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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
Commission File Number: 0-29630
SHIRE PHARMACEUTICALS GROUP PLC
(Exact name of registrant as specified in its charter)
England and Wales 98-0359573
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Hampshire International Business Park, Chineham,
Basingstoke, Hampshire, England RG24 8EP
(Address of principal executive offices) (Zip Code)
44 1256 894 000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Class Outstanding at August 6, 2002
Common Stock: Ordinary Shares 483,355,570
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 and
commercialization, patents, government regulation and approval, including but
not limited to the expected product approval date of lanthanum carbonate
(FOSRENOL(TM)/FOZNOL(TM)), the impact of competitive products, including but not
limited to the impact of same on Shire's ADHD franchise, and other risks and
uncertainties detailed from time to time in our filings, including the Annual
Report filed on Form 10-K by Shire with the Securities and Exchange Commission.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
June 30, December 31,
2002 2001
ASSETS ----------- -----------
Current assets:
Cash and cash equivalents 714,523 118,040
Marketable securities and other current asset investments 225,890 723,911
Accounts receivable, net 144,711 193,913
Inventories, net 57,791 46,690
Deferred tax asset 26,811 19,430
Prepaid expenses and other current assets 36,746 38,571
------------ ------------
Total current assets 1,206,472 1,140,555
Investments 72,533 68,743
Property, plant and equipment, net 117,662 113,347
Intangible assets, net 567,808 549,044
Deferred tax asset 9,926 12,874
Other assets 25,599 26,168
------------ ------------
Total assets 2,000,000 1,910,731
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current instalments of long-term debt 2,270 4,325
Accounts and notes payable 150,631 167,152
Unearned income - 17,409
Other current liabilities 11,422 42,730
------------ ------------
Total current liabilities 164,323 231,616
Long-term debt, excluding current instalments 401,953 402,481
Other long-term liabilities 12,855 13,645
------------ ------------
Total liabilities 579,131 647,742
------------ ------------
Shareholders' equity:
Common stock, 5p par value: 800,000,000 shares authorized; and
483,068,965 shares issued and outstanding (2001: 481,817,487) 39,932 39,861
Exchangeable shares: 5,881,066 shares issued and outstanding (2001:
5,978,902) 272,855 277,386
Additional paid-in capital 1,023,347 1,014,796
Accumulated other comprehensive losses (55,329) (93,009)
Accumulated surplus 140,064 23,955
------------ ------------
Total shareholders' equity 1,420,869 1,262,989
------------ ------------
Total liabilities and shareholders' equity 2,000,000 1,910,731
------------ ------------
The accompanying notes are an integral part of these financial statements.
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
3 months to 3 months to 6 months to 6 months to
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Product sales 212,915 168,577 415,633 320,091
Licensing and development 923 244 1,605 3,286
Royalties 40,512 39,172 80,088 72,063
Other revenues (212) 471 5 746
------------ ------------ ------------ ------------
Total revenues 254,138 208,464 497,331 396,186
Costs and expenses:
Cost of revenues (31,174) (26,659) (57,685) (55,044)
Research and development (46,802) (41,827) (96,531) (79,511)
Selling, general and administrative
(inclusive of stock option compensation
charge of $152,000, $232,000, ($150,000)
and $2,352,000 respectively) (98,473) (75,165) (192,550) (144,326)
Asset impairments and restructuring charges - (85,447) - (85,447)
Merger transaction expenses - (83,470) - (83,470)
Losses on dispositions of assets (116) (8,098) (116) (8,098)
------------ ------------ ------------ ------------
Total operating expenses (176,565) (320,666) (346,882) (455,896)
------------ ------------ ------------ ------------
Operating income/(loss) 77,573 (112,202) 150,449 (59,710)
Interest income 4,820 4,471 9,551 9,611
Interest expense (1,796) (1,684) (3,773) (4,682)
Other income, net 945 2,909 2,830 3,679
------------ ------------ ------------ ------------
Total other income, net 3,969 5,696 8,608 8,608
----------- ----------- ----------- -----------
Income/(loss) before income taxes 81,542 (106,506) 159,057 (51,102)
Income taxes (22,235) (17,685) (42,948) (31,624)
------------ ------------ ------------ ------------
Net income/(loss) 59,307 (124,191) 116,109 (82,726)
------------ ------------ ------------ ------------
Net income/(loss) per share:
Basic 11.9c (25.3c) 23.2c (16.9c)
Diluted 11.6c (25.3c) 22.6c (16.9c)
Weighted average number of shares:
Basic 500,365,947 489,977,184 500,147,383 489,205,296
Diluted 523,990,414 489,977,184 525,324,877 489,205,296
SHIRE PHARMACEUTICALS GROUP PLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
6 months to 6 months to
June 30, June 30,
2002 2001
Cash flows from operating activities: --------------- ---------------
Net income/(loss) 116,109 (82,726)
Adjustments to reconcile net income/(loss) to net cash provided by operating
activities:
Depreciation and amortization 22,312 22,027
Stock option compensation (150) 2,352
Tax benefit of stock option compensation charged directly to equity 689 3,307
Non cash exchange gains and losses 1,672 (5,031)
Write-down of long-term investments 2,500 24,937
Write-down of intangible assets - 20,890
Write-down of net assets of business transferred under contractual arrangements - 30,811
Loss on sale of fixed assets 116 8,098
Changes in assets and liabilities:
Decrease in accounts receivable 53,404 17,735
(Increase)/decrease in inventory (9,987) 1,671
(Increase)/decrease in deferred tax asset (4,433) 13,768
Decrease/(increase) in prepayments and other current asset investments 4,328 (13,414)
Decrease in other assets 569 1,064
(Decrease)/increase in accounts and notes payable (24,543) 34,957
Decrease in unearned income (17,409) -
Decrease in other current liabilities (26,609) (7,186)
Decrease in other long-term liabilities (790) (1,757)
--------------- ---------------
Net cash provided by operating activities 117,778 71,503
--------------- ---------------
Cash flows from investing activities:
Redemption of marketable securities - 38,754
Decrease in short-term deposits 498,021 98,342
Purchase of long-term investments (3,086) (11,107)
Purchase of intangible assets (19,040) (32,035)
Purchase of fixed assets (7,648) (6,044)
Proceeds from sale of other assets - 547
Proceeds from sale of fixed assets - 1,200
--------------- ---------------
Net cash provided by investing activities 468,247 89,657
--------------- ---------------
Cash flows from financing activities:
Payments on long-term debt and notes (2,583) (201,876)
Proceeds from issue of common stock, net of expenses - (17)
Proceeds from exercise of options 3,552 23,201
--------------- --------------
Net cash provided by/(used in) financing activities 969 (178,692)
--------------- --------------
Effect of foreign exchange rate changes on cash and cash equivalents 9,489 (3,910)
--------------- --------------
Net increase/(decrease) in cash and cash equivalents 596,483 (21,442)
Cash and cash equivalents at beginning of period 118,040 93,266
--------------- --------------
Cash and cash equivalents at end of period 714,523 71,824
--------------- --------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS)
(In thousands of U.S. dollars)
(Unaudited)
3 months to 3 months to 6 months to 6 months to
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income/(loss) 59,307 (124,191) 116,109 (82,726)
Foreign currency translation adjustments 43,644 2,609 37,680 (29,563)
Unrealized holding gains/(losses) on
non-current investments - 14 - (196)
------------ ------------ ------------ ------------
Comprehensive income/(loss) 102,951 (121,568) 153,789 (112,485)
------------ ------------ ------------ ------------
There are no tax effects related to the items included above.
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a) Description of Operations and Principles of Consolidation
Shire Pharmaceuticals Group plc (the Company) is an international specialty
pharmaceutical company with a strategic focus on three therapeutic areas:
central nervous system disorders, oncology and anti-infectives. The Company's
strategy is further supported by two technology platforms, drug delivery and
biologics.
The Company has sales and marketing subsidiaries with a portfolio of products
targeting the U.S., Canada, the U.K., the Republic of Ireland, France, Germany,
Italy and Spain. Shire also covers other significant pharmaceutical markets
indirectly through distributors. The business is operated and managed within
three individual operating segments: U.S., International and global research and
development. Within these segments, revenues are derived primarily from three
sources: sales of products by the Company's own sales and marketing operations,
royalties and licensing and development fees.
The Company is referred to as "specialty" because its principal products tend to
be prescribed by specialists as opposed to primary care physicians. The
Company's main approach is to start projects in-house through research and
advanced drug delivery or to in-license projects, and then to develop them and
launch them using its sales and marketing capability in eight of the key world
markets (to complete its geographic coverage of the key world pharmaceutical
markets, Shire intends to build a presence in Japan by 2004). The Company seeks
to protect the intellectual property upon which it relies through a range of
patents and patent applications (both its own and those of its licensors).
The Company's principal products include:
o in the U.S., ADDERALL XR(TM) and ADDERALL(TM) for the treatment of
Attention Deficit Hyperactivity Disorder (ADHD); AGRYLIN(TM) for the
treatment of elevated blood platelets; PENTASA(TM) for the treatment
of ulcerative colitis; CARBATROL(TM) for the treatment of epilepsy;
and PROAMATINE(TM) for the treatment of postural hypotension. In
addition, the Company receives royalties on sales of REMINYL* for the
treatment of Alzheimer's disease, marketed by Johnson & Johnson, and
on EPIVIR**, COMBIVIR** and TRIZIVIR** for the treatment of HIV/AIDS
and EPIVIR-HBV** for the treatment of hepatitis B, each marketed by
GlaxoSmithKline;
o in the U.K. and the Republic of Ireland, the CALCICHEW(TM)range, used
primarily as adjuncts in the treatment of osteoporosis, and REMINYL,
which was launched in September 2000 and is co-promoted by
Janssen-Cilag;
o in Canada, 3TC** for the treatment of HIV/AIDS, COMBIVIR and
HEPTOVIR** (all marketed in partnership with GlaxoSmithKline);
AMATINE(TM); SECOND LOOK(TM), a breast cancer diagnostics product for
which the Company received FDA approval in January 2002; and FLUVIRAL
S/F(TM), a vaccine for the prevention of influenza; and
o in the Rest of the World, royalties on the sales of ZEFFIX** for the
treatment of hepatitis B, marketed by GlaxoSmithKline, and royalties
on sales of REMINYL from Janssen Pharmaceutica.
In addition, the Company has a number of products in late stage development
including FOSRENOL(TM) (FOZNOL(TM)) for the treatment of high blood phosphate
levels associated with kidney failure and TROXATYL(TM) for the treatment of
leukemia and pancreatic cancer. 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 U.S. FDA on April 30, 2002.
The accompanying consolidated financial statements include the accounts of Shire
Pharmaceuticals Group plc and all its subsidiary undertakings after elimination
of intercompany accounts and transactions.
* Registered trademark of Johnson and Johnson
** Registered trademark of GlaxoSmithKline
(TM) Unless otherwise indicated, all product names set out in this document
are trademarks of Shire or companies within the Shire Group, many of
which are the subject of trademark registrations in certain
territories.
b) Basis of Presentation
The accompanying consolidated financial statements, which include the operations
of the Company and its wholly owned subsidiaries and the financial information
included herein, are unaudited. They have been prepared in accordance with
generally accepted accounting principles in the United States and Securities and
Exchange Commission regulations for interim reporting. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
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. These consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements for the three years ended December 31, 2001
and notes thereto. The results for the period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
c) New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires that the fair value of a liability for asset
retirement obligations be recognized in the period in which it is incurred if a
reasonable estimate of the fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the related
long-lived asset. SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company has assessed the
potential impact of the adoption of SFAS No. 143 and concluded that there is no
impact.
2. Inventory
June 30, December 31,
2002 2001
$'000 $'000
-------------- --------------
Finished goods 24,961 19,880
Work-in-process 21,352 18,262
Raw materials 11,478 8,548
-------------- --------------
57,791 46,690
-------------- --------------
3. Analysis of revenue, operating income and reportable segments
The Company has disclosed segment information for the individual operating areas
of the business based on the way in which the business is managed and
controlled. Shire's principal reporting segments are U.S., International and
Global Research and Development, each being managed and monitored separately.
The Company evaluates performance based on operating income.
Three months ended June 30, 2002 U.S. International R&D Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Product sales 179,949 32,966 - 212,915
Licensing and development 662 261 - 923
Royalties 7 40,505 - 40,512
Other revenues - (212) - (212)
---------- ---------- ---------- ----------
Total revenues 180,618 73,520 - 254,138
---------- ---------- ---------- ----------
Cost of revenues 18,521 12,653 - 31,174
Research and development - - 46,802 46,802
Selling, general and administrative 57,292 29,042 - 86,334
Depreciation and amortization 7,534 4,605 - 12,139
Loss on dispositions of assets 116 - - 116
---------- ---------- ---------- ----------
Total operating expenses 83,463 46,300 46,802 176,565
---------- ---------- ---------- ----------
Operating income/(loss) 97,155 27,220 (46,802) 77,573
---------- ---------- ---------- ----------
Three months ended June 30, 2001 U.S. International R&D Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Product sales 141,648 26,929 - 168,577
Licensing and development 244 - - 244
Royalties 120 39,052 - 39,172
Other revenues - 471 - 471
---------- ---------- ---------- ----------
Total revenues 142,012 66,452 - 208,464
---------- ---------- ---------- ----------
Cost of revenues 17,616 9,043 - 26,659
Research and development - - 41,827 41,827
Selling, general and administrative 45,580 18,381 - 63,961
Depreciation and amortization 5,410 5,794 - 11,204
Asset impairments and restructuring charges - 85,447 - 85,447
Merger transaction expenses - 83,470 - 83,470
Losses on dispositions of assets - 8,098 - 8,098
---------- ---------- ---------- ----------
Total operating expenses 68,606 210,233 41,827 320,666
---------- ---------- ---------- ----------
Operating income/(loss) 73,406 (143,781) (41,827) (112,202)
---------- ---------- ---------- ----------
Six months ended June 30, 2002 U.S. International R&D Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Product sales 353,473 62,160 - 415,633
Licensing and development 1,203 402 - 1,605
Royalties 221 79,867 - 80,088
Other revenues - 5 - 5
---------- ---------- ---------- ----------
Total revenues 354,897 142,434 - 497,331
---------- ---------- ---------- ----------
Cost of revenues 32,941 24,744 - 57,685
Research and development - - 96,531 96,531
Selling, general and administrative 113,743 56,495 - 170,238
Depreciation and amortization 13,479 8,833 - 22,312
Loss on dispositions of assets 116 - - 116
---------- ---------- ---------- ----------
Total operating expenses 160,279 90,072 96,531 346,882
---------- ---------- ---------- ----------
Operating income/(loss) 194,618 52,362 (96,531) 150,449
---------- ---------- ---------- ----------
Six months ended June 30, 2001 U.S. International R&D Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Product sales 268,452 51,639 - 320,091
Licensing and development 2,329 957 - 3,286
Royalties 180 71,883 - 72,063
Other revenues - 746 - 746
---------- ---------- ---------- ----------
Total revenues 270,961 125,225 - 396,186
---------- ---------- ---------- ----------
Cost of revenues 35,493 19,551 - 55,044
Research and development - - 79,511 79,511
Selling, general and administrative 81,986 40,313 - 122,299
Depreciation and amortization 9,870 12,157 - 22,027
Asset impairments and restructuring charges - 85,447 - 85,447
Merger transaction expenses - 83,470 - 83,470
Losses on dispositions of assets - 8,098 - 8,098
---------- ---------- ---------- ----------
Total operating expenses 127,349 249,036 79,511 455,896
---------- ---------- ---------- ----------
Operating income/(loss) 143,612 (123,811) (79,511) (59,710)
---------- ---------- ---------- ----------
4. Net income/(loss) per share
Basic net income/(loss) per share is based upon the net income/(loss) available
to common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted net income/(loss) per share is based upon
net income/(loss) available to common stockholders divided by the
weighted-average number of common shares outstanding during the period and
adjusted for the effect of all dilutive potential common shares that were
outstanding during the period.
The following table sets forth the computation of basic and diluted net
income/(loss) per share:
3 months to 3 months to 6 months to 6 months to
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
$'000 $'000 $'000 $'000
---------------- ---------------- ---------------- ----------------
Numerator for basic net income/(loss) per share 59,307 (124,191) 116,109 (82,726)
Interest charged on convertible debt, net of tax 1,411 - 2,808 -
---------------- ---------------- ---------------- ----------------
Numerator for diluted net income/(loss) per share 60,718 (124,191) 118,917 (82,726)
---------------- ---------------- ---------------- ----------------
No. of No. of No. of shares No. of shares
Weighted average number of shares: shares shares
---------------- ---------------- ---------------- ----------------
Basic - weighted average number of shares 500,365,947 489,977,184 500,147,383 489,205,296
Effect of dilutive stock options 2,357,078 - 3,910,105 -
Warrants 1,144,179 - 1,144,179 -
Convertible debt 20,123,210 - 20,123,210 -
---------------- ---------------- ---------------- ----------------
Diluted - weighted average number of shares 523,990,414 489,977,184 525,324,877 489,205,296
---------------- ---------------- ---------------- ----------------
Basic net income/(loss) per share 11.9c (25.3c) 23.2c (16.9c)
---------------- ---------------- ---------------- ----------------
Diluted net income/(loss) per share 11.6c (25.3c) 22.6c (16.9c)
---------------- ---------------- ---------------- ----------------
The calculation of weighted average number of shares for the three and six
months ended June 30, 2001 does not include share options, warrants or
convertible debt because their inclusion in a loss making period would be
anti-dilutive.
5. Goodwill and Other Intangible Assets - Adoption of Statement 142
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
The statement directs that goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather will be tested at least annually
for impairment. Intangible assets that have finite useful lives will continue to
be amortized over their useful lives, but without the constraint of an arbitrary
ceiling.
a) Goodwill
A reconciliation table for the results for the three and six months ended June
30, 2001 is provided to exclude the effect of goodwill amortization in
accordance with transitional disclosures relating to SFAS 142. Results for the
three and six months ended June 30, 2002 have been prepared in accordance with
SFAS 142.
A transitional assessment of goodwill impairment as of January 1, 2002 has been
completed. The Company has concluded that the fair value of its individual
reporting units exceeds the carrying value of the net assets including goodwill,
and hence no adjusting entry is necessary.
3 months to 3 months to 6 months to 6 months to
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
$'000 $'000 $'000 $'000
---------------- ---------------- ---------------- ----------------
Reported net income/(loss) 59,307 (124,191) 116,109 (82,726)
Add back: Goodwill amortization - 2,650 - 5,349
---------------- ---------------- ---------------- ----------------
Adjusted net income/(loss) 59,307 (121,541) 116,109 (77,377)
Interest charged on convertible debt, net of tax 1,411 - 2,808 -
---------------- ---------------- ---------------- ----------------
Numerator for diluted net income/(loss) per share 60,718 (121,541) 118,917 (77,377)
---------------- ---------------- ---------------- ----------------
No. of No. of No. of shares No. of shares
Weighted average number of shares: shares shares
---------------- ---------------- ---------------- ----------------
Basic 500,365,947 489,977,184 500,147,383 489,205,296
Diluted 523,990,414 489,977,184 525,324,877 489,205,296
Basic earnings per share:
Reported net income/(loss) 11.9c (25.3c) 23.2c (16.9c)
Goodwill amortization (net of tax effect) - 0.5c - 1.1c
---------------- ---------------- ---------------- ----------------
Adjusted net income/(loss) 11.9c (24.8c) 23.2c (15.8c)
---------------- ---------------- ---------------- ----------------
Diluted earnings per share:
Reported net income/(loss) 11.6c (25.3c) 22.6c (16.9c)
Goodwill amortization (net of tax effect) - 0.5c - 1.1c
---------------- ---------------- ---------------- ----------------
Adjusted net income/(loss) 11.6c (24.8c) 22.6c (15.8c)
---------------- ---------------- ---------------- ----------------
The calculation of the diluted weighted average number of shares for the three
and six months ended June 30, 2001 excludes the effects of share options,
warrants and convertible debt because their inclusion in a loss making period
would be anti-dilutive.
There is no tax effect related to the inclusion of goodwill amortization in the
earnings calculation disclosed above.
b) Intangible fixed assets
June 30, June 30,
2002 2001
$'000 $'000
------------ ------------
Intellectual property rights acquired 485,036 464,817
Less: Accumulated amortization (100,878) (75,190)
------------ ------------
384,158 389,627
------------ ------------
The useful economic lives of all intangible assets have been reassessed in
accordance with SFAS 142.
Management estimates that the annual amortization charge in respect of
intangible fixed assets held at June 30, 2002 will be approximately $35 million
for each of the five years to June 30, 2007. Estimated amortization expense can
be affected by various factors including future acquisitions and disposals of
product rights.
6. Consolidated statement of changes in shareholders' equity
Accumu-
Exchan- lated
Common Exchan- geable other Total
Common Stock geable shares Additional Accumu- compre- sharehold-
Stock No. shares No. paid-in lated hensive ers'
Amount Shares Amount shares capital surplus losses equity
$'000 000's $'000 000's $'000 $'000 $'000 $'000
----------- ----------- ----------- ---------- ------------ ---------- ---------- -------------
As at January 1,
2002 39,861 481,817 277,386 5,979 1,014,796 23,955 (93,009) 1,262,989
Net income - - - - - 116,109 - 116,109
Foreign currency
translation - - - - - - 37,680 37,680
Exchange of
exchangeable shares - 294 (4,531) (98) 4,531 - - -
Options exercised 71 958 - - 3,482 - - 3,553
Stock option
compensation - - - - (150) - - (150)
Tax benefit
associated with
exercise of stock
options - - - - 688 - - 688
----------- ----------- -----------------------------------------------------------------------
As at June 30, 2002 39,932 483,069 272,855 5,881 1,023,347 140,064 (55,329) 1,420,869
----------- ----------- ----------------------------------------------------------------------
Each exchangeable share is exchangeable into 3 ordinary shares or one ADS.
7. Contingent liabilities
(i) Phentermine
Shire US Inc. (SUS) is a defendant in twelve lawsuits still pending in both U.S.
federal and state courts which seek damages for, among other things, personal
injury arising from phentermine products supplied for the treatment of obesity
by SUS and several other pharmaceutical companies. SUS, formerly known as Shire
Richwood Inc., has been sued as a manufacturer and distributor of phentermine,
an anorectic used in the short-term treatment of obesity and one of the products
addressed by the lawsuits. The suits relate to phentermine either alone or
together with fenfluramine or dexenfluramine. The lawsuits generally allege the
following claims: the defendants marketed phentermine and other products for the
treatment of obesity and misled users about the products and dangers associated
with them; the defendants failed adequately to test phentermine individually and
when taken in combination with the other drugs; and the defendants knew or
should have known about the negative effects of the drugs and should have
informed the public about such risks and/or failed to provide appropriate
warning labels. SUS has been named as a defendant in a total of approximately
3,800 such phentermine lawsuits, but in all but the twelve cases referenced
above, SUS has been dismissed as a defendant.
SUS became involved with phentermine through its acquisition of certain assets
of Rexar Pharmacal Corporation (Rexar) in January 1994. In addition to SUS
potentially incurring liability as a result of its own production of Oby-Cap, a
phentermine product, the plaintiffs may additionally seek to impose liability on
SUS as successor to Rexar. SUS intends vigorously to defend all the lawsuits and
pursue all available reasonable defenses. SUS denies liability on a number of
grounds including lack of
scientific evidence that phentermine, properly prescribed, causes the alleged
side effects and that SUS did not promote phentermine for long-term combined use
as part of the "fen/phen" diet. Accordingly, SUS intends to defend vigorously
any and all claims made against the Group in respect of phentermine and believes
that liability is neither probable nor quantifiable at this stage of litigation.
Legal expenses have been paid by Eon Labs Manufacturing Inc. (Eon), the supplier
to SUS, or Eon's insurance carriers but such insurance is now exhausted. Eon has
agreed to defend and indemnify SUS in this litigation pursuant to an agreement
dated November 30, 2000 between Eon and SUS.
At the present stage of litigation, Shire is unable to estimate the level of
future legal costs after taking into account any available product liability
insurance and enforceable indemnities. To the extent that any legal costs are
not covered by insurance or available indemnities, these will be expensed as
incurred.
(ii) ADDERALL
On September 22, 2000, a lawsuit was filed against Shire in the United States
District Court for the District of North Dakota. The suit involves an incident
in 1999 in which a young North Dakota man, Ryan Ehlis, shot and killed his
infant daughter and wounded himself, allegedly as a result of a psychotic
reaction to ADDERALL. Mr Ehlis' physician had prescribed ADDERALL for the
treatment of ADHD. Trial is set to commence in August 2002.Shire intends to
vigorously defend such action.
On October 3, 2001, a lawsuit was filed against Shire in Boone County Kentucky
Circuit Court. The suit involves an automobile accident that is alleged to have
been the result of a psychotic episode experienced by the driver of the car
following an ingestion of ADDERALL. As a result of the accident, the driver's
young son was killed. Shire has filed an answer to this lawsuit and intends to
vigorously defend such action.
On July 27, 2001, Shire received service of a complaint filed in state court in
Texas that alleged that ADDERALL caused or contributed to a stroke. The
plaintiff, an adult female aged 39, was prescribed ADDERALL as treatment for her
ADHD. The complaint alleges that the plaintiff used ADDERALL during the period
from January 1999 to September 1999. Also named as defendants are two doctors
who were involved in diagnosing the plaintiff's ADHD and for prescribing
ADDERALL for its treatment. Trial is set to commence in November 2002. Shire
intends to vigorously defend such action.
Shire filed a Complaint against Barr Laboratories, Inc. on April 30, 2002 in the
District Court of New Jersey. In the Complaint, Shire requested a preliminary
and permanent injunction to prevent Barr from marketing a mixed amphetamine salt
product in a trade dress similar to that of ADDERALL. Shire requested that Barr
recall all such products and also asked for damages. In connection with the
preliminary injunction, Barr has moved to dismiss the Complaint. A hearing on
the preliminary injunction was held on June 3, 2002. The decision from the
District Court is pending.
(iii) AGRYLIN
SUS has been named as a defendant in a lawsuit filed in a Texas state court
involving AGRYLIN. The complaint was served on Shire on December 26, 2001.
Shire's contract manufacturer for AGRYLIN, Mallinckrodt, Inc., is also a named
defendant.
The complaint alleges that the Plaintiff suffered a debilitating stroke due to
the fact that the Plaintiff was allegedly unable to procure this product in some
fashion. Shire has filed an answer to the complaint in which it denies the
allegations in the Plaintiffs original petition. Shire intends to vigorously
defend such action.
(iv) Emory
Shire BioChem was involved in worldwide patent disputes with Emory University
(Emory) relating to lamivudine wherein Shire BioChem opposed certain patents and
patent applications of Emory and wherein Emory opposed certain patents and
patent applications of Shire BioChem. Further detail regarding these disputes is
provided below. In November 2001, Shire and GlaxoSmithKline (GSK) signed an
agreement as to the key terms of a global settlement agreement with Emory. In
May 2002 the parties finalized the Settlement Agreement. Pursuant to the
Settlement Agreement, Emory has
granted Shire and GSK an exclusive license under Emory's patent rights for
lamivudine. The Settlement Agreement provides for the resolution of the below
noted worldwide patent disputes between the parties relating to lamivudine. The
settlement involves an upfront payment to Emory by Shire of $2.5 million and a
royalty payment from Shire of 0.5% on worldwide sales of lamivudine over an 11
year period commencing on January 1, 2001 and a licence under Shire's FTC patent
rights, in consideration for the settlement of all claims against Shire and GSK
relating to lamivudine. The total cost to Shire in 2001 of the settlement
(including upfront payment) was $7.7 million.
Emory filed oppositions to two of Shire BioChem's granted patent applications in
Europe which cover oxathiolane nucleosides including lamivudine and dioxolane
nucleosides, including troxacitabine, related nucleoside analogues and use of
these analogues for treating viral infections. In oral hearings held in 1999,
both of these oppositions were dismissed by the Opposition Division of the
European Patent Office. Emory is not pursuing its appeal of the decision
relating to oxathiolanes.
Emory had filed an appeal against the dioxolane-related decision in the European
Patent Office but this appeal has been withdrawn in July 2002. This appeal was
withdrawn by Emory pursuant to a Binding Material Terms Agreement executed in
July 2002 by Shire BioChem , Shire, the University of Georgia Research
Foundation (Georgia) and Triangle Pharmaceuticals Inc. (Triangle). Pursuant to
the Agreement Shire will grant an exclusive royalty bearing license to Emory,
sub licensable to Triangle, for certain dioxolane nucleoside analogs, including
diamino purine dioxolane (DAPD). Emory, Georgia and Triangle will grant an
exclusive royalty bearing license to Shire for certain dioxolane nucleosides,
including SPD 756 .The compounds the subject of these licences are in
development. A low royalty will be payable by Shire upon commercialization of
SPD 756 .The Binding Material Terms Agreement provides for the resolution of
worldwide patent disputes relating to the licensed patents.
Emory has filed revocation actions in Australia and South Korea against Shire
BioChem's granted patents covering lamivudine. Shire BioChem has aggressively
defended these patents. In accordance with the Settlement Agreement, Emory has
agreed to withdraw these proceedings relating to lamivudine.
On July 23, 1996, Emory filed a complaint in the U.S. alleging infringement from
the commercialization of EPIVIR by Shire BioChem and GSK, Shire BioChem's
exclusive licensee in the U.S., of an Emory U.S. patent granted that same day.
Shire BioChem considers this patent infringement suit to be without merit and
has successfully challenged the validity of Emory's patent in the below noted
interference proceedings.
On May 19, 1998, the United States Patent and Trademark Office (USPTO) declared
an interference between the Emory patent that is the subject of the above
mentioned lawsuit and a pending patent application of Shire BioChem. The Board
of Patent Appeals and Interferences issued a decision on December 21, 2000
invalidating Emory's patent. Emory had appealed the decision. Pursuant to the
Settlement Agreement, the infringement suit and Emory's appeal from the
interference decision were dismissed in June 2002.
Emory has obtained a granted patent application in Europe relating to
oxathiolane nucleosides, including lamivudine. Shire BioChem and GSK filed an
opposition to this grant. An examined patent application filed by Emory claiming
lamivudine was successfully opposed by Shire BioChem in Australia and Norway.
Emory has filed an appeal from the Australian decision in the Federal Court of
Australia. Shire BioChem also filed an appeal from certain portions of the
decision. These proceedings will be resolved in accordance with the Settlement
Agreement. An examined patent application filed by Emory claiming lamivudine was
opposed by Shire BioChem and GSK in South Korea and such Emory claims to
lamivudine were cancelled by the South Korean Patent Office. Emory has appealed
this decision. Shire BioChem is aware that Emory has filed patent applications
in other countries, which Shire BioChem believes may claim similar subject
matter. All such patent applications and related disputes will be subject to the
Settlement Agreement.
(v) Yale
On November 23, 1999, the USPTO declared an interference between Shire's
hepatitis B patent for lamivudine and a patent application filed by Yale
University (Yale) claiming methods of treating
hepatitis B using lamivudine. The Company believes that this application is
licensed to Vion Pharmaceuticals, Inc. (Vion), formerly known as OncoRx, Inc., a
New Haven, Connecticut-based, U.S. company. On March 28, 2002, the Board of
Patent Appeals and Interferences issued an order awarding priority to the
Company's patent. Yale has not appealed from the Board's judgement and the
Company is not aware of corresponding patent applications by Yale or Vion in
countries other than the US.
On April 14, 2000, the USPTO declared a further interference between BioChem's
hepatitis B patent for lamivudine and a patent application by GSK claiming
methods of treating hepatitis B using lamivudine. There is no guarantee that
Shire will be successful in this interference and that Shire's patent will be
maintained.
(vi) Commitments
The Company has undertaken to subscribe to interests in companies and
partnerships for amounts totalling $39.6 million. As at June 30, 2002 an amount
of $23.4 million (June 30, 2001: $21.0 million) has been subscribed.
(vii) FLUVIRAL
The Company has signed a ten-year contract with the Government of Canada 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. Under the contract, Shire Biologics will also supply the Government of
Canada with a substantial proportion of its annual influenza vaccine
requirements over the ten-year period. Subject to mutual agreement, the contract
can be renewed for a further period of between one and ten years from 2011.
The concept of a state of readiness against an influenza pandemic requires the
development of sufficient infrastructure and capacity in Canada to provide 100%
of domestic vaccine needs in the event of an influenza pandemic. Canada would
require 32 million doses of single-strain (monovalent) flu vaccine within a
production period of 16 weeks. Shire Biologics will therefore begin expanding
its current production capacity in order to meet this objective within a
five-year period.
Shire Biologics is committed to Cdn$4.5 million (approximately $3.0 million) of
capital expenditure on immoveables for the purpose of achieving the level of
pandemic readiness required. In addition, a performance bond equal to Cdn$17.5
million (approximately $11.5 million) has been established to ensure that in the
event of default by Shire Biologics, adequate funds will be available to
complete the work according to the terms of the contract.
(viii) Other matters
In addition, the Company is involved in other claims and lawsuits in the normal
course of business. It is not possible at this time to determine the ultimate
outcome of any of these claims.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations for the three months ended June 30, 2002, as compared with
those for the three months ended June 30, 2001
Overview of financial results
Total revenues for the three months ended June 30, 2002 increased by 22 per cent
to $254.1 million as compared to the three months ended June 30, 2001. The
Company recorded a second quarter net income of $59.3 million (2001: net loss
$124.2 million after one time merger related expenses and restructuring charges
of $177.0 million).
Sales and marketing
Product sales of $212.9 million, which represented 84 per cent of total revenues
for the second quarter 2002, increased by 26 per cent over second quarter 2001
product sales of $168.6 million. Product sales in the U.S. continue to represent
a significant percentage of our worldwide sales, 85 per cent in the three months
ended June 30, 2002 (2001: 84 per cent).
The Company manages and controls the sales and marketing operations on
geographic lines. The following table presents the Company's net product sales
by individual operating segment:
Product sales by segment 3 months to 3 months to
June 30, 2002 June 30, 2001
$'000 $'000 % change
United States 179,949 141,648 +27
International 32,966 26,929 +22
------------ ------------ ------------
Total product sales 212,915 168,577 +26
------------ ------------ ------------
Second quarter combined sales of ADDERALL XR and ADDERALL, marketed in the U.S.
for the treatment of Attention Deficit Hyperactivity Disorder (ADHD), were
$104.1 million, representing growth of 50 per cent over the second quarter of
2001. ADDERALL XR and ADDERALL had a 26 per cent share of the prescription
market for ADHD in the U.S. in June 2002 compared to 33 per cent in June 2001.
Sales of AGRYLIN, the only U.S. product licensed for the treatment of essential
thrombocythemia were $29.4 million, a 14 per cent increase over second quarter
2001 sales of $25.8 million. Shire achieved a prescription share of 26 per cent
of the total U.S. AGRYLIN market (including Hydrea (a trademark of Bristol Myers
Squibb Company) and generic hydroxyurea), in June 2002 compared to 21 per cent
in June 2001.
Sales of PENTASA, licensed for the treatment of ulcerative colitis, were $21.5
million for the second quarter 2002, 13 per cent higher than the comparable
period last year. PENTASA had an 18 per cent share of the oral
mesalamine/obsalazine market in June 2002, consistent with June 2001.
Sales of PROAMATINE, for the treatment of postural hypotension, were $10.9
million, 3 per cent higher than second quarter 2001 sales of $10.5 million. The
U.S. prescription market for PROAMATINE and FLORINEF(TM) prescriptions indicates
that PROAMATINE had a 24 per cent share in June 2002, consistent with June 2001.
CARBATROL containing carbamazapine for the treatment of epilepsy, recorded sales
growth of 27 per cent from sales of $9.9 million in the three months ended June
30, 2001 to $12.6 million in the three months ended June 30, 2002. This
translates to 36 per cent of the U.S. extended release carbamazepine
prescription market in June 2002, compared to 34 per cent in June 2001.
Royalties
Royalties increased by $1.3 million in the three months ended June 30, 2002, up
3 per cent from the three months ended June 30, 2001, to $40.5 million. The
Company receives royalties from GlaxoSmithKline on the worldwide sales of 3TC
(for the treatment of HIV infection / AIDS), and ZEFFIX (an oral treatment for
chronic hepatitis B), with the exception of Canada where a commercialization
partnership with GSK exists. The Company also receives royalties from J&J on
sales of REMINYL, for the treatment of Alzheimer's Disease.
Cost of revenues
Gross margin on product sales increased from 84 per cent for the three months
ended June 30, 2001 to 85 per cent for the three months ended June 30, 2002.
This is a reflection of the product mix as the higher margin products, ADDERALL
XR, ADDERALL and AGRYLIN, represented approximately 63 per cent of total product
sales in the three months ended June 30, 2002 compared to 56 per cent in the
three months ended June 30, 2001. Improved pricing in respect of the ADHD
franchise has also contributed to the higher gross margin for the three months
ended June 30, 2002.
Research and development
R&D expenditure increased 12 per cent to $46.8 million for the three months
ended June 30, 2002 (2001: $41.8 million). R&D expenditure in second quarter
2002 represented 18 per cent of revenues compared to 20 per cent in second
quarter 2001.
Selling, general and administrative expenses
Selling, general and administrative expenses, excluding the effects of a stock
option compensation charge of $0.2 million (2001: $0.2 million) and depreciation
and amortization of $12.1 million (2001: $11.2 million), increased by 35 per
cent to $86.1 million for the three months ended June 30, 2002 (2001: $63.7
million). This reflects the high promotional spend associated with the ADDERALL
XR launch. As a percentage of product sales, selling, general and administrative
costs represented 40 per cent for the second quarter 2002 (2001: 38%).
Interest income and expense
For the three months ended June 30, 2002, the Company received interest income
of $4.8 million (Q2 2001: $4.5 million). Interest expense increased from $1.7
million to $1.8 million.
Income taxes
For the three months ended June 30, 2002 income taxes increased $4.5 million to
$22.2 million from $17.7 million for the three months ended June 30, 2001. The
Company's effective tax rate before the stock compensation charge was 27 per
cent for the three months ended June 30, 2002 (Q2 2001: 25 per cent before stock
compensation charge and exceptional items). The Company has recorded net
deferred tax assets of $36.7 million (June 30, 2001: $32.3 million). Realization
is dependent upon generating sufficient taxable income to utilize such assets.
Although realization on these assets is not assured, management believes it is
more likely than not that the deferred tax assets will be realized.
Results of operations for the six months ended June 30, 2002, as compared with
those for the six months ended June 30, 2001
Overview of financial results
Total revenues for the six months ended June 30, 2002 increased by 26 per cent
to $497.3 million as compared to the six months ended June 30, 2001. The Company
recorded a half year net income of $116.1 million (2001: net loss $82.7 million
after one time merger related expenses and restructuring charges of $177.0
million).
Sales and marketing
Product sales of $415.6 million, which represented 84 per cent of total
revenues, increased by 30 per cent over half year 2001 product sales of $320.1
million. Product sales in the U.S. continue to represent a significant
percentage of our worldwide product sales, 85 per cent in the six months ended
June 30, 2002 (2001: 84 per cent).
The Company manages and controls the sales and marketing operations on
geographic lines. The following table presents the Company's net product sales
by individual operating segment:
Product sales by segment 6 months to 6 months to
June 30, June 30,
2002 2001
$'000 $'000 % change
United States 353,473 268,452 +32
International 62,160 51,639 +20
------------ ------------ ------------
Total product sales 415,633 320,091 +30
------------ ------------ ------------
Cost of revenues
Gross margin on product sales increased from 83 per cent for the six months
ended June 30, 2001 to 86 per cent for the six months ended June 30, 2002. The
main reason for this is that higher margin products represented a higher
proportion of total sales in the current period.
Research and development
Research and development expenditure increased 21 per cent to $96.5 million for
the six months ended June 30, 2002 (2001: $79.5 million). R&D expenditure in
half year 2002 represented 19 per cent of revenues compared to 20 per cent in
first half year 2001.
Selling, general and administrative expenses
Selling, general and administrative expenses, excluding the effects of a stock
option compensation credit of $0.2 million (2001: charge $2.4 million) and
depreciation and amortization of $22.3 million (2001: $22.0 million), increased
by 42 per cent to $170.4 million for the six months ended June 30, 2002 (2001:
$119.9 million). This reflects the high promotional spend associated with the
ADDERALL XR launch. As a percentage of product sales, selling, general and
administrative costs represented 41 per cent for the half year 2002 (2001: 37%).
Interest income and expense
For the six months ended June 30, 2002, the Company received interest income of
$9.6 million (Q2 2001: $9.6 million). Interest expense decreased from $4.7
million to $3.8 million. This decrease reflects an improved debt profile
resulting from the repayment of a $125 million term loan in May 2001 and the
subsequent issue of the $400 million convertible notes in August 2001, which
bear interest at the comparatively lower fixed rate of 2% per annum.
Income taxes
For the six months ended June 30, 2002 income taxes increased $11.3 million to
$42.9 million from $31.6 million for the six months ended June 30, 2001. The
Company's effective tax rate before the stock compensation credit was 27 per
cent for the six months ended June 30, 2002 (2001: 25 per cent). The Company has
recorded net deferred tax assets of $36.7million. Realization is dependent upon
generating sufficient taxable income to utilize such assets. Although
realization on these assets is not assured, management believes it is more
likely than not that the deferred tax assets will be realized.
Liquidity and Financial Condition
The Company's funding requirements depend on a number of factors, including the
Company's 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 its key
products.
At June 30, 2002, the Company had net cash funds available as follows:
June 30, December 31,
2002 2001
$'000 $'000
-------------- --------------
Cash and cash equivalents 714,523 118,040
Marketable securities and other current
asset investments 225,890 723,911
Debt (404,223) (406,806)
-------------- --------------
Net cash 536,190 435,145
-------------- --------------
Net cash provided by operating activities for the six months ended June 30, 2002
was $117.8 million compared to $71.5 million for the six months ended June 30,
2001.
Investing activities provided $468.2 million for the six months ended June 30,
2002 (2001: $89.7 million). This was due to an inflow of $498.0 million of cash
by reducing funds placed on short-term deposit, and outflows in respect of
capital expenditure on long-term investments, intangible assets and fixed assets
of $29.8 million.
Investing activities for the six months ended June 30, 2001 included $137.1
million from the redemption of marketable securities and reduction in cash
placed on short-term deposit, and outflows in respect of net capital expenditure
on long-term investments, intangible assets and fixed assets of $47.4 million.
Financing activities provided $1.0 million for the six months ended June 30,
2002 (2001: used $178.7 million). The $1.0 million inflow included $3.6 million
received from exercises of employee stock options and $2.6 million in repayments
of long-term debt.
Financing activities for the six months ended June 30, 2001 included a $23.2
million inflow from exercises of employee stock options and repayments of
long-term debt totalling $201.9 million.
Capital expenditure
Capital expenditure on tangible fixed assets for the six months ended June 30,
2002 was $7.6 million, which was primarily laboratory and computer equipment
purchased across the Group. Other capital expenditure related to the purchase of
long-term investments ($3.1 million) and intangible assets ($19.0 million). The
expenditure on intangible assets was in respect of SOLARAZE(TM), a product
purchased from Skye Pharma plc and Bioglan Pharma plc (in administration) in May
2002 for the treatment of a skin condition related to excessive exposure to the
sun, actinic keratosis.
Capital expenditure on tangible fixed assets for the six months ended June 30,
2001 was $6.0 million, which included $1.7 million of equipment related to the
Company's new head office facility occupied from March 2001. Expenditure was
offset by $1.2 million in proceeds received on the disposal of the Toronto
facility. Other capital expenditure related to the purchase of long-term
investments ($11.1 million) and $32.0 million for new products, including
MONOCID(TM) and INDURGAN(TM) marketed by the Company's Italian and Spanish
operations respectively.
ITEM 3. Qualitative and Quantitative Disclosures about Market Risk
Item 7A of the Group's Annual Report on Form 10-K for the year ended December
31, 2001 contains a detailed discussion of the Group's market risk exposure in
relation to interest rate market risk and foreign exchange market risk. There
have been no material changes in the Group's market risk exposure since December
31, 2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(i) Phentermine
Shire US Inc. (SUS) is a defendant in twelve lawsuits still pending in both U.S.
federal and state courts which seek damages for, among other things, personal
injury arising from phentermine products supplied for the treatment of obesity
by SUS and several other pharmaceutical companies. SUS, formerly known as Shire
Richwood Inc., has been sued as a manufacturer and distributor of phentermine,
an anorectic used in the short-term treatment of obesity and one of the products
addressed by the lawsuits. The suits relate to phentermine either alone or
together with fenfluramine or dexenfluramine. The lawsuits generally allege the
following claims: the defendants marketed phentermine and other products for the
treatment of obesity and misled users about the products and dangers associated
with them; the defendants failed adequately to test phentermine individually and
when taken in combination with the other drugs; and the defendants knew or
should have known about the negative effects of the drugs and should have
informed the public about such risks and/or failed to provide appropriate
warning labels. SUS has been named as a defendant in a total of approximately
3,800 such phentermine lawsuits, but in all but the twelve cases referenced
above, SUS has been dismissed as a defendant.
SUS became involved with phentermine through its acquisition of certain assets
of Rexar Pharmacal Corporation (Rexar) in January 1994. In addition to SUS
potentially incurring liability as a result of its own production of Oby-Cap, a
phentermine product, the plaintiffs may additionally seek to impose liability on
SUS as successor to Rexar. SUS intends vigorously to defend all the lawsuits and
pursue all available reasonable defenses. SUS denies liability on a number of
grounds including lack of scientific evidence that phentermine, properly
prescribed, causes the alleged side effects and that SUS did not promote
phentermine for long-term combined use as part of the "fen/phen" diet.
Accordingly, SUS intends to defend vigorously any and all claims made against
the Group in respect of phentermine and believes that liability is neither
probable nor quantifiable at this stage of litigation. Legal expenses have been
paid by Eon Labs Manufacturing Inc. (Eon), the supplier to SUS, or Eon's
insurance carriers but such insurance is now exhausted. Eon has agreed to defend
and indemnify SUS in this litigation pursuant to an agreement dated November 30,
2000 between Eon and SUS.
At the present stage of litigation, Shire is unable to estimate the level of
future legal costs after taking into account any available product liability
insurance and enforceable indemnities. To the extent that any legal costs are
not covered by insurance or available indemnities, these will be expensed as
incurred.
(ii) ADDERALL
On September 22, 2000, a lawsuit was filed against Shire in the United States
District Court for the District of North Dakota. The suit involves an incident
in 1999 in which a young North Dakota man, Ryan Ehlis, shot and killed his
infant daughter and wounded himself, allegedly as a result of a psychotic
reaction to ADDERALL. Mr Ehlis' physician had prescribed ADDERALL for the
treatment of ADHD. Trial is set to commence in August 2002.Shire intends to
vigorously defend such action.
On October 3, 2001, a lawsuit was filed against Shire in Boone County Kentucky
Circuit Court. The suit involves an automobile accident that is alleged to have
been the result of a psychotic episode experienced by the driver of the car
following an ingestion of ADDERALL. As a result of the accident,
the driver's young son was killed. Shire has filed an answer to this lawsuit and
intends to vigorously defend such action.
On July 27, 2001, Shire received service of a complaint filed in state court in
Texas that alleged that ADDERALL caused or contributed to a stroke. The
plaintiff, an adult female aged 39, was prescribed ADDERALL as treatment for her
ADHD. The complaint alleges that the plaintiff used ADDERALL during the period
from January 1999 to September 1999. Also named as defendants are two doctors
who were involved in diagnosing the plaintiff's ADHD and for prescribing
ADDERALL for its treatment. Trial is set to commence in November 2002. Shire
intends to vigorously defend such action.
Shire filed a Complaint against Barr Laboratories, Inc. on April 30, 2002 in the
District Court of New Jersey. In the Complaint, Shire requested a preliminary
and permanent injunction to prevent Barr from marketing a mixed amphetamine salt
product in a trade dress similar to that of ADDERALL. Shire requested that Barr
recall all such products and also asked for damages. In connection with the
preliminary injunction, Barr has moved to dismiss the Complaint. A hearing on
the preliminary injunction was held on June 3, 2002. The decision from the
District Court is pending.
(iii) AGRYLIN
SUS has been named as a defendant in a lawsuit filed in a Texas state court
involving AGRYLIN. The complaint was served on Shire on December 26, 2001.
Shire's contract manufacturer for AGRYLIN, Mallinckrodt, Inc., is also a named
defendant.
The complaint alleges that the Plaintiff suffered a debilitating stroke due to
the fact that the Plaintiff was allegedly unable to procure this product in some
fashion. Shire has filed an answer to the complaint in which it denies the
allegations in the Plaintiffs original petition. Shire intends to vigorously
defend such action.
(iv) Emory
Shire BioChem was involved in worldwide patent disputes with Emory University
(Emory) relating to lamivudine wherein Shire BioChem opposed certain patents and
patent applications of Emory and wherein Emory opposed certain patents and
patent applications of Shire BioChem. Further detail regarding these disputes is
provided below. In November 2001, Shire and GlaxoSmithKline (GSK) signed an
agreement as to the key terms of a global settlement agreement with Emory. In
May 2002 the parties finalized the Settlement Agreement. Pursuant to the
Settlement Agreement, Emory has granted Shire and GSK an exclusive license under
Emory's patent rights for lamivudine. The Settlement Agreement provides for the
resolution of the below noted worldwide patent disputes between the parties
relating to lamivudine. The settlement involves an upfront payment to Emory by
Shire of $2.5 million and a royalty payment from Shire of 0.5% on worldwide
sales of lamivudine over an 11 year period commencing on January 1, 2001 and a
licence under Shire's FTC patent rights, in consideration for the settlement of
all claims against Shire and GSK relating to lamivudine. The total cost to Shire
in 2001 of the settlement (including upfront payment) was $7.7 million.
Emory filed oppositions to two of Shire BioChem's granted patent applications in
Europe which cover oxathiolane nucleosides including lamivudine and dioxolane
nucleosides, including troxacitabine, related nucleoside analogues and use of
these analogues for treating viral infections. In oral hearings held in 1999,
both of these oppositions were dismissed by the Opposition Division of the
European Patent Office. Emory is not pursuing its appeal of the decision
relating to oxathiolanes.
Emory had filed an appeal against the dioxolane-related decision in the European
Patent Office but this appeal has been withdrawn in July 2002. This appeal was
withdrawn by Emory pursuant to a Binding Material Terms Agreement executed in
July 2002 by Shire BioChem , Shire, the University of Georgia Research
Foundation (Georgia) and Triangle Pharmaceuticals Inc. (Triangle). Pursuant to
the Agreement Shire will grant an exclusive royalty bearing license to Emory,
sub licensable to Triangle, for certain dioxolane nucleoside analogs, including
diamino purine dioxolane (DAPD). Emory, Georgia and Triangle will grant an
exclusive royalty bearing license to Shire for certain dioxolane nucleosides,
including SPD 756. The compounds the subject of these licences are in
development. A low royalty will be payable by Shire upon commercialization of
SPD 756. The Binding
Material Terms Agreement provides for the resolution of worldwide patent
disputes relating to the licensed patents.
Emory has filed revocation actions in Australia and South Korea against Shire
BioChem's granted patents covering lamivudine. Shire BioChem has aggressively
defended these patents. In accordance with the Settlement Agreement, Emory has
agreed to withdraw these proceedings relating to lamivudine .
On July 23, 1996, Emory filed a complaint in the U.S. alleging infringement from
the commercialization of EPIVIR by Shire BioChem and GSK, Shire BioChem's
exclusive licensee in the U.S., of an Emory U.S. patent granted that same day.
Shire BioChem considers this patent infringement suit to be without merit and
has successfully challenged the validity of Emory's patent in the below noted
interference proceedings.
On May 19, 1998, the United States Patent and Trademark Office (USPTO) declared
an interference between the Emory patent that is the subject of the above
mentioned lawsuit and a pending patent application of Shire BioChem. The Board
of Patent Appeals and Interferences issued a decision on December 21, 2000
invalidating Emory's patent. Emory had appealed the decision. Pursuant to the
Settlement Agreement, the infringement suit and Emory's appeal from the
interference decision were dismissed in June 2002.
Emory has obtained a granted patent application in Europe relating to
oxathiolane nucleosides, including lamivudine. Shire BioChem and GSK filed an
opposition to this grant. An examined patent application filed by Emory claiming
lamivudine was successfully opposed by Shire BioChem in Australia and Norway.
Emory has filed an appeal from the Australian decision in the Federal Court of
Australia. Shire BioChem also filed an appeal from certain portions of the
decision. These proceedings will be resolved in accordance with the Settlement
Agreement. An examined patent application filed by Emory claiming lamivudine was
opposed by Shire BioChem and GSK in South Korea and such Emory claims to
lamivudine were cancelled by the South Korean Patent Office. Emory has appealed
this decision. Shire BioChem is aware that Emory has filed patent applications
in other countries, which Shire BioChem believes may claim similar subject
matter. All such patent applications and related disputes will be subject to the
Settlement Agreement.
(v) Yale
On November 23, 1999, the USPTO declared an interference between Shire's
hepatitis B patent for lamivudine and a patent application filed by Yale
University (Yale) claiming methods of treating hepatitis B using lamivudine. The
Company believes that this application is licensed to Vion Pharmaceuticals, Inc.
(Vion), formerly known as OncoRx, Inc., a New Haven, Connecticut-based, U.S.
company. On March 28, 2002, the Board of Patent Appeals and Interferences issued
an order awarding priority to the Company's patent. Yale has not appealed from
the Board's judgement and the Company is not aware of corresponding patent
applications by Yale or Vion in countries other than the US.
On April 14, 2000, the USPTO declared a further interference between BioChem's
hepatitis B patent for lamivudine and a patent application by GSK claiming
methods of treating hepatitis B using lamivudine. There is no guarantee that
Shire will be successful in this interference and that Shire's patent will be
maintained.
(vi) Other matters
In addition, the Company is involved in other claims and lawsuits in the normal
course of business. It is not possible at this time to determine the ultimate
outcome of any of these claims.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual General Meeting of Shareholders was held on June 13, 2002. The
following resolutions were adopted by the margins indicated:
1. Ordinary resolution to receive and consider the report of the directors' and
financial statements for the year ended December 31, 2001.
For Against Open Abstentions
245,429,708 1,802,805 2,267,661 1,747,921
2. Ordinary resolution to re-elect Dr James Henry Cavanaugh as Director.
For Against Open Abstentions
231,781,418 2,183,014 2,272,167 15,011,496
3. Ordinary resolution to re-elect Dr Barry John Price as Director.
For Against Open Abstentions
246,587,213 296,039 2,270,467 2,094,376
4. Ordinary resolution to re-elect Mr Ronald Nordmann as Director.
For Against Open Abstentions
246,614,399 298,336 2,270,467 2,064,893
5. Ordinary resolution to re-appoint Arthur Andersen as Auditors and authorize
the Directors to fix their remuneration.
For Against Open Abstentions
226,964,936 14,545,268 2,268,767 7,469,124
6. Ordinary resolution to receive the Report of the Remuneration Committee for
the financial year ended 31 December 2001.
For Against Open Abstentions
238,243,329 7,318,020 2,270,197 3,416,549
7. Ordinary resolution to authorize the directors pursuant to Section 80 of the
Companies Act 1985 to exercise all or any powers of the Company to allot
relevant securities up to an aggregate nominal amount equal to 331/3 per cent of
the total share capital of the Company in issue on 13 February 2002 and for a
period expiring five years after the date of the passing of this resolution.
For Against Open Abstentions
245,831,434 1,338,023 2,270,566 1,808,072
8. Special resolution to empower the Directors pursuant to Section 95 of the
Companies Act 1985 and subject to the passing of the resolution detailed in
point 7 above, to allot equity securities of the Company pursuant to the
authority conferred by the passing of that resolution, as if section 89(1) of
the Companies Act 1985 did not apply to such allotments, provided that this
power shall expire five years after the date of passing the resolution and that
it is limited to certain equity securities and that it is limited 5 per cent of
the issued share capital at the date of the last published accounts of the
Company.
For Against Open Abstentions
246,765,968 1,691,295 2,272,950 517,882
9. Ordinary resolution to authorize the directors to amend the rules of the
Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (ESPP) to allow all
full and part-time employees to be eligible to participate in the ESPP with
immediate effect.
For Against Open Abstentions
228,655,295 17,344,911 2,271,267 2,976,622
10. Special resolution to generally and unconditionally authorize the directors
to make market purchases of not more than 48,259,763 ordinary shares of 5p each
in its share capital at not less than 5 p per share and not more than 5% above
the average of the middle market quotations for the ordinary shares in the
Company taken from the London Stock Exchange Daily Official List for the 5
business days immediately preceding the day on which the shares are contracted
to be purchased provided that this authority shall expire at the conclusion of
the next Annual General Meeting of the Company.
For Against Open Abstentions
247,097,682 129,214 2,270,617 1,750,582
The following Directors continued in their term of office:
Dr Francesco Bellini
Dr Bernard Canavan*
The Hon James Grant
Mr Angus Russell
Mr Rolf Stahel
Dr Wilson Totten
Mr Gerard Veilleux
* Shire regrets to announce that Dr Canavan died on August 11, 2002.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
During the second quarter ended June 30, 2002, the following reports on
Form 8-K were filed by the Company with the Securities and Exchange
Commission:
Form 8-K (Item 5 - Other Events), date of earliest event reported May 3,
2002, with respect to determination of foreign private issuer status.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
Exhibits), date of earliest event reported May 7, 2002, with respect to
Notice of Annual General Meeting and Form of Proxy.
Form 8-K (Item 5 - Other Events), date of earliest event reported May 15,
2002, with respect to press release announcement.
Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and
Exhibits), date of earliest event reported May 22, 2002, with respect to
the published transcript of an investor presentation held in Philadelphia,
Pennsylvania.
During the period between June 30, 2002 and the filing of this form 10-Q,
the following report on Form 8-K was filed by the Company with the
Securities and Exchange Commission:
Form 8-K (Item 4 - Changes in the Registrant's Certifying Accountant), on
July 31, 2002 Arthur Andersen informed Shire Pharmaceuticals Group plc (the
Registrant) that it would no longer be able to serve as the Registrant's
independent auditors and submitted its letter of resignation. The
Registrant subsequently engaged the services of Deloitte & Touche effective
July 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHIRE PHARMACEUTICALS GROUP PLC
(Registrant)
Date: August 14, 2002 By: /s/ Angus C Russell
---------------------------
Angus C Russell
Group Finance Director
Date: August 14, 2002 By: /s/ Rolf Stahel
---------------------------
Rolf Stahel
Chief Executive
Certification
Accompanying Form 10-Q Report
of Shire Pharmaceuticals Group plc
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chapter 63, Title 18 U.S.C. ss.1350(a) and (b))
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63,
Title 18 U.S.C. ss.1350(a) and (b)), each of the undersigned hereby certifies
that, to the best of their respective knowledge and belief, the Quarterly Report
on Form 10-Q for the period ended June 30, 2002 of Shire Pharmaceuticals Group
plc ("Company") fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 and that the information
contained in such Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Dated: August 14, 2002 /s/ Rolf Stahel
---------------------------------
Rolf Stahel
Chief Executive
Shire Pharmaceuticals Group plc
Dated: August 14, 2002 /s/ Angus C Russell
---------------------------------
Angus C. Russell
Group Finance Director
Shire Pharmaceuticals Group plc