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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended March 31, 2004

Commission File Number: 0-29630

SHIRE PHARMACEUTICALS GROUP PLC
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]           No [  ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X]           No [  ]

As of April 30, 2004, the number of outstanding ordinary shares of the Registrant was 479,994,787.

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THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially affected. The risks and uncertainties include, but are not limited to, risks associated with the inherent uncertainty of pharmaceutical research, product development, manufacturing and commercialization, the impact of competitive products, including, but not limited to, the impact of competitive products on Shire’s Attention Deficit Hyperactivity Disorder (ADHD) franchise, patents, including but not limited to, legal challenges relating to Shire’s ADHD franchise, government regulation and approval, including but not limited to the expected product approval dates of lanthanum carbonate (FOSRENOL^®), methylphenidate (METHYPATCH^®), anagrelide hydrochloride (XAGRID^®), carbamazepine (BIPOTROL^®) mesalamine (PENTASA^® 500mg) and the adult indication for extended release mixed amphetamine salts (ADDERALL XR^®), the implementation of Shire’s internal reorganization and other risks and uncertainties detailed from time to time in Shire’s filings, including the Annual Report filed on Form 10-K, for the year ended December 31, 2003 by Shire, with the Securities and Exchange Commission.

The following are trademarks of Shire Pharmaceuticals Group plc or its subsidiaries, which are the subject of trademark registrations in certain countries.

ADDERALL XR^® (mixed amphetamine salts)
AGRYLIN^® (anagrelide hydrochloride)
AMATINE^® (midodrine hydrochloride)
BIPOTROL ^® (carbamazepine)
CALCICHEW^® (calcium carbonate)
CARBATROL^® (carbamazepine)
FOSRENOL^® (lanthanum carbonate)
FLUVIRAL^® S/F (split virion influenza vaccine)
PROAMATINE^® (midodrine hydrochloride)
TROXATYL^® (troxacitabine)
XAGRID^® (anagrelide hydrochloride)

The following are trademarks of third parties.

3TC^® (trademark of GlaxoSmithKline (GSK))
COMBIVIR^® (trademark of GSK)
EPIVIR^® (trademark of GSK)
HEPTOVIR^® (trademark of GSK)
METHYPATCH^® (trademark of Noven)
PENTASA^® (trademark of Ferring AS)
REMINYL^® (trademark of Johnson & Johnson)
TRIZIVIR^® (trademark of GSK)
ZEFFIX^® (trademark of GSK)

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

SHIRE PHARMACEUTICALS GROUP PLC
CONDENSED CONSOLIDATED BALANCE SHEETS

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

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SHIRE PHARMACEUTICALS GROUP PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

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SHIRE PHARMACEUTICALS GROUP PLC
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)

The components of accumulated other comprehensive income/(loss) as at March 31, 2004 and December 31, 2003, are as follows:

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

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SHIRE PHARMACEUTICALS GROUP PLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

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

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SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

a) Description of Operations

Shire Pharmaceuticals Group plc (Shire) and its subsidiaries (collectively referred to as the Company or the Group) is a global pharmaceutical company with a strategic focus on meeting the needs of the specialist physician. The Company has a particular interest in innovative therapies that are prescribed by specialist doctors as opposed to primary care physicians.

The Company is focused on the development of late stage projects and marketed products in the areas of central nervous system (CNS), gastrointestinal (GI) and renal.

Geographically, the Company has operations in the world’s key pharmaceutical markets, namely North America and Europe. The Company’s business is organized across five operating segments: US, International (covering territories outside of the US), Research & Development (R&D), Biologics and Corporate. Revenues are derived primarily from three sources: sales of products by the Company’s own sales and marketing operations, royalties (where Shire has out-licensed products to third parties) and licensing and development fees.

Following a strategic review in 2003, the Company announced its new business model in July 2003. Shire will search, develop and market but will not invent. The Company will seek to acquire products with substantive patent protection rather than just three years’ Hatch-Waxman exclusivity. The Company will also focus its in-licensing and merger and acquisition (M&A) efforts on the US market, and obtain European rights whenever possible. As part of this strategy the Company has developed a plan to achieve closer interaction between development, marketing and sales.

The strategic review thoroughly evaluated the Group’s R&D pipeline and refocused resources on a number of projects, of which two are currently in Phase III and two in Phase II of development. This approach aims to deliver the combined benefit of increased returns and lower risks. Whilst Shire has refocused its R&D efforts to concentrate on areas where it has a commercial presence, it will be flexible in adding new therapeutic areas if appropriate product acquisition opportunities arise.

As a consequence of the change in strategy, the Company has announced:

• The exit from early stage therapeutic research (Lead Optimization), which was completed in the third quarter of 2003;
  
  
• A North American site consolidation which commenced in 2004; and
  
  
• The agreement to sell the Company’s Biologics (vaccines) business to ID Biomedical Corporation (IDB). The agreement is subject to various conditions including, Canadian anti-trust approval and consents under various Canadian Government contracts.

During the three months to March 31, 2004, the Company has advanced its plans to reduce the number of North American sites from fourteen to four, including the opening of a new US headquarters office in Wayne, Pennsylvania. The Company will close its sites in Newport, Kentucky and Rockville, Maryland. Shire’s world headquarters will continue to be located in Basingstoke, UK. There are currently elements of the plan that need to be finalized and these may impact the total estimated costs of the reorganization. The current estimated cost of $50 to $60million is shown in more detail in Note 9.

There are inherent risks associated with any significant organizational change, including the possibility of disruption to the Company's business or the loss of key personnel. Although, a project team has been set up to actively manage the process and the associated risks, delays to R&D projects, failure to attain sales targets or other disruption to the business could occur as a result of the reorganization.

The Company’s principal source of revenues include:

• in the US, ADDERALL XR for the treatment of ADHD, AGRYLIN for the treatment of elevated blood platelets, PENTASA for the treatment of ulcerative colitis and CARBATROL for the treatment of epilepsy. In addition, the Company receives royalties on sales of REMINYL for the treatment of alzheimer’s disease, marketed by Janssen Pharmaceutica NV (Janssen), and on EPIVIR, COMBIVIR and TRIZIVIR for the treatment of HIV/AIDS, marketed by GSK;
  

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• in the UK and the Republic of Ireland, the CALCICHEW range, used primarily as adjuncts in the treatment of osteoporosis, and REMINYL, which was co-promoted with Janssen-Cilag until March 31, 2004. On March 31, 2004, the Company acquired from Janssen the exclusive commercialization rights to REMINYL in the UK and Ireland;
  
  
• in Canada, 3TC for the treatment of HIV/AIDS, COMBIVIR and HEPTOVIR for the treatment of hepatitis (all marketed in partnership with GSK), AMATINE for the treatment of symptomatic orthostatic hypotension and FLUVIRAL S/F, a vaccine for the prevention of influenza. FLUVIRAL forms part of the vaccines business and will cease to be part of Shire’s product portfolio following its anticipated disposal to IDB.
  
  
• in the Rest of the World, royalties on the sales of ZEFFIX for the treatment of hepatitis B, marketed by GSK, and royalties on sales of REMINYL, marketed by Johnson & Johnson.
  

The Company has a number of projects in the later stages of development and in registration for marketing approval, including:

• FOSRENOL for the treatment of high blood phosphate levels associated with end-stage renal disease. The Company submitted the first regulatory submission for FOSRENOL under the European Mutual Recognition procedure on March 13, 2001, and a New Drug Application with the US Food and Drug Administration (FDA) on April 30, 2002. The Company received an approvable letter from the FDA, as announced on March 3, 2003, and received its first European approval from Reference Member State Sweden, on March 19, 2004. The next step by the FDA for FOSRENOL is anticipated by mid-year 2004;
  
  
• XAGRID (trade name of AGRYLIN in the EU) for the treatment of elevated blood platelets. On July 25, 2003, the Company received a positive opinion from the European Committee for Proprietary Medicinal Products (CPMP) for XAGRID. An extended review process is underway within the CPMP in considering the issuance of licenses under the Orphan Drug designation. The next anticipated step of the CPMP on this issue is mid-year 2004;
  
  
• Adult indication for ADDERALL XR. The Company received an approvable letter from the FDA on October 20, 2003, for the treatment of adult ADHD. Responses have been filed to the questions raised in the approvable letter and the next action date by the FDA on this response is expected mid-year 2004;
  
  
• METHYPATCH, a transdermal delivery system for the once daily treatment of ADHD. Shire and Noven are to undertake further clinical investigations to assist the FDA in addressing the questions raised in their ‘Not Approvable’ letter issued on April 28, 2003;
  
  
• BIPOTROL for bipolar disorder. In February 2004 Shire filed a New Drug Application with the US FDA for this indication;
  
  
• PENTASA 500mg for the treatment of ulcerative colitis. In March 2004 Shire filed a New Drug Application with the FDA for this indication;
  
  
• SPD503 (guanfacine) for ADHD, which is in Phase III clinical trials; and
  
  
• SPD476 for ulcerative colitis, which is in Phase III clinical trials.
  

b) Basis of Presentation

These interim financial statements, which include the operations of the Company, and the financial information included in this Form 10-Q, are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP) and Securities and Exchange Commission regulations for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. However, such information includes all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to fairly state the results of the interim periods. Interim results are not necessarily indicative of results to be expected for the full year.

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The December 31, 2003 balance sheet was derived from audited financial statements but does not include all disclosures required by US GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading.

These interim financial statements should be read in conjunction with the Company’s consolidated balance sheets as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2003.

c) Employee stock plans

The Company accounts for its stock options using the intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Accordingly, compensation cost of stock options is measured as the excess, if any, of the quoted market price of Shire’s stock at the measurement date over the option exercise price and is charged to operations over the vesting period. For plans where the measurement date occurs after the grant date, referred to as variable plans, compensation cost is re-measured on the basis of the current market value of Shire stock at the end of each reporting period. Shire recognizes compensation expense for variable plans with performance conditions if achievement of those conditions becomes probable. As required by SFAS No. 123, “Accounting for Stock Based on Compensation” (SFAS No. 123), the Company has included in these financial statements the required pro forma disclosures as if the fair-value method of accounting had been applied.

At March 31, 2004, the Company had seven stock-based employee compensation plans, which are described more fully in the Company’s 2003 Form 10-K.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R or the Interpretation). FIN 46R clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses or receive a majority of the entity’s expected residual returns, or both.

Among other changes, FIN 46R (a) clarified some requirements of the original FIN 46 issued in January 2003, (b) eased some implementation problems and (c) added new exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period that ends after March 15, 2004 except that all public companies must, at a minimum, apply the provisions of the Interpretation to all entities that were previously considered

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“special purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. The adoption of FIN 46R had no impact on the Company.

e) New Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01 or the Issue). EITF 03-01 is applicable to (a) debt and equity securities within the scope of Statement of Financial Accounting Standards (SFAS) No. 115, (b) debt and equity securities within the scope of SFAS No. 124 and that are held by an investor that reports a performance indicator, and (c) equity securities not within the scope of SFAS No. 115 and not accounted for under the Accounting Principles Board Opinion 18's equity method (e.g., cost method investments). EITF 03-01 provides a step model to determine whether an investment is impaired and if an impairment is other-than-temporary. In addition, it requires that investors provide certain disclosures for cost method investments and, if applicable, other information related specifically to cost method investments, such as the aggregate carrying amount of cost method investments, the aggregate amount of cost method investments that the investor did not evaluate for impairment because an impairment indicator was not present, and the situations under which the fair value of a cost method investment is not estimated. The disclosures relating to cost method investments should not be aggregated with other types of investments. The EITF 03-01 impairment model shall be applied prospectively to all current and future investments within the scope of the Issue, effective in reporting periods beginning after June 15, 2004. The disclosure requirements are effective for annual periods for fiscal years ending after June 15, 2004.

2. Analysis of revenue, operating income and reportable segments

The Company has disclosed segment information for the individual reporting segments of the business, based on the way in which the business is managed and controlled. The Company’s principal reporting segments are by operational function, each being managed and monitored separately and each serving different markets. The Company evaluates performance based on operating income. The Company does not have inter-segment transactions.

The US segment represents Shire’s commercial operations in the United States and the International segment represents the commercial operations in the Rest of the World. The Biologics segment represents the vaccine operations in Canada and the research and development center in the United States. The R&D segment represents all research and development costs incurred by the Company throughout the world. Corporate represents the royalty business that is managed at the corporate office and certain costs that are managed at the corporate office and not allocated to the other segments.

(1) Depreciation of manufacturing plants is included within cost of product sales. Depreciation and amortization relating to R&D assets are included within US and International segments.

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(2) Total assets and long-lived assets in the Biologics segment relate to the research and development center in the US.

(1) Included within the selling, general and administrative costs for the Corporate segment for the three months to March 31, 2003 is $7.2 million in respect of the former Chief Executive’s departure.

(2) Depreciation of manufacturing plants is included within cost of product sales. Depreciation and amortization relating to R&D assets are included within US and International segments.

(3) Total assets and long-lived assets in the Biologics segment relate to the research and development center in the US.

3. Earnings per share

Basic earnings per share is computed by dividing consolidated net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period.

Diluted earnings per share is computed by dividing consolidated net income available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period, adjusted for the potentially dilutive ordinary shares that were outstanding during the period.

Stock options to purchase approximately 10.3 million ordinary shares for the 3 months to March 31, 2004 (2003 18.6 million) were not dilutive and were therefore not included in the computation of diluted earnings per share.

Warrants to purchase approximately 1.4 million ordinary shares for the 3 months to March 31, 2003 were not dilutive and were therefore not included in the computation of diluted earnings per share.

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Included within research and development contracts receivable are amounts due in respect of an agreement with the Canadian Government, Technology Partnerships Canada (TPC), under which a contribution is made towards certain eligible research and development costs incurred by Shire’s Canadian subsidiary, Shire BioChem Inc. This was $4.1 million at March 31, 2004 (December 31, 2003: $3.4 million).

Trade receivables are stated net of a provision for doubtful accounts and discounts of $8.5 million at March 31, 2004 (March 31, 2003: $4.7 million).

5. Inventories

Throughout the year the Company assesses the carrying value of its investments for decreases in fair value and other-than-temporary impairments. Upon completion of this assessment, the Company wrote-off $7.2 million of investments during the three months to March 31, 2004 (March 31, 2003: $4.0 million). This has been reflected in other expense net, in the consolidated statement of operations.

At December 31, 2003, Shire held an investment in a private company that was entering the later stages of an Initial Public Offering (IPO). At December 31, 2003 the anticipated flotation price was used to value the investment. On March 25, 2004, this private company gained its listing, but the initial listing price was below the anticipated flotation price used at December 31, 2003. As a result, Shire recorded an impairment of $4.2 million to decrease the value of the investment to the initial IPO price. Any changes in the fair value since that date are recorded in other comprehensive income. The Company wrote-off additional investments in private companies of $3.0 million based on changes in the estimates of their carrying value.

7. Other intangible assets, net

The useful economic lives of all intangible assets that continue to be amortized under SFAS No. 142 have been assessed. Management estimates that the annual amortization charges in respect of intangible fixed assets held at March 31, 2004 will be approximately $45 million for each of the five years to March 31, 2009. Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights and the technological advancement and regulatory approval of competitor products.

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8. Long-term debt, excluding current installments

During the three months to March 31, 2004 the Company did not issue debt or make any debt repayments, other than in respect of capital leases.

During the three months to March 31, 2003 the Company repurchased $14.0 million of the $400.0 million 2% guaranteed convertible notes due 2011, recording a gain of $0.5 million.

9. Reorganizations and closures

(a) Reorganization

As discussed in Note 1, and following the appointment of Matthew Emmens as Chief Executive Officer, the Group has been through a strategic review.

As part of this strategic review the Company has developed a plan to achieve closer interaction between development, marketing and sales. This plan requires a variety of actions by the Company, the most significant of which is the consolidation of the North American sites from fourteen sites to four, including the opening of a new US headquarters office, in Wayne, Pennsylvania. There are currently elements of the plan that need to be finalized and these may impact the total estimated costs of the reorganization. The cost of the reorganization is currently estimated to be $50 to $60 million and is expected to be completed towards the end of 2005. The main types of costs that will be incurred are as follows:

• The severance of employees;
  
• Retention payments to key employees;
  
• The relocation of employees;
  
• Lease termination costs; and
  
• Other incremental costs associated with the site closures, such as legal, consultancy and duplicate facilities.

As of March 31, 2004 the Company has agreed severance packages with employees at one of its locations and continues to communicate with employees at its other locations where site closure will occur. The Company estimates that the first site will close towards the end of 2004.

The following table presents the cost of the reorganization recorded to date and the total estimated costs, for the reorganization which will be incurred in 2004 and 2005.

The costs have been reflected within reorganization costs in the statement of operations and within the reporting segments as follows:

In addition to the costs of the reorganization, it is anticipated that additional taxes will be paid as part of the site consolidation plan and the move to Pennsylvania. The Company has estimated that the additional taxes will be approximately $10 million for 2004. These tax costs together with the costs associated with the reorganization actions to be taken in 2004, have been estimated to be $55 million.

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As noted above, certain of the costs associated with the reorganization will be incurred in subsequent periods. The following provides a reconciliation of the liability that has been recorded as of March 31, 2004.

(b) Closure of Lead Optimization

On July 31, 2003, Shire announced its decision to close Lead Optimization as a result of a strategic review. The closure resulted in:

• The severance of 134 Lead Optimization employees. As of March 31, 2004, all employees had left the Company. Severance payments are being made to the former employees over a fifteen month period, as required by local regulations;
  
  
• A $6.0 million write-off of associated tangible fixed assets. These assets, primarily laboratory equipment, were used by Lead Optimization for research and development and have no alternative use; and
  
  
• The cancellation, to the extent possible, of contracts directly relating to Lead Optimization.
  

The costs have been reflected in the statement of operations in the year ended December 31, 2003 and within the reporting segments as follows:

As noted above, certain of the costs associated with the closure will be incurred in subsequent periods. The following table provides a reconciliation of the liability that has been recorded as of March 31, 2004.

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10. Consolidated statement of changes in shareholders’ equity

Each exchangeable share is exchangeable into 3 ordinary shares.

11. Commitments and contingent liabilities
(a) Leases

The Company leases facilities, motor vehicles and certain equipment under operating leases expiring through 2015. Lease expense under these commitments was approximately $3.4 million for the three months to March 31, 2004. Expense related to operating leases is recognized on a straight-line basis over the life of the lease.

Future minimum lease payments presented below include principal lease payments and other fixed executory fees under lease arrangements at March 31, 2004:

Shire acts as guarantor in respect of the building lease entered into by its wholly owned subsidiary, Shire US Manufacturing Inc. In addition, as at March 31, 2004 the Company had $5.3 million of restricted cash held as collateral for certain equipment leases.

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During the three months to March 31, 2004 Shire signed an eleven-year lease on a property in Wayne. The future minimum lease payments under the lease agreement are $34.4 million in aggregate.

(b) Letters of credit

As of March 31, 2004, the Company had the following letters of credit outstanding:

(i) An irrevocable standby letter of credit with Fifth Third Bank to Allfirst Bank in the amount of $10.0 million related to the bonds that were used to finance the construction of Shire’s US manufacturing facility at Owings Mills, Maryland;

(ii) An irrevocable standby letter of credit with Barclays Bank plc in the amount of $15.0 million providing security on the recoverability of insurance claims; and

(iii) An irrevocable standby letter of credit of $18.6 million (CAN$24.5 million) that represented the Company's Canadian subsidiary’s obligations with respect to the establishment of influenza pandemic readiness in Canada at March 31, 2004.

The Company has restricted cash of $42.8million, as required by these letters of credit.

(c) Commitments

(i) The Company has undertaken to subscribe to interests in companies and partnerships for amounts totaling $44.8 million (December 31, 2003: $44.8 million). As of March 31, 2004 an amount of $37.5 million (December 31, 2003: $36.8 million) has been subscribed, leaving an outstanding commitment of $7.3 million (December 31, 2003: $8.0 million).

(ii) Government of Canada

In 2001, the Company signed a ten-year non-cancelable contract with the Government of Canada (GOC) to assure a state of readiness in the case of an influenza pandemic (worldwide epidemic) and to provide influenza vaccine for all Canadian citizens in such an event (hereinafter referred to as the Pandemic contract).

The concept of a state of readiness against an influenza pandemic requires the development of sufficient infrastructure and capacity in Canada to provide for domestic vaccine needs in the event of an influenza pandemic. The Company is committed to provide 32 million doses of single-strain (monovalent) influenza vaccine within a production period of 16 weeks. The Company has therefore begun a process of expanding its production capacity in order to meet this objective within a five-year period ending January 2006.

The Company is committed to approximately $13.7 million (CAN$18.0 million) of capital expenditure for the purpose of achieving the level of pandemic readiness required in the Pandemic contract. The Government has agreed to reimburse the Company $10.3 million (CAN$13.5 million). At the end of the contract, the Company is committed to buy back any unused and unexpired materials and capital assets reimbursed by the GOC (at net book value) that can be used for production of trivalent vaccine or other products.

As a condition of the Pandemic contract, Shire Biochem, a wholly owned subsidiary, entered into an irrevocable standby letter of credit of $18.6 million (CAN$24.5 million). The standby letter of credit is collateralized by an equivalent amount of cash.

In addition, under another GOC contract, Biologics is required to supply the GOC with a substantial proportion of its annual influenza vaccine requirements over a ten-year period ending March 2011. Subject to mutual agreement, the contract can be renewed for a further period of between one and ten years.

(iii) Vaccine production facility

The Company is also committed to the expansion of its vaccine production facility located in Quebec City. A new building will be located alongside the existing vaccine production facility in the Quebec Metro High Tech Park for an estimated $37.1 million (CAN$48.8 million). Construction of this facility commenced in November 2003. It is expected that this facility will be operational in 2006.

(iv) TPC research facility

In March 2000, the Company entered into a funding agreement with TPC, a Canadian governmental agency, (hereinafter referred to as the TPC agreement) relating to the research and development of recombinant protein vaccines. The TPC agreement has as its objective the creation in Canada of skilled scientific and technological jobs in the research and development field, the local manufacture of developed products, capital investment and financial return on investment.

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The TPC agreed to a total contribution not to exceed $60.9 million (CAN$80.0 million). Such contribution is repayable to the TPC in the form of royalties on the net sales value (gross invoiced amounts less discounts, taxes and delivery costs) if the products become commercialized. The Company is obligated to pay such royalties in the period to December 31, 2016. No amounts have been accrued with respect to this obligation as the conditions for repayment have not yet been met.

As a condition of the TPC agreement, the Company has an obligation to build a vaccine research facility in Canada. The construction of the vaccine research center in Laval, Canada will represent an investment of approximately $27.5 million (CAN$35.6 million) and should be completed in December 2004.

The TPC agreement requires the Company to comply with certain conditions as outlined in the agreement. Any violation of such conditions allows the TPC to declare the Company in default and may result in repayment of all previous funding.

The commitments disclosed in (ii), (iii) and (iv) above, will be transferred to ID Biomedical Corporation as part of the disposal of the vaccines business (see note 12, subsequent events for further details).

(v) METHYPATCH

In connection with the Company’s purchase of METHYPATCH in 2003, the Company is committed to pay an additional $50 million upon regulatory approval of the product. In addition the Company has an obligation to make further milestone payments, which are linked to the future sales performance of the product. These payments could total $75 million.

(vi) DRAXIS

In connection with the Company’s purchase of a range of products from DRAXIS Health Inc. in 2003, the Company has an obligation to make certain milestone payments if no generic events occur for certain products purchased. The milestone payments could reach an amount up to $3.0 million (CAN$4 million) if no generic events have occurred for those products by January 22, 2007.

(vii) FOSRENOL patent rights

In March 2004, Shire acquired the rights to the global patents for FOSRENOL, excluding Japan, from AnorMED Inc. (AnorMED) for consideration of up to $31.0 million.

Under the terms of the agreement, Shire will pay AnorMED $18.0 million when FOSRENOL is approved in the US and $7.0 million when it is approved in the relevant European countries. As Shire will own the patents it will have no obligation to make royalty payments.

The agreement also provides Shire with a twelve-month option to purchase the Japanese patent for $6.0 million to be paid upon receipt of regulatory approval of FOSRENOL in Japan. On the exercise of the option, Shire’s royalty obligations to AnorMED for FOSRENOL sales in Japan also cease. If the option is not exercised AnorMED will continue to be entitled to royalties in respect of sales of FOSRENOL in Japan.

(d) Legal proceedings

(i) General

The Company accounts for litigation losses in accordance with SFAS No. 5, "Accounting for Contingencies" (SFAS No. 5). Under SFAS No. 5, loss contingency provisions are recorded for probable losses when management is able to reasonably estimate the loss. Where the estimated loss lies within a range and no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. In other cases management's best estimate of the loss is recorded. These estimates are developed substantially before the ultimate loss is known and the estimates are refined in each accounting period in light of additional information becoming known. In instances where the Company is unable to develop a reasonable estimate of loss, no litigation loss is recorded at that time. As information becomes known a loss provision is set up when a reasonable estimate can be made. The estimates are reviewed quarterly and the estimates are changed when expectations are revised. Any outcome upon settlement that deviates from the Company’s estimate may result in an additional expense in a future accounting period.

(ii) Specific

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There are various legal proceedings brought by and against the Company. There are no material updates to those proceedings discussed in the Company’s Form 10-K for 2003 since the filing of the Form 10-K. There is no assurance that the Company will be successful in these proceedings and if it is not there may be a material impact on the Company’s results and financial position.

12. Subsequent events

As announced in the prior year, Shire has been negotiating with the GOC, primarily in relation to the closure of the Lead Optimization business that occurred in August 2003 and the sale of the vaccines business. On April 8, 2004 Shire announced the conclusion of these negotiations and subsequently entered into the following agreements.

(i) ViroChem Pharma Inc (ViroChem)

On April 8, 2004 Shire announced that it had contributed cash of $3.8 million (CAN$5.0 million), equipment and intellectual property to the start-up of a new Canadian-based pharmaceutical research and development organization, ViroChem in return for a 14% interest. Further to this agreement, Shire and ViroChem’s other investors have commitments to subscribe for future shares in ViroChem. Shire’s commitment is $7.6 million (CAN$10.0 million).

(ii) ID Biomedical Corporation (IDB)

On April 19, 2004, Shire entered into an agreement to sell its vaccines business to IDB, a Canadian-based biotechnology company. The conditions precedent to this transaction include the obtaining of Canadian anti-trust approval and various consents under various Canadian Government contracts. The Company expects the transaction to close before June 30, 2004. However, if the transaction closes after this date, IDB will reimburse Shire at completion for the net cost of operating the vaccines business from June 30, 2004.

The total consideration is $120 million of which $60 million will be received in cash in two equal installments, one at closing and the other on the first anniversary of completion of the transaction. The remaining $60 million will be received in common shares of IDB, or in cash at the discretion of IDB, at closing. If IDB completes one or more share offerings within 22 months of closing, Shire has the option to exchange its shares for $60 million of cash.

As part of the transaction Shire will enter into an agreement to provide IDB with a loan facility of up to $100 million, which can be drawn down over the four years following closing. This facility can be used by IDB to fund development of injectable flu and pipeline products within the vaccines business acquired from Shire. This loan will be segregated into two components; loans for injectable flu development and loans for pipeline development (the latter of which is limited to drawing of up to $70 million). The loans are repayable out of income generated by IDB on future non-Canadian injectable flu and pipeline products developed using the $100 million, subject to minimum repayments on the injectable flu loan of $30 million of principal, by 2017.

The Company anticipates recording a loss on disposition of approximately $45 million based on the proceeds listed above. This loss includes the recognition of a liability for the $70 million loan for pipeline development as any repayment is based on future income, which is not probable and cannot be estimated.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes appearing elsewhere in this report.

Reorganization

Following a strategic review in 2003, the Company announced its new business model in July 2003. Shire will search, develop and market but will not invent. The Company will seek to acquire products with substantive patent protection rather than just three years’ Hatch-Waxman exclusivity. The Company will also focus its in-licensing and merger and acquisition (M&A) efforts on the US market, and obtain European rights whenever possible. As part of this strategy the Company has developed a plan to achieve closer interaction between development, marketing and sales.

The strategic review thoroughly evaluated the Group’s R&D pipeline and refocused resources on a number of projects, of which two are currently in Phase III and two in Phase II of development. This approach aims to deliver the combined benefit of increased returns and lower risks. Whilst Shire has refocused its R&D efforts to concentrate on areas where it has a commercial presence, it will be flexible in adding new therapeutic areas if appropriate product acquisition opportunities arise.

As a consequence of the change in strategy, the Company has announced:

• The exit from early stage therapeutic research (Lead Optimization), which was completed in the third quarter of 2003;
  
  
• A North American site consolidation which commend in 2004; and
  
  
• The agreement to sell the Company’s Biologics (vaccines) business to ID Biomedical Corporation (IDB). The agreement is subject to various conditions including, Canadian anti-trust approval and consents under various Canadian Government contracts.
  

During the three months to March 31, 2004, the Company has advanced its plans to reduce the number of North American sites from fourteen to four, including the opening of a new US headquarters in Wayne, Pennsylvania. The Company will close its sites in Newport, Kentucky and Rockville, Maryland. Shire’s world headquarters will continue to be located in Basingstoke, UK. There are currently elements of the plan that need to be finalized and these may impact the total estimated costs of the reorganization. The current estimated costs of $50 to $60 million is shown in more detail in Note 9 to the consolidated financial statements.

There are inherent risks associated with any significant organizational change, including the possibility of disruption to the Company's business or the loss of key personnel. Although, a project team has been set up to actively manage the process and the associated risks, delays to R&D projects, failure to attain sales targets or other disruption to the business could occur as a result of the reorganization.

FOSRENOL
On March 31, 2004 the Company purchased the rights to the global patents, excluding Japan, for FOSRENOL from AnorMED for consideration of up to $31.0 million. On March 24, 2004 Shire announced that the Swedish authorities have granted the first European regulatory approval for FOSRENOL, a new medicine, which helps control phosphate levels in patients who require daily dialysis for severe kidney disease. Sweden will be the reference member state in the EU Mutual Recognition Procedure for FOSRENOL.

Recent developments

As announced in the prior year, Shire has been negotiating with the GOC, primarily in relation to the closure of the Lead Optimization business that occurred in August 2003 and the sale of the vaccines business. On April 8, 2004 Shire announced the conclusion of these negotiations and subsequently entered in to the following agreements.

ViroChem Pharma Inc (ViroChem)

On April 8, 2004, Shire announced that it had contributed cash of $3.8 million (CAN$5.0 million), equipment and intellectual property to the start-up of a new Canadian-based pharmaceutical research and development organization, ViroChem, in return for a 14% interest. Further to this agreement, Shire and ViroChem’s other investors have commitments to subscribe for future shares in ViroChem. Shire’s commitment is $7.6 million (CAN$ 10.0 million).

ID Biomedical Corporation (IDB)

On April 19, 2004, Shire entered into an agreement to sell its vaccines business to IDB, a Canadian-based biotechnology company. The conditions precedent to this transaction include the obtaining of Canadian anti-trust approval and various consents under various Canadian Government contracts. The Company expects the transaction to close before June 30, 2004. However if the transaction closes after this date, IDB will reimburse Shire at completion for the net cost of operating the vaccines business from June 30, 2004.

The total consideration is $120 million of which $60 million will be received in cash in two equal installments, one at closing and the other on the first anniversary of completion of the transaction. The remaining $60 million will be received in common shares of IDB, or in cash at the discretion of IDB, at closing. If IDB completes one or more share offerings within 22 months of closing, Shire has the ability to exchange its shares for $60 million of cash.

As part of the transaction Shire will enter in to an agreement to provide IDB with a loan facility of up to $100 million, which can be drawn down over the next four years following closing. This facility can be used by IDB to fund development of injectable flu and pipeline products within the vaccines business acquired from Shire. This loan will be segregated into two components; loans for injectable flu development and loans for pipeline development (the latter of which is limited to drawings of $70 million). The loans are repayable out of income generated by IDB on future non-Canadian injectable flu and pipeline products developed using the $100million, subject to minimum repayments on the injectable flu loan of $30 million of principal by 2017.

The Company anticipates recording a loss on disposition of approximately $45 million, based on the proceeds listed above. This loss includes the recognition of a liability for the $70 million of funding as any repayment is based on future sales, which are not probable and cannot be estimated.

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Results of operations for the three months to March 31, 2004 and 2003

Total revenues

The following table provides an analysis of the Company’s total revenues by source:

Product sales
For the three months to March 31, 2004, product sales increased $10.9 million (4%) to $267.3 million (2003: $256.4 million) and represented 82% of total revenues (2003: 84%). The following table provides an analysis of the Company’s key product sales:

The following discussion includes references to prescription and market share data for the Company’s key products. The source of this data is IMS Health, March 2004. IMS Health is a leading global provider of business intelligence for the pharmaceutical and healthcare industries.

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ADDERALL XR
Sales of ADDERALL XR for the 3 months to March 31, 2004 were $139.5 million, an increase of 21% compared to prior year (2003: $115.2 million).

US prescriptions were up 21% over the same period, due primarily to a 22% increase in the total US ADHD market.

ADDERALL XR maintained its 23% share of the total US ADHD market in March 2004 (March 2003: 23%), despite increased competition within the market.

Sales growth was in line with prescription volume growth. Price rises in April and November 2003 were offset by modest adjustments in customer inventory levels and higher rates of contractual discounting.

The Company’s extended release “once daily” ADDERALL XR, is covered by two US patents. During 2003 the Company was notified that Barr Laboratories Inc. (Barr) had submitted an Abbreviated New Drug Application (ANDA) under the Hatch-Waxman Act seeking permission to market a generic version of ADDERALL XR prior to the expiration date of the Company’s two US patents and alleging that one patent is invalid and one is not infringed by Barr’s mixed amphetamine salt product. The Company has filed two lawsuits against Barr seeking a ruling that Barr’s product infringes both of the Company’s US patents.

The Company was also notified in November 2003 that Impax Laboratories Inc. (Impax) has submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of ADDERALL XR prior to the expiry of the Company’s two US patents and alleging that the patents are not infringed by Impax’s mixed amphetamine salt product. In December 2003, the Company filed a lawsuit against Impax seeking a ruling that Impax’s product infringes the Company’s two US patents.

AGRYLIN
Worldwide sales of AGRYLIN for the three months to March 31, 2004 were $38.3 million, a decrease of 3% compared to the prior year (2003: $39.7 million).

The decrease was driven by an 11% decrease in US revenues being offset by a 20% increase in revenues outside the US market, where AGRYLIN is currently available on a named patient basis.

US prescription volumes were up 3% over the same period.

A significant proportion of the sales outside the US market is driven by favorable movements in foreign exchange rates.

The sales growth in the US is below prescription growth due to significant customer stocking in the three months to March 31, 2003.

AGRYLIN had a 27% share of the total US AGRYLIN, hydrea and generic hydroxyurea prescription market in March 2004 (March 2003: 27%).

AGRYLIN remains the only product specifically approved for essential thrombocythemia in the US. A pediatric exclusivity process is underway with the FDA, which is expected to extend the existing exclusivity to mid-September 2004, after which time it is expected to face generic competition. In waiting for the FDA’s formal response, Shire was granted a “de facto” extension to its orphan drug exclusivity. The expected launch of XAGRID in the EU, in the second half of 2004, will continue to drive growth from markets outside the US.

PENTASA
Sales of PENTASA for the three months to March 31, 2004 were $27.2 million, a decrease of 8% compared to prior year (2003: $29.7 million).

US prescription volumes were up 3% over the same period.

The sales growth for the three months to March 31, 2004 is below prescription growth due to significant customer stocking that occurred in the three months to March 31, 2003.

PENTASA had a 17% share of the total US oral mesalamine/olsalazine prescription market in March 2004 (March 2003: 17%).

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CARBATROL
Sales of CARBATROL for the three months to March 31, 2004 were $15.8 million, an increase of 68% compared to prior year (2003: $9.4 million).

US prescription volumes were up 15% over the same period, due to the impact of promotional efforts.

Pricing increases combined with favorable movements in customer inventory levels (estimated to be $3.0 million) contributed to the revenue growth between quarters.

CARBATROL had a 45% share of the total US extended release carbamazepine prescription market in March 2004, compared with 36% in March 2003.

In August 2003, the Company received notification that Nostrum Pharmaceuticals Inc. (Nostrum) had submitted an ANDA to market its generic version of the 300mg strength of CARBATROL prior to the expiry of the Company’s US patents for CARBATROL. In September 2003, Shire filed a lawsuit against Nostrum seeking a ruling that Nostrum’s ANDA infringed the Company’s patents.

Product sales by operating segment
The following table presents the product sales of the Company by operating segment:

Of the Company’s five reportable operating segments, only three generate revenues from the sale of products.

Product sales in the US continue to represent a significant percentage of the Company’s worldwide product sales, 84% in the three months to March 31, 2004 (2003: 86%). The 16% product sales growth in the International market was primarily driven by favorable movements in foreign exchange rates, in addition to growth of AGRYLIN ($1.7 million) and CALCICHEW ($2.8 million).

Royalties
Royalty revenue increased 18% to $56.1 million for the three months to March 31, 2004 (2003: $47.8 million). The following table provides an analysis of Shire’s royalty income:

3TC
Royalties from 3TC for the three months to March 31, 2004 were $38.2 million, an increase of 12% compared to the three months to March 31, 2003 ($34.1 million). This was primarily due to the impact of foreign exchange movements but also continued growth in the nucleoside analogue market for HIV.

For 3TC, Shire receives royalties from GSK on worldwide sales, with the exception of Canada where a commercialization partnership with GSK exists. GSK’s worldwide sales of 3TC for the three months to March 31, 2004 were $289 million, an increase of 8% compared to the three months to March 31, 2003 ($267 million).

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ZEFFIX
Royalties from ZEFFIX for the three months to March 31, 2004 were $6.3 million, a decrease of 1% compared to the three months to March 31, 2003 ($6.4 million). Foreign exchange movements and weaker sales in Asia Pacific have adversely impacted the quarter on quarter performance. However, the product continues to show strong growth in China and Japan.

For ZEFFIX, Shire receives royalties from GSK on worldwide sales, with the exception of Canada where a commercialization partnership with GSK exists. GSK’s worldwide sales of ZEFFIX, for the three months to March 31, 2004, were $55 million, an increase of 12% compared to the three months to March 31, 2003 ($49 million).

Other
Other royalties are primarily in respect of REMINYL, a product marketed worldwide by Johnson & Johnson (J&J), with the exception of the United Kingdom where a commercialization partnership with J&J existed for the three months to March 31, 2004. With effect from March 31, 2004, the Company acquired the exclusive commercialization rights to REMINYL in the UK and Ireland.

Sales of REMINYL, a treatment for mild to moderately severe dementia of the Alzheimer’s type, are growing well in the Alzheimer’s market.

Cost of product sales
For the three months to March 31, 2004, the cost of product sales amounted to 14% of product sales (2003: 15%). The decrease is driven by a change in the product mix, with more income coming from higher margin products.

Research and development (R&D)
R&D expenditure decreased from $54.6 million in the three months to March 31, 2003 to $44.5 million in the three months to March 31, 2004. Expressed as a percentage of total revenues, R&D expenditure was 14% (2003: 18%). This expenditure is below normal levels partially due to the phasing of project spend; however, it is anticipated that R&D expenditure will return to higher levels (16-17% of revenues) for the full year, excluding any new costs arising from in-licensing transactions.

Selling, general and administrative
Selling, general and administrative expenses, excluding depreciation and amortization, increased from $110.4 million in the three months to March 31, 2003 to $121.6 million in the three months to March 31, 2004, an increase of 10%. As a percentage of product sales, these expenses were 46% (2003: 43%).

The increase in expenditure relates to additional advertising and promotional spend on ADDERALL XR, together with the adverse impact of exchange rate movements.

The depreciation charge for the three months to March 31, 2004 was $4.5 million, an increase of $0.8 million compared to the three months to March 31, 2003.

The amortization charge for the three months to March 31, 2004 was $9.1 million, an increase of $1.1 million compared to the three months to March 31, 2003. The Company continuously assesses the carrying value of its other intangible assets. This involves consideration of amongst other things, the direction of the business and the marketability of the underlying products.

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Reorganization costs
During the three months to March 31, 2004 the Company incurred costs of $3.8 million in relation to the reorganization of the business announced earlier this year. These primarily relate to employee severance costs. For further information see the Liquidity and Capital resources section of this Form 10-Q.

Interest income and expense
For the three months to March 31, 2004, the Company received interest income of $4.0 million (2003: $5.1 million). The decrease is due to the reduction in interest rates more than offsetting the benefit of the increased cash balances.

Interest expense decreased from $2.6 million in the three months to March 31, 2003 to $2.1 million in 2004, as a result of the partial buy back of the convertible notes in the second quarter of 2003.

Other expense, net
For the three months to March 31, 2004, other expense totaled $5.1 million (2003: $3.6 million). In 2004 and 2003, other expense, net was primarily attributable to the write-downs of certain portfolio investments.

Taxation
The effective rate of tax for the three months to March 31, 2004 was 28% (2003: 28%). At March 31, 2004, net deferred tax assets of $65.3 million were recognized (December 31, 2003: $63.1 million). Realization is dependent upon generating sufficient taxable income to utilize such assets. Although realization of these assets is not assured, management believe it is more likely than not that the deferred tax assets will be realized.

Equity in earnings/(losses) of equity method investees
During the three months to March 31, 2004 the Company received $1.0 million, representing a 50% share of earnings from the antiviral commercialization partnership with GSK in Canada (2003: $0.7 million). In the three months to March 31, 2003, a loss of $1.1 million was incurred representing a 50% share of the losses in Qualia Computing Inc. The Company sold its interest in Qualia Computing Inc. to iCAD Inc. in the fourth quarter of 2003.

Liquidity and capital resources
The Company has financed its activities since inception through private and public offerings of equity securities, the issuance of loan notes and convertible loan notes, cash generated from operational activities and the proceeds of disposals.

The Company’s funding requirements depend on a number of factors, including its product development programs, business and product acquisitions, the level of resources required for the expansion of marketing capabilities as the product base expands, increased investment in accounts receivable and inventory which may arise as sales levels increase, competitive and technological developments, the timing and cost of obtaining required regulatory approvals for new products and the continuing revenues generated from sales of Shire’s key products.

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Sources and uses of cash

The following table provides an analysis of the Company’s gross and net cash funds, including restricted cash, as at March 31, 2004 and December 31, 2003:

Cash flow activity

Net cash provided by operating activities for the three months to March 31, 2004 was $130.9 million compared to $82.6 million for the three months to March 31, 2003. This increase in cash provided by operating activities was primarily the result of an increase in net income, a change in the provision for rebates and returns and a change in working capital. These changes resulted from an increase in the estimate of returns and the timing of payments.

Net cash used in investing activities was $32.1 million in the three months to March 31, 2004. This was primarily due to outflows of $36.3 million of cash becoming restricted and $12.8 million of net capital expenditure on long-term investments and fixed assets partially offset by a reduction of $16.8 million of cash placed on short-term deposit. Capital expenditure on tangible fixed assets for the three months to March 31, 2004 was $12.1 million, with the main expenditure being in relation to the manufacturing facility in Canada. Other capital expenditure related to the purchase of long-term investments ($0.7 million).

This is in comparison to the prior year where investing activities provided $52.5 million of cash. This was due to an inflow of $67.6 million by reducing cash placed on short-term deposit, and outflows in respect of net capital expenditure on long-term investments and fixed assets of $15.1 million. Capital expenditure on tangible fixed assets was $13.6 million, which primarily related to the purchase of additional office accommodation at the Group headquarters in Basingstoke, UK. Other capital expenditure related to the purchase of long-term investments ($1.5 million).

The Company’s financing activities for the three months to March 31, 2004 provided $3.0 million, which included $3.1 million received from exercises of employee stock options and repayments of long-term debt of $0.1 million. Financing activities provided a $0.8 million inflow, which included $0.9 million of exercises of employee stock options and repayments of long-term debt of $0.1 million for the three months to March 31, 2003.

As discussed in Note 1, to the condensed unaudited consolidated financial statements included in this Form 10-Q, the Company has developed a plan to achieve closer interaction between development, marketing and sales.

This plan requires a variety of actions by the Company, the most significant of which is the consolidation of the North American sites from fourteen sites to four, including the opening of a new US headquarters office, in Wayne, Pennsylvania. There are currently elements of the plan that need to be finalized and these may impact the total estimated costs of the reorganization. The cost of the reorganization is currently estimated to be $50 to $60 million and is expected to be complete towards the end of 2005. The main types of costs that will be incurred are as follows:

• The severance of employees;
  
  
• Retention payments to key employees;
  
  
• The relocation of employees;
  
  
• Lease termination costs; and
  
  
• Other incremental costs associated with the site closures, such as legal, consultancy and duplicate facilities.
  

As of March 31, 2004 the Company has agreed severance packages with employees at one of its locations and continues to communicate with employees at its other locations where site closure will occur. The Company estimates that the first site will close toward the end of 2004.

The following table presents the cost of the reorganization recorded to date and the total estimated costs for the reorganization which will be incurred in 2004 and 2005.

Obligations and commitments

Outstanding borrowings

Total borrowings as of March 31, 2004 were $377.8 million (December 31, 2003: $377.8 million). The main component of borrowings is $370.2 million (December 31, 2003: $370.2 million) in guaranteed convertible loan notes due 2011.

At the choice of investors, each $1,000 of nominal value notes can be converted into 49.62 Shire ordinary shares (subject to adjustment) or 16.54 Shire ADSs (subject to adjustment) at any time up to August 21, 2011. Alternatively, investors can choose to receive repayment of the nominal principal in cash either at the maturity date of August 21, 2011 or by exercising a put option on any of the three put dates being August 21, 2004, August 21, 2006 and August 21, 2008.

The decision as to whether a note holder should exercise a put option will depend on a number of factors, particularly the price of Shire shares at the put date and the likelihood of the Company’s share price exceeding the conversion threshold price. The conversion threshold price is equivalent to $20.15 or £12.52 (at the closing exchange rate for 2002) for Shire ordinary shares and $60.46 for Shire ADSs. If the price of Shire ordinary shares at the first put date of August 21, 2004 remains at a level similar to the 2003 year-end price of £5.42 ($29.06 for Shire ADSs), it is quite possible that note holders will choose to exercise their put options. The Company currently has adequate resources from which it could satisfy repayment of the entire convertible debt principal of $370.2 million.

Contractual obligations

At March 31, 2004 the Company’s contractual obligations had altered from those disclosed in the Table of Contractual Obligations in the Company’s 2003 Form 10-K as follows:

a) Operating leases

During the three months to March 31, 2004 Shire signed an eleven-year lease on a premises in Wayne, Pennsylvania as part of its reorganization and consolidation of its US sites. The future minimum lease payments under the lease agreement are $34.4 million in aggregate, of which $3.5 million, $6.3 million and $24.6 million will be due within one to three years, three to five years and after five years respectively.

b) Purchase obligations

Shire has commitments to subscribe for future shares in ViroChem of $7.6 million (CAN$10.0 million). This subscription will be due within one to three years.

c) Other long-term liabilities reflected on the balance sheet

There are increased obligations included within other long-term liabilities on the balance sheet of $23.3 million which primarily relate to obligations associated with the Supplemental Executive Retirement Plan and deferred consideration of which $10.0 million and $15.9 million are due in less than one year and in one to three years respectively, and there is a $2.6 million decrease in obligations due within three to five years.

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Interests in companies and partnerships

The Company has undertaken to subscribe to interests in companies and partnerships for amounts totaling $44.8 million. As of March 31, 2004 an amount of $37.5 million has been subscribed, leaving an outstanding commitment of $7.3 million.

Government of Canada

In 2001, the Company signed a ten-year non-cancelable contract with the Government of Canada (GOC) to assure a state of readiness in the case of an influenza pandemic (worldwide epidemic) and to provide influenza vaccine for all Canadian citizens in such an event (hereinafter referred to as the Pandemic contract).

The concept of a state of readiness against an influenza pandemic requires the development of sufficient infrastructure and capacity in Canada to provide for domestic vaccine needs in the event of an influenza pandemic. Shire is committed to providing 32 million doses of single-strain (monovalent) influenza vaccine within a production period of 16 weeks. The Company has begun the process of expanding its production capacity in order to meet this objective within a five-year period ending January 2006.

The Company is also committed to approximately $13.7 million (CAN $18.0million) of capital expenditures for the purpose of achieving the level of pandemic readiness required in the Pandemic contract. The Government has agreed to reimburse the Company $10.3 million (CAN$13.5million). At the end of the contract, Shire is committed to buy back any unused and unexpired materials and capital assets reimbursed by the GOC (at net book value) that can be used for production of trivalent vaccine or other products.

As a condition of the Pandemic contract, Shire Biochem, a wholly-owned subsidiary, entered into an irrevocable standby letter of credit of $18.6 million (CAN $24.5 million). The standby letter of credit is collateralized by an equivelent amount of cash.

In addition, under another GOC contract, the Company is required to supply the GOC with a substantial proportion of its annual influenza vaccine requirements over a ten-year period ending March 2011. Subject to mutual agreement, the contract can be renewed for a further period of between one and ten years.

Vaccine production facility

The Company is also committed to the expansion of its vaccine production facility located in Quebec City. A new building will be located alongside the existing vaccine production facility in the Quebec Metro High Tech Park for an estimated $37.1 million (CAN$48.8 million). Construction of this facility commenced in November 2003. It is expected that this facility will be operational in 2006.

Technology Partnership Canada (TPC)

In March 2000, the Company entered into a funding agreement with TPC, a Canadian governmental agency, (hereinafter referred to as the TPC agreement) relating to the research and development of recombinant protein vaccines. The TPC agreement has as its objective the creation in Canada of skilled scientific and technological jobs in the research and development field, the local manufacture of developed products, capital investment and financial return on investment.

TPC agreed to a total contribution not to exceed $60.9 million (CAN$80.0 million). Such contribution is repayable to TPC in the form of royalties on the net sales value (gross invoiced amounts less discounts, taxes and delivery costs) if the products become commercialized. The Company is obligated to pay such royalties in the period up to December 31, 2016. No amounts have been accrued with respect to this obligation as the conditions for repayment have not yet been met.

As a condition of the TPC agreement, the Company has an obligation to build a vaccine research facility in Canada. The construction of the vaccine research center in Laval, Canada will represent an investment of approximately $21.7 million (CAN$28.0 million) and should be completed in December 2004.

The TPC agreement requires the Company to comply with certain conditions as outlined in the agreement. Any violation of such conditions allows the TPC to declare the Company in default and may result in repayment of all previous funding.

The GOC vaccine production facility and TPC commitments above will be transferred to IDB as part of the disposal of the vaccines business.

METHYPATCH

In connection with the Company’s purchase of METHYPATCH in 2003, the Company is committed to pay an additional $50 million upon regulatory approval of the product. In addition the Company has an obligation to make further milestone payments, which are linked to the future sales performance of the product. These payments could total $75 million.

DRAXIS

In connection with the Company’s purchase of a range of products from DRAXIS Health Inc. in 2003, the Company has an obligation to make certain milestone payments if no generic events occur for certain products purchased. The

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milestone payments could reach an amount up to $3.0 million (CAN$4 million) if no generic events have occurred for those products by January 22, 2007.

FOSRENOL patent rights

Shire has acquired the rights to the global patents for FOSRENOL, excluding Japan, from AnorMED Inc. (AnorMED) for consideration of up to $31.0 million.

Under the terms of the agreement, Shire will pay AnorMED $18.0 million when FOSRENOL is approved in the US and $7.0 million when it is approved in the relevant European countries. In consideration of these payments, Shire’s royalty obligations to AnorMED will cease throughout the world, except for Japan, and title to the patents will be transferred to Shire upon payment.

The agreement also provides Shire with a twelve-month option to purchase the Japanese patent for $6.0 million to be paid upon receipt of regulatory approval of FOSRENOL in Japan. On the exercise of the option, Shire’s royalty obligations to AnorMED for FOSRENOL sales in Japan also cease. If the option is not exercised AnorMED will continue to be entitled to royalties in respect of sales of FOSRENOL in Japan.

Shire anticipates that its operating cash flow together with available cash, cash equivalents and marketable securities will be sufficient to meet its anticipated future operating expenses, capital expenditures (including planned expansions at its facilities) and debt service and lease obligations as they become due over the next twelve months (including the possible repayment of the convertible notes). The Company’s strategy of continued growth contemplates the possibility of growth through acquisitions of other businesses and the purchase of intangible assets, should appropriate opportunities become available. If the Company decides to seek to acquire other businesses, it expects to fund these acquisitions from existing cash resources, through additional borrowings and, possibly, with the proceeds of sales of its capital stock.

Based on the Company’s assessment of its material contractual obligations and commercial commitments, there is no known trend, demand, event or uncertainty that is reasonably likely to have a material adverse effect on its consolidated results of operations, financial condition or liquidity.

Accounting Pronouncements adopted during the period

In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R or the Interpretation). FIN 46R clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses or receive a majority of the entity’s expected residual returns, or both.

Among other changes, FIN 46R (a) clarified some requirements of the original FIN 46 issued in January 2003, (b) eased some implementation problems and (c) added new exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period that ends after March 15, 2004 except that all public companies must, at a minimum, apply the provisions of the Interpretation to all entities that were previously considered “special purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003.

New Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (EITF 03-01 or the Issue). EITF 03-01 is applicable to (a) debt and equity securities within the scope of Statement of Financial Accounting Standards (SFAS) No. 115, (b) debt and equity securities within the scope of SFAS No. 124 and that are held by an investor that reports a performance indicator, and (c) equity securities not within the scope of SFAS No. 115 and not accounted for under the Accounting Principles Board Opinion 18's equity method (e.g., cost method investments). EITF 03-01 provides a step model to determine whether an investment is impaired and if an impairment is other-than-temporary. In addition, it requires that investors provide certain disclosures for cost method investments and, if applicable, other information related specifically to cost method investments, such as the aggregate carrying amount of cost method investments, the aggregate amount of cost method investments that the investor did not evaluate for impairment because an impairment indicator was not present, and the situations under which the fair value of a cost method investment is not estimated. The disclosures relating to cost method investments should not be aggregated with other types of investments. The EITF 03-01 impairment model shall be applied prospectively to all current and future investments within the scope of the Issue, effective in reporting periods beginning after June 15, 2004. The disclosure requirements are effective for annual periods for fiscal years ending after June 15, 2004.

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ITEM 3. Qualitative and Quantitative Disclosures about Market Risk

There have been no material changes in the Company’s market risk exposure since December 31, 2003. Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 contains a detailed discussion of the Company’s market risk exposure in relation to interest rate market risk and foreign exchange market risk.

ITEM 4. Controls and procedures

As of March 31, 2004, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, had performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at the reasonable level of assurance for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.

There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are various legal proceedings brought by and against the Company. Please see the Company’s Form 10-K for 2003 for further details. There are no material updates to the proceedings since the filing of the Company’s Form 10-K. There is no assurance that the Company will be successful in these proceedings and if it is not there may be a material impact on the Company’s results and financial position.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Certification of Matthew Emmens pursuant to Rule 13a – 14 under The Exchange Act.

31.2 Certification of Angus Russell pursuant to Rule 13a – 14 under The Exchange Act.

32 Certification of Matthew Emmens and Angus Russell pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

(b) Reports on Form 8-K

During the quarter ended March 31, 2004, the following reports on Form 8-K were filed by the Company with the Securities and Exchange Commission:

A report on Form 8-K was filed on January 7, 2004 that included the Company’s News Release, announcing that the Company will present at the JPMorgan 22^nd Annual Healthcare conference, San Francisco.

A report on Form 8-K was filed on January 15, 2004 that included the Company’s News Release, announcing the Company’s legal suit filed against Nostrum Pharmaceuticals Inc.

A report on Form 8-K was filed on January 29, 2004 that included the Company’s News Release, announcing the holdings of ordinary share capital by FMR Corporation, Fidelity International Limited and their subsidiaries at January 23, 2004.

A report on Form 8-K was filed on January 29, 2004 that included the Company’s News Release, announcing the holdings of ordinary share capital by FMR Corporation, Fidelity International Limited and their subsidiaries at January 28, 2004.

A report on Form 8-K was filed on February 2, 2004 that included the Company’s News Release, announcing that the Company will present at the Merrill Lynch Healthcare conference, New York.

A report on Form 8-K was filed on February 4, 2004 that included the Company’s News Release, announcing the holdings of ordinary share capital by FMR Corporation, Fidelity International Limited and their subsidiaries at February 3, 2004.

A report on Form 8-K was filed on February 6, 2004 that included the Company’s News Release, announcing the Company’s application to the UK Listing Authority and the London Stock Exchange for the admission of shares to the official list.

A report on Form 8-K was filed on February 26, 2004, with respect to the issue of a press release announcing invitation to the full year 2003 results presentation.

A report on Form 8-K was filed on March 1, 2004, with respect to the issue of two press releases both announcing the holdings by FMR Corporation, Fidelity International Limited and their subsidiaries in the ordinary share capital of Shire at February 27, 2004.

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A report on Form 8-K was filed on March 3, 2004 that included the Company’s News Release, announcing the Company’s application to the UK Listing Authority and the London Stock Exchange for the admission of shares to the official list.

A report on Form 8-K was filed on March 10, 2004 that included the Company’s News Release, announcing the Company’s appointment of a new Non-Executive Director.

A report on Form 8-K was filed on March 11, 2004 that included the Company’s News Release, announcing the issue of a press release announcing the Company's results for the twelve months ended December 31, 2003.

A report on Form 8-K was filed on March 19, 2004, with respect to the issue of two press releases announcing (i) the holdings by Aviva plc and its subsidiaries in the ordinary share capital of Shire, and (ii) the holdings by Barclays plc and its associated companies in the ordinary share capital of Shire.

A report on Form 8-K was filed on March 22, 2004 that included the Company’s News Release, announcing the holdings of ordinary share capital by FMR Corporation, Fidelity International Limited and their subsidiaries at March 22, 2004.

A report on Form 8-K was filed on March 24, 2004, that included the Company’s Releases, announcing (i) that the Company has acquired the rights to the global patents for FOSRENOL, and (ii) the announcement that the Swedish authorities have granted the first European regulatory approval for FOSRENOL.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Exhibits Index