulatory requirements;
and
- close manufacturing plants that do not operate in conformity with current
Good Manufacturing Practices and/or other regulatory requirements or
approvals.
Such delays or actions could affect our ability to manufacture and sell our
products.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS FOR WHICH WE MAY NOT HAVE ADEQUATE
INSURANCE.
The testing, manufacturing, marketing and selling of pharmaceutical products
entails a risk of product liability. If, in the absence of insurance, we do not
have sufficient financial resources to satisfy a liability resulting from such a
claim or to fund the legal defense of such a claim, we could become insolvent.
Product liability insurance coverage is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. Although we carry
primary product liability insurance in the amount of L100 million (approximately
$160 million) per claim and L100 million in the aggregate on a claims-made basis
and umbrella liability insurance, which can also be used for product liability
claims, in the amount of L20 million (approximately $32 million) per claim and
L20 million in the aggregate, this coverage may not be adequate. This insurance
coverage does not include phentermine, which is not separately insured by us in
the current year. In addition, we cannot be certain that insurance coverage for
present or future products will continue to be available.
18
IF WE ARE UNABLE TO RENEW OR EXTEND CONTRACTS WITH MANUFACTURERS OR LICENSEES AS
THEY EXPIRE, WE MAY NOT BE ABLE TO DEVELOP OR MANUFACTURE SOME OF OUR
PRODUCTS.
We have 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, we may not be able to renew or extend the agreement with the
third party as interests may no longer coincide. In addition, we may not be able
to obtain an alternative supplier for the necessary goods or services on
commercially viable terms if at all. Our development agreements are generally
terminable upon the occurrence of events described in the agreements, such as
the non-payment of royalties or the insolvency of one of the parties to the
agreement, and, in some cases, upon notice. In such circumstances, we may be
unable to continue to develop or market our products as planned and could be
required to abandon or divest a product line.
The principal components of our products are active and inactive
pharmaceutical ingredients and special packaging materials. Many of these
components are available only from one supplier. We may not be able to establish
or maintain good relationships with suppliers. Additionally, there is no
assurance that suppliers will continue to exist or be able to supply ingredients
which meet regulatory requirements. We currently contract for some of our
manufacturing needs with manufacturers that comply with current Good
Manufacturing Practices, and other applicable laws and regulations. Our
third-party manufacturers may not be able to supply finished products which meet
these requirements. The availability of finished products may also be
interrupted because of noncompliance with regulatory requirements. In the case
of a new product, we are also subject to the risk that third party manufacturers
will not be able to meet our need to supply market requirements for production
in sufficient quantities.
The development and approval of our products depends on the ability to
procure active ingredients and special packaging materials from sources approved
by regulatory authorities. Because 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 our development and marketing efforts.
LARGER COMPETITORS MAY BE ABLE TO TAKE OUR MARKET SHARE BY DEVELOPING SUPERIOR
OR MORE COST-EFFECTIVE PRODUCTS.
The manufacture and sale of pharmaceuticals is highly competitive. If any
products are approved by the FDA to compete with one of our principal drugs,
sales of those drugs will likely fall. Many of our competitors are large,
well-known pharmaceutical, chemical and health care companies, which have
considerably greater resources. Many of our present and potential competitors
have research and development capabilities that may allow them to develop new or
improved products that may compete with our products. Companies with more
resources and larger research and development expenditures have a greater
ability to fund research and clinical trials necessary for regulatory
applications. They may also have an improved likelihood of obtaining approval of
drugs competing with those currently marketed or under development by us. The
pharmaceutical industry is characterized by rapid product development and
technological change. Our pharmaceuticals could be rendered obsolete or
uneconomical by the development of new pharmaceuticals or as the result of
either technological advances affecting the cost of production or marketing or
pricing action by one or more competitors.
19
OUR FUTURE RESULTS OF OPERATIONS WILL DEPEND, TO A SIGNIFICANT EXTENT, UPON OUR
ABILITY TO SUCCESSFULLY IN-LICENSE, ACQUIRE, DEVELOP AND MARKET NEW PRODUCTS.
Due to the complexity of the formulation and development of pharmaceuticals,
we cannot assure you that we will successfully complete the development of new
products, or, if successful, that such products will be commercially viable. The
failure to in-license or acquire new products or to develop, on a commercially
viable basis, new products would have a material adverse effect on our financial
condition and results of operations.
WE INTEND TO CONTINUE TO EXPLORE ACQUISITIONS, AND IF WE DO NOT SUCCESSFULLY
INTEGRATE FUTURE ACQUISITIONS, WE MAY HAVE PRODUCTS OR OPERATIONS THAT DO NOT
YIELD ANY BENEFIT TO US OR OUR SHAREHOLDERS.
We intend to pursue product acquisitions that could complement or expand our
business. However, we may not be able to identify appropriate product
acquisition candidates in the future. If a product acquisition candidate is
identified, we do not know if we will be able to successfully negotiate the
terms of the acquisition, finance the acquisition or integrate an acquired
product into our existing business and products. The negotiation and
consummation of potential product acquisitions could cause diversion of
management's time and resources. If we consummate one or more significant
product acquisitions through the issuance of ordinary shares or ADSs, holders of
ordinary shares and ADSs could suffer significant dilution of their ownership
interests.
IF WE CANNOT OBTAIN THE FINANCING NECESSARY TO FUND OUR EXPANSION, WE WILL NOT
BE ABLE TO RESPOND TO CHANGES IN DEMAND FROM OUR CUSTOMERS.
We anticipate that our existing capital resources, together with cash
expected from operations and available from bank borrowings, should be
sufficient to finance current and anticipated operations and working capital
requirements for the next twelve months. However, the acquisition and licensing
of products, the expansion of our sales force, and any expansion or relocation
of our facilities would require substantial capital resources. If adequate funds
are not available, we may be unable to pursue acquisitions, or be forced to
curtail in-licensing or research and development programs. To satisfy our
capital requirements, we may need to raise additional funds through public and
private financings, including equity financings. We may also seek additional
funding through corporate collaborations and other financing arrangements. We do
not know whether adequate funds will be available when needed or on terms
acceptable to us. Alternatively, we may need to obtain funds through
arrangements with future collaborative partners or others that may require us to
relinquish rights to some or all of our technologies or product candidates. If
we are successful in obtaining additional financing, the terms of the financing
may have the effect of diluting the value of ordinary shares and ADSs.
OUR SALES WILL DECLINE IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MEDICAL
COMMUNITY.
Our ability to sell any pharmaceutical products after the receipt of
regulatory approval will depend in part on the acceptance of those products by
physicians and patients. Unanticipated side effects or unfavorable publicity
concerning any of our products generally or those of our competitors could have
an adverse effect on our ability to maintain and/or obtain regulatory approvals
or successfully market our products. Our future results of operations will also
depend on continued market acceptance of our current products and the lack of
substitutes which are cheaper or more effective.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, COMPETITORS MAY
MANUFACTURE AND MARKET PRODUCTS SIMILAR TO OURS.
An important part of our business strategy is to protect our products and
technologies through the use of patents, proprietary technology and trademarks,
to the extent available. In addition, our success
20
depends upon the ability of our collaborators and licensers to protect their own
intellectual property rights. Patents and patent applications covering a number
of the technologies and processes owned or licensed to us have been granted or
are pending in various countries, including the U.S. We intend to enforce
vigorously our patent rights and believes that our collaborators intend to
vigorously enforce patent rights that have been licensed to us. However, patent
rights may not prevent other entities from developing, using or commercializing
products that are similar or functionally equivalent to our products or
technologies or processes for formulating or manufacturing similar or
functionally equivalent products. Patent rights may be successfully challenged
in the future. Additionally, our 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 our 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 us
or our strategic collaborators from developing, manufacturing or selling our
products. We may need to obtain licenses for intellectual property rights from
others to develop, manufacture and market commercially viable products. We may
not be able to obtain these licenses on commercially reasonable terms, if at
all. In addition, any licensed patents or proprietary rights may not be valid
and enforceable.
There has been substantial litigation in the pharmaceutical industry with
respect to the manufacture, use and sale of new products that are the subject of
conflicting patent rights. These lawsuits relate to the validity and
infringement of patents. The expense of defending lawsuits brought against us
could cause us not to defend these suits and abandon the products. In the past,
innovators of products which we are in the process of developing have filed
patent infringement lawsuits challenging notices of non-infringement submitted
as part of regulatory filings. These lawsuits may be brought by innovators
against us or our collaborative partners while we or our collaborative partners
pursue regulatory approvals for our products. The ultimate outcome of this type
of litigation, if brought, may not be favorable. Our own patents may be subject
to infringement by others. While we may pursue litigation in order to protect
these rights, we may not be successful in these lawsuits. We are also required
to certify to regulatory authorities, such as the FDA, when seeking approval of
some of our products that the product does not infringe upon third party rights.
A patent holder may challenge a notice of non-infringement or invalidity by
filing suit for patent infringement within 45 days of receiving notice. This
challenge, if made, would prevent regulatory approval in the U.S. until the suit
is resolved or until at least 30 months had elapsed.
We also rely on trade secrets and other un-patented proprietary information,
which we generally seek to protect by confidentiality and nondisclosure
agreements with our employees, consultants, advisors and collaborators. These
agreements may not effectively prevent disclosure of confidential information
and may not provide us with an adequate remedy in the event of unauthorized
disclosure of such information. For example, although we rely on proprietary
information and trade secrets relating to Adderall, Adderall is not patent
protected and competitors may be able to produce competing products. If our
employees, scientific consultants or collaborators develop inventions or
processes that may be applicable to our products under development, such
inventions and processes will not necessarily become our 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 our
proprietary rights. Our failure to obtain or maintain patent and trade secret
protection, for any reason, could allow other companies to make competing
products and reduce the sales of our products.
We have filed applications to register various trademarks for use in
connection with pharmaceuticals and related laboratory services in the U.S. and
intend to continue to trademark new product names as they are developed. In
addition, with respect to certain products, we rely on the trademarks of third
parties. These trademarks may not afford adequate protection, or we and the
third parties may not have the financial resources to enforce any rights under
any of these trademarks. Our
21
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 our trademarks and dilute their value.
REIMBURSEMENT POLICIES OF THIRD PARTIES MAY AFFECT THE MARKETING OF OUR
PRODUCTS.
Our ability to market our products will depend in part on reimbursement
levels for the cost of the products and related treatment established by health
care providers, including government authorities, private health insurers and
other organizations, such as health maintenance organizations and managed care
organizations. Third party payers are increasingly challenging the pricing of
pharmaceutical products and reviewing their reimbursement practices. In
addition, the purchase of pharmaceutical products could be significantly
influenced by the following, which would result in lower prices and a reduced
demand for our products:
- the trend toward managed health care in the U.S.;
- the growth of organizations such as HMOs and MCOs;
- legislative proposals to reform health care and government insurance
programs; and
- price controls and non-reimbursement of new and highly priced medicines
for which the economic and therapeutic rationales are not established.
These cost containment measures and health care reform could affect our
ability to sell our products.
The reimbursement status of a newly approved pharmaceutical product may be
uncertain. Reimbursement might not be available for some of our products.
Reimbursement for a product, if granted, may not be maintained. Limits placed on
reimbursement could reduce the demand for, or make it harder for people to buy
our products. The unavailability or inadequacy of third party reimbursement for
our products would reduce or possibly eliminate demand for its products. We are
unable to predict whether governmental authorities will enact additional
legislation or regulation which will affect third party coverage and
reimbursement that reduces demand for our products.
CONTINUED CONSOLIDATION COULD CAUSE A DECLINE IN OUR SALES.
In both the U.S. and the U.K., a small number of large wholesale
distributors control a significant share of each market. 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 our
products.
IF WE DO NOT ACHIEVE A DIVERSIFIED CUSTOMER BASE, WE WILL BE VULNERABLE TO THE
LOSS OF IMPORTANT INDIVIDUAL CUSTOMERS.
In the U.S., our customers include McKesson Corp., Bergen Brunswig Corp. and
Cardinal Health, Inc. In the U.K., our customers include The Boots Company plc,
AAH Pharmaceuticals Ltd and Unichem plc. For the fiscal year ended December 31,
1999, our two largest customers accounted for approximately 25% and 14% of our
revenues, respectively. The loss of either of these customer accounts could
substantially reduce our revenues.
ANY LOSS OF KEY PERSONNEL COULD PREVENT US FROM DEVELOPING NEW PRODUCTS.
Our success is dependent on our ability to attract and retain highly
qualified management and scientific personnel. We face intense competition for
personnel from other companies, academic institutions, government entities and
other organizations. We may not be able to successfully attract and retain such
personnel. In general, we have agreements with some of our 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 our activities, could prevent us from developing new
products. We have key man insurance for Rolf Stahel, our Chief Executive, in the
amount of $1 million.
22
ITEM 2: PROPERTIES
Our worldwide headquarters are located at East Anton, Andover, Hampshire,
England, which consist of an aggregate of 17,500 square feet leased office
space.
In addition, the following principal premises were occupied as of
December 31, 1999:
LOCATION USE SQUARE FOOTAGE OWNED OR LEASED
- -------- ----------------------------- -------------- ---------------
Rockville, Maryland................. Office accommodation and 44,500 Leased
laboratories
Florence, Kentucky.................. Office accommodation and 32,000 Leased
warehousing
Eatontown, New Jersey (1)........... Office accommodation 115,000 Owned
Valley Stream, New York............. Manufacturing facility and 9,700 Leased
laboratories
Oakville, Ontario, Canada........... Manufacturing facility and 100,000 Owned
office accommodation
Buffalo Grove, Illinois............. Distribution facility 70,000 Owned
Guildford, Surrey, England (2)...... Office accommodation 3,800 Leased
- ------------------------
(1) In December 1999, we decided to close the office facility in Eatontown, New
Jersey and have commenced negotiations with potential purchasers of the
property.
(2) The office accommodation at Guildford, Surrey was vacated in March 2000 and
will subsequently be sublet.
ITEM 3: LEGAL PROCEEDINGS
We are currently a defendant in approximately 3,500 lawsuits, in both U.S.
federal and state courts, which seek damages for, among other things, personal
injury arising from certain products supplied for the treatment of obesity by us
and several other pharmaceutical companies. See "Risk Factors--We are named as a
defendant in a large number of lawsuits involving phentermine and if we are
found liable in some or all of those lawsuits for damages in excess of our
assets, we would be required to reorganize or seek bankruptcy protection."
Pursuant to a license agreement we entered into with Rhone-Poulenc
Rorer, Inc. and Armour Pharmaceutical Company, a wholly-owned subsidiary of RPR,
we licensed our patented manufacturing process and related technology for BChE
to RPR and Armour. The license agreement required RPR to use its best efforts to
research, develop, market and sell BChE throughout the world. We believe that
RPR has materially failed to perform its obligations under this license
agreement and as a result we have not received appropriate milestone payments
and BChE's development as a viable product has been significantly delayed. We
have initiated arbitration against RPR and its other partners for breach of the
license agreement or other actions.
We are a party to an arbitration proceeding before the American Arbitration
Association in which Staticon International GmbH has asserted approximately $16
million in claims against us, relating to the sale of our contract clinical
research subsidiary, VRG International Inc., in May 1998. We have asserted
approximately $3.5 million in claims against Staticon, relating primarily to the
remaining balance due under a promissory note issued to us by Staticon in
connection with the sale of VRG. We are not able to make a reasonable estimate
of the possible outcome of this matter, although we believe that we have
meritorious defenses and will prevail in this matter. We are vigorously
defending the claims that have been asserted against us and are pursuing the
claims we have made against Staticon.
23
In addition, we are from time to time party to litigation or other legal
proceedings. Other than as discussed above, we are not a party to any litigation
or other legal proceedings that we believe could reasonably be expected to have
a material adverse effect on our financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 22, 1999, we held an Extraordinary General Meeting for the
purposes of considering and, if thought fit, passing the following resolution
proposed as an ordinary resolution:
Ordinary resolution concerning:
- the acquisition of Roberts Pharmaceutical Corporation;
- an increase in our authorized share capital from L10,000,000 to
L20,000,000 by the creation of 200,000,000 new ordinary shares of 5p each
forming a single class with the existing ordinary shares of 5p each in our
capital;
- the issuance and allotment of relevant securities up to an aggregate
nominal amount of L9,019,562;
- increasing the maximum amount of aggregate fees paid to our directors for
their services as directors on an annual basis from L150,000
(approximately $240,000) to L500,000 (approximately $800,000); and
- the authority to borrow up to US$250,000,000 pursuant to a credit facility
entered into on November 19, 1999 between, inter alia, us and our U.S.
subsidiaries as borrowers and DLJ Capital Funding, Inc as agent.
Our shareholders approved the resolution with 39,840,645 ordinary shares voting
in favor of the resolution, 5,676 ordinary shares voting against the resolution
and 33,773 ordinary shares abstaining.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of December 31, 1999
were as follows:
NAME AGE POSITION
- ---- -------- ------------------------------------------
Dr James Cavanaugh........................ 62 Non-executive Chairman
Rolf Stahel............................... 55 Chief Executive
Angus Russell............................. 43 Group Finance Director
Dr Wilson Totten.......................... 44 Group Research and Development Director
Dr Barry Price............................ 56 Senior Non-executive Director
Dr Bernard Canavan........................ 64 Non-executive Director
Dr Zola Horovitz.......................... 65 Non-executive Director
Ronald Nordman............................ 58 Non-executive Director
Joseph Smith.............................. 61 Non-executive Director
Dr Robert Vukovich........................ 56 Non-executive Director (resigned February
15, 2000)
John Spitznagel........................... 58 Non-executive Director
The brief biographical details of the Directors are as follows:
DR JAMES CAVANAUGH joined the Board on March 24, 1997 and was appointed as
Non-executive Chairman with effect from May 11, 1999. Dr Cavanaugh is the
President of HealthCare Ventures LLC. Formerly he was President of SmithKline &
French Laboratories, the US pharmaceutical division of SmithKline Beecham
Corporation. Prior to that, he was President of SmithKline Beecham
24
Corporation's clinical laboratory business and, before that, President of
Allergan International. Prior to his industry experience, Dr Cavanaugh served as
Deputy Assistant to the President of the US for Health Affairs on the White
House Staff in Washington, DC. He is a Non-executive Director of MedImmune Inc.
and Diverse Corporation.
ROLF STAHEL joined Shire in March 1994 as Chief Executive from Wellcome plc
where he worked for 27 years. From April 1990 until February 1994, he served as
Director of Group Marketing reporting to the Chief Executive. A business studies
graduate of KSL Lucerne, Switzerland, he attended the 97(th) Advanced Managers
Program at Harvard Business School.
ANGUS RUSSELL joined Shire on December 13, 1999 as Group Finance Director.
Mr Russell worked for ICI, Zeneca and AstraZeneca for a total of 19 years. His
last position was Vice President--Corporate Finance at Astra Zeneca PLC, where
he was responsible for financial input into M&A activities, management of tax,
legal and finance structure, investor relations activities and the management of
various financial risks. Prior to this, he held a number of positions within
Zeneca Group PLC and ICI including Group Treasurer, Group Investor Relations
Manager, Strategic Planner, Marketing Manager and management accounting roles in
manufacturing and R&D operations. Mr Russell is a chartered accountant, having
qualified with Coopers & Lybrand and is a member of the Association of Corporate
Treasurers.
DR WILSON TOTTEN joined Shire in January 1998 as Group Research and
Development Director. Dr Totten is a medical doctor and has wide experience in
the pharmaceutical industry covering all phases of drug development. He has
substantial experience in the field of CNS disorders. His last position was Vice
President of Clinical Research and Development with Astra Charnwood where he
served from 1995 to 1997, having previously worked for Fisons Pharmaceuticals
from 1989 to 1995, and prior to that with 3M Health Care and Eli Lilly.
DR BARRY PRICE joined the Board on January 24, 1996 having spent 28 years
with Glaxo holding a succession of key executive positions with Glaxo Group
Research. He is a Non-executive Director of Celltech Chiroscience plc. and
Chairman of Antisoma plc. Dr Price is Senior Non-executive Director and Chairman
of the Remuneration Committee.
DR BERNARD CANAVAN joined the Board as a Non-executive Director on
March 11, 1999. Dr Canavan is a medical doctor and graduate of the University of
Edinburgh. He was employed by American Home Products for over 25 years until he
retired in January 1994. He was president of that Corporation from 1990 to 1994,
and prior to that was Chairman and Chief Executive Officer of American Home
Products, Pharmaceutical Division, Wyeth-Ayerst Laboratories. Dr Canavan is also
a director of Biochem Pharma Inc., Magainin Pharmaceuticals Inc., 3-Dimensional
Pharmaceuticals Inc. and Nelson Communications Inc. Dr Canavan is Chairman of
the Audit Committee.
DR ZOLA HOROVITZ, Ph.D. joined the Board on December 23, 1999 having
previously served as a director of Roberts Pharmaceutical Corporation since
October 1996. Dr Horovitz has been self-employed as a consultant in the
biotechnology and pharmaceutical industries since 1994. From 1959 to 1994 Dr
Horovitz held various positions at Squibb Corporation and its successor
corporation, Bristol-Meyers Squibb & Co, including that of Vice President,
Business Development and Planning. Dr Horovitz received undergraduate and
masters degrees and a Ph.D. from the University of Pittsburgh.
RONALD NORDMANN joined the Board on December 23, 1999 having previously
served as a non-executive director of Roberts Pharmaceutical Corporation since
May 1999 and has been a financial analyst in healthcare securities since 1971.
Since September 1994 he has been an analyst and limited partner at Deerfield
Management. He has held senior positions with PaineWebber, Oppenheimer & Co., F.
Eberstadt & Co., and Warner-Chilcott Laboratories, a division of Warner-Lambert.
25
Mr Nordmann received his undergraduate degree from the John Hopkins University
and an M.B.A. from Fairleigh Dickinson University.
JOSEPH SMITH joined the Board on December 23, 1999 having previously served
as a non-executive director of Roberts since August 1998. From 1989 to 1997, Mr
Smith served in various positions at Warner-Lambert Company, including President
of Parke-Davis Pharmaceuticals and President of Shaving Products Division
(Schick and Wilkinson Sword). Mr Smith previously held positions at Johnson &
Johnson and served as President of Rorer Pharmaceutical Corporation. Mr Smith
received his undergraduate degree from the University of Buffalo and an M.B.A.
degree from the Wharton School of the University of Pennsylvania.
ROBERT VUKOVICH, Ph.D. joined the Board on December 23, 1999 having
previously served as non-executive Chairman of Roberts Pharmaceutical
Corporation since the inception of that company in 1983 and was Chief Executive
Officer until September 1997. Dr. Vukovich also acted as a consultant to Roberts
Pharmaceutical Corporation with respect to researching and developing
pharmaceutical products and identifying and evaluating products and businesses
for potential licensing and acquisition. He currently serves as Chairman,
President and Chief Executive Officer of Wellspring Pharmaceutical Corporation.
Dr. Vukovich has worked in various positions for Revlon Health Care Group, the
Squibb Institute and The Warner Lambert Research Institute. Dr Vukovich is a
graduate of Jefferson Medical College, Philadelphia, Pennsylvania, with training
in pharmacology and pathology.
Dr. Vukovich resigned from the Board on February 15, 2000.
JOHN SPITZNAGEL joined the Board on December 23, 1999 having previously
served as President and Chief Executive Officer of Roberts Pharmaceutical
Corporation since September 1997 and as a director since July 1996. He was
Executive Vice President--Worldwide Sales and Marketing form March 1996 to
September 1997, having served as President of Reed and Carnrick Pharmaceuticals
from September 1990 until July 1995. He previously served as Chief Executive
Officer of BioCryst Pharmaceuticals, Inc. having held before that various sales,
marketing and management positions in the industry.
26
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ORDINARY SHARES
Our ordinary shares are traded on the London Stock Exchange. The following
table sets forth, for the quarters indicated, the high and low middle market
closing quotations (and VWAP prices (see below) from December 14, 1998) for the
ordinary shares on the London Stock Exchange as reported on its Daily Official
List. The middle market closing quotation of a security was the standard method
of describing the price of a security listed on the LSE until December 13, 1998,
and is the mean of (i) the highest price offered by any registered market maker
to purchase the security, and (ii) the lowest price required by any market maker
to sell the security, as at the close of business on a given day. As of
December 14, 1998, the LSE adopted the Volume-Weighted Average Price (VWAP) as
the method for calculating the closing price. The VWAP is derived by dividing
the total value of trades in the last 10 minutes of the trading period by the
total volume of trades in the same period. If there are no trades in the closing
10 minutes the VWAP price equals the price of the last automatically executed
trade prior to the closing 10 minutes.
HIGH LOW
------------------------ ------------------------
PENCE PER ORDINARY SHARE PENCE PER ORDINARY SHARE
------------------------ ------------------------
YEAR ENDED DECEMBER 31, 1998
1(st) Quarter..................................... 410.0 286.5
2(nd) Quarter..................................... 444.0 380.0
3(rd) Quarter..................................... 540.5 293.5
4(th) Quarter..................................... 435.0 346.0
YEAR ENDED DECEMBER 31, 1999
1(st) Quarter..................................... 516.5 374.0
2(nd) Quarter..................................... 527.5 396.0
3(rd) Quarter..................................... 613.0 473.5
4(th) Quarter..................................... 733.5 559.0
Number of record holders of Ordinary Shares as of March 24, 2000:
U.S. holders................................................ 37
Total holders............................................... 5,067
AMERICAN DEPOSITORY SHARES
American Depository Shares (each representing three ordinary shares)
evidenced by American Depository Receipts issued by Morgan Guaranty Trust
Company of New York, as depository, are quoted on the NASDAQ National Market. As
of March 24, 2000, the proportion of Ordinary Shares represented by American
Depository Receipts was 40.1% of the Ordinary Shares outstanding.
The following table sets forth, for the quarters indicated, the high and low
market quotations for the ADS's quoted on the NASDAQ National Market.
HIGH LOW
--------- ---------
$ PER ADS $ PER ADS
--------- ---------
YEAR ENDED DECEMBER 31, 1998
1(st) Quarter............................................... --(1) --(1)
2(nd) Quarter............................................... 23.00 19.00
3(rd) Quarter............................................... 27.81 16.56
4(th) Quarter............................................... 22.50 18.63
27
HIGH LOW
--------- ---------
$ PER ADS $ PER ADS
--------- ---------
YEAR ENDED DECEMBER 31, 1999
1(st) Quarter............................................... 25.50 19.13
2(nd) Quarter............................................... 26.00 18.88
3(rd) Quarter............................................... 29.31 23.75
4(th) Quarter............................................... 35.06 26.19
- ------------------------
(1) On April 1, 1998, we completed an initial offering of 7,265,177 American
Depository shares.
The number of record holders of American Depository Shares in the United
States as of March 24, 2000 was 389. 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.
DIVIDEND POLICY
Historically, we have not paid any dividends. We do not anticipate paying
any dividends on ordinary shares, or indirectly on ADSs, in the foreseeable
future. As a matter of English law, we may pay dividends only out of our
distributable profits, which are accumulated realized profits under U.K. GAAP,
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. As of December 31, 1999, we
had accumulated profits of L1.8 million (approximtely $2.9 million). Future
dividend policy will be dependent upon our distributable profits, our financial
condition, the terms of any then existing debt facilities and other relevant
factors existing at that time.
ITEM 6: SELECTED FINANCIAL DATA
The results for all periods presented below have been restated to reflect
the combined results of Shire and Roberts Pharmaceutical Corporation. The merger
was accounted for as a pooling of interests. The selected consolidated financial
data for the Company should be read in conjunction with "Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Company's consolidated financial statements and related notes appearing
elsewhere in this report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
$'000 $'000 $'000 $'000 $'000
-------- -------- -------- -------- --------
Revenues................................... 401,532 308,984 191,554 127,772 137,624
Operating expenses......................... (477,600) (285,748) (277,395) (183,086) (152,655)
(Loss)/income from operations.............. (76,068) 23,236 (85,841) (55,314) (15,031)
Interest and other, net.................... (2,868) 327 3,109 3,236 (3,437)
(Loss)/income from continuing operations
before taxes............................. (78,936) 23,563 (82,732) (52,078) (18,488)
Income taxes............................... (16,062) (2,991) (1,420) 15,815 (2,518)
(Loss)/income from continuing operations... (94,998) 20,572 (84,152) (36,263) (21,006)
(Loss)/income from discontinued operations,
net of tax............................... -- -- -- (27,045) 556
Net (loss)/income.......................... (94,998) 20,572 (84,152) (35,707) (48,051)
Net (loss)/income per share from continuing
operations--basic........................ $ (0.39) $ 0.09 $ (0.45) $ (0.31) $ (0.25)
Net (loss)/income per share from continuing
operations--diluted...................... $ (0.39) $ 0.08 $ (0.45) $ (0.31) $ (0.25)
Weighted average number of shares
outstanding--basic....................... 244,699 234,045 185,153 118,766 83,083
Weighted average number of shares
outstanding--diluted..................... 244,699 242,806 185,153 118,766 83,083
-------- -------- -------- -------- --------
Cash and cash equivalents.................. 54,082 52,973 59,868 96,056 24,352
Total assets............................... 887,763 873,605 664,930 435,338 356,410
Long term debt............................. 126,314 126,774 10,327 10,639 16,183
Shareholders' equity....................... 587,284 663,314 565,920 361,365 242,292
-------- -------- -------- -------- --------
28
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The results for the three years ended December 31, 1999, 1998 and 1997 have
been restated from prior periods to reflect the merger of Shire Pharmaceuticals
Group plc and Roberts Pharmaceutical Corporation as if the merger had occurred
on January 1, 1997.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
OVERVIEW
On December 23, 1999, Shire and Roberts merged in a tax-free exchange of
shares. Shire exchanged 1.0427 ADSs for each common share of Roberts. This
transaction was accounted for as a pooling of interests. Merger transaction
expenses and merger related restructuring costs totaled $75.9 million and are
reflected in Shire's 1999 accounts.
For the year ended December 31, 1999, total revenue increased by 30% to
$401.5 million, compared to $309.0 million in fiscal 1998. This increase was
primarily the result of an increase in product sales. Product sales in the U.S.
continue to represent a significant percentage of worldwide sales, increasing to
81% in 1999 from 78% in 1998.
The Company manages and controls the business on geographic lines. The three
reportable segments are the United States, Europe and the rest of the World.
Additional information regarding segments is provided in Note 20 to the
consolidated financial statements.
PRODUCT SALES
PRODUCT SALES BY SEGMENT 1999 % CHANGE 1998 % CHANGE 1997
- ------------------------ -------- -------- -------- -------- --------
$M $M $M
United States........................................... 314 38.3 227 99.1 114
Europe.................................................. 55 10.0 50 21.9 41
Rest of World........................................... 16 14.3 15 7.1 14
--- ---- ---- ---- ---
Total product sales................................. 385 32.3 292 72.3 169
=== ==== ==== ==== ===
For the year ended December 31, 1999, total product sales increased by 32%
to $385.2 million, compared to $291.8 million in the prior year. Of the
Company's total product sales, 39% related to Adderall and DextroStat, the
Company's products marketed in the U.S. for the treatment of ADHD. On a combined
basis, these products increased their share of the total U.S. ADHD prescriptions
written from 20.4% in December 1998 to 30.5% in December 1999.
Other significant contributors to the increase in product sales in 1999 were
the U.S. marketed products Pentasa, Carbatrol and Agrylin. The Company acquired
Pentasa, licensed for the treatment of ulcerative colitis, in the second quarter
of 1998, and recorded sales of $51.8 million in 1999 compared to $33.3 million
in 1998. Carbatrol increased its share of total U.S. extended release
carbamazepine prescriptions written to 22.8% at December 31, 1999 from 8.5% in
December 1998 and Agrylin sales grew 37% over 1998 to $32.6 million in 1999.
COST OF SALES
For the year ended December 31, 1999 cost of sales amounted to 24.3% of
product sales as compared to 32.6% in 1998. The decrease in cost of sales
percentage and corresponding increase in
29
gross margin is attributable to an improved product mix due to the faster growth
of products with a higher gross margin. Additionally, the