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EX-32.1 - EXHIBIT 32.1 - Shire plcdp18726_ex3201.htm
 


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 June 30, 2010
 
Commission File Number: 0-29630
 
SHIRE PLC
(Exact name of registrant as specified in its charter)
 
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization)
98-0601486
(I.R.S. Employer Identification No.)
 
5 Riverwalk, Citywest Business Campus, Dublin
24, Republic of Ireland
 (Address of principal executive offices and zip code)
 
+353 1 429 7700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  [X]                        No  [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  [X]                        No  [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
Large accelerated filer  [X]      Accelerated filer  [  ]    Non-accelerated filer  [  ]      Smaller reporting company  [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  [  ]                        No  [X]
 
As at July 30, 2010 the number of outstanding ordinary shares of the Registrant was 562,144,763.
 
 
 

 
 
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, the Company’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, risks associated with: the inherent uncertainty of research, development, approval, reimbursement, manufacturing and commercialization of the Company’s Specialty Pharmaceutical and Human Genetic Therapies products, as well as the ability to secure new products for commercialization and/or development; government regulation of the Company’s products; the Company’s ability to manufacture its products in sufficient quantities to meet demand; the impact of competitive therapies on the Company’s products; the Company’s ability to register, maintain and enforce patents and other intellectual property rights relating to its products; the Company’s ability to obtain and maintain government and other third-party reimbursement for its products; and other risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
 
 
The following are trademarks either owned or licensed by Shire plc or its subsidiaries, which are the subject of trademark registrations in certain territories, or which are owned by third parties as indicated and referred to in this Form 10-Q:
 
ADDERALL XR® (mixed salts of a single entity amphetamine)
CALCICHEW® range (calcium carbonate with or without vitamin D3)
CARBATROL® (carbamazepine extended-release capsules)
DAYTRANA® (methylphenidate transdermal system)
ELAPRASE® (idursulfase)
EQUASYM® IR (methylphenidate hydrochloride)
EQUASYM® XL (methylphenidate hydrochloride)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
INTUNIV™ (guanfacine extended release)
JUVISTA®
LIALDA® (mesalamine)
MEZAVANT® (mesalazine)
PENTASA® (trademark of Ferring A/S Corp)
RAZADYNE® (trademark of Johnson & Johnson (“J&J”))
RAZADYNE® ER (trademark of J&J)
REMINYL® (galantamine hydrobromide) (United Kingdom ("UK”) and Republic of Ireland) (trademark of J&J, excluding UK and Republic of Ireland)
REMINYL XL™ (galantamine hydrobromide) (UK and Republic of Ireland) (trademark of J&J, excluding UK and Republic of Ireland)
REPLAGAL® (agalsidase alfa)
RESOLOR® (trademark of Movetis NV (Movetis))
SEASONIQUE® (trademark of Barr Laboratories, Inc. (“Barr”))
VENVANSE (lisdexamfetamine dimesylate)
VYVANSE® (lisdexamfetamine dimesylate)
VPRIV® (velaglucerase alfa)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GlaxoSmithKline (“GSK”))
3TC® (trademark of GSK)
 
 
2

 
 
SHIRE PLC
Form 10-Q for the three months to June 30, 2010

Table of contents

 
 
Page
     
PART I
FINANCIAL INFORMATION
 
     
ITEM 1.
FINANCIAL STATEMENTS
 
     
Unaudited Consolidated Balance Sheets at June 30, 2010 and December 31, 2009
4
     
Unaudited Consolidated Statements of Income for the three months and six months to June 30, 2010 and June 30, 2009
6
     
Unaudited Consolidated Statement of Changes in Equity for the six months to June 30, 2010
8
     
Unaudited Consolidated Statements of Comprehensive Income for the three months and six months to June 30, 2010 and June 30, 2009
9
     
Unaudited Consolidated Statements of Cash Flows for the six months to June 30, 2010 and June 30, 2009
10
     
Notes to the Unaudited Consolidated Financial Statements
12
     
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32
   
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
49
     
ITEM 4.
CONTROLS AND PROCEDURES
49
     
PART II
OTHER INFORMATION
49
     
ITEM 1.
LEGAL PROCEEDINGS
49
     
ITEM 1A.
RISK FACTORS
49
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
49
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
49
     
ITEM 4.
OTHER INFORMATION
49
     
ITEM 5.
EXHIBITS
50

 
3

 

PART 1. FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
SHIRE PLC
 
UNAUDITED CONSOLIDATED BALANCE SHEETS
 
 
 
   
June 30,
   
December 31,
 
 
 
 
   
2010
   
2009
 
 
 
Notes
      $’M       $’M  
ASSETS
 
 
                 
Current assets:
 
 
                 
Cash and cash equivalents
 
 
      682.5       498.9  
Restricted cash
 
 
      27.1       33.1  
Accounts receivable, net
    4       612.5       597.5  
Inventories
    5       232.7       189.7  
Deferred tax asset
            140.0       135.8  
Prepaid expenses and other current assets
    6       195.1       115.2  
Total current assets
            1,889.9       1,570.2  
 
                       
Non-current assets:
                       
Investments
    7       84.0       105.7  
Property, plant and equipment, net
    8       801.1       676.8  
Goodwill
            355.7       384.7  
Other intangible assets, net
    9       1,653.1       1,790.7  
Deferred tax asset
            76.4       79.0  
Other non-current assets
            8.7       10.4  
Total assets
            4,868.9       4,617.5  
                         
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Accounts payable and accrued expenses
    10       1,031.9       929.1  
Deferred tax liability
            2.9       2.9  
Other current liabilities
    11       41.1       88.0  
Total current liabilities
            1,075.9       1,020.0  
 
                       
Non-current liabilities
                       
Convertible bonds
            1,100.0       1,100.0  
Other long-term debt
    12       6.8       43.6  
Deferred tax liability
            341.8       294.3  
Other non-current liabilities
    13       226.0       247.1  
Total liabilities
            2,750.5       2,705.0  
Commitments and contingencies
    14                  
 
 
4

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)
 
 
   
 
 
 
   
 
 
 
   
 
 
June 30,
   
December 31,
 
 
   
 
 
2010
   
2009
 
 
 
Notes
    $’M       $’M  
 
   
 
               
Equity:
   
 
               
Common stock of 5p par value; 1,000 million shares authorized; and 562.1 million shares issued and outstanding (2009: 1,000 million shares authorized; and 561.5 million shares issued and outstanding)
   
 
    55.7       55.6  
Additional paid-in capital
   
 
    2,711.8       2,677.6  
Treasury stock: 15.4 million shares (2009: 17.8 million shares)
   
 
    (308.9 )     (347.4 )
Accumulated other comprehensive income
   
 
    45.8       149.1  
Accumulated deficit
   
 
    (386.0 )     (622.4 )
Total equity
   
 
    2,118.4       1,912.5  
Total liabilities and equity
   
 
    4,868.9       4,617.5  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
5

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

   
 
   
3 months to
   
3 months to
   
6 months to
   
6 months to
 
   
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
   
Notes
      $’M       $’M       $’M       $’M  
Revenues:
 
 
                                 
  Product sales
 
 
      764.3       558.4       1,482.4       1,314.3  
  Royalties
 
 
      82.7       66.9       178.0       117.5  
  Other revenues
 
 
      2.4       4.4       5.1       15.6  
Total revenues
 
 
      849.4       629.7       1,665.5       1,447.4  
Costs and expenses:
 
 
                                 
  Cost of product sales (1)
 
 
      119.1       96.4       221.0       180.0  
  Research and development
 
 
      147.0       158.7       278.0       344.6  
  Selling, general and administrative (1)
 
 
      354.4       334.7       714.3       653.3  
  Gain on sale of product rights
 
 
      (4.1 )     -       (4.1 )     -  
  Reorganization costs
    3       8.6       2.9       13.6       5.1  
  Integration and acquisition costs
            -       2.3       0.6       3.8  
Total operating expenses
            625.0       595.0       1,223.4       1,186.8  
                                         
Operating income
            224.4       34.7       442.1       260.6  
Interest income
            0.5       0.6       0.8       1.3  
Interest expense
            (8.3 )     (10.1 )     (17.3 )     (21.2 )
Other (expenses)/income, net
            (2.6 )     4.7       8.2       54.9  
Total other (expenses)/income, net
            (10.4 )     (4.8 )     (8.3 )     35.0  
Income from continuing operations before income taxes and equity in earnings of equity method investees
            214.0       29.9       433.8       295.6  
Income taxes
            (54.5 )     23.4       (108.1 )     (26.1 )
Equity in earnings of equity method investees, net of taxes
            1.0       0.5       0.5       0.4  
Income from continuing operations, net of taxes
            160.5       53.8       326.2       269.9  
                                         
Loss from discontinued operations (net of income tax expense of $nil in all periods)
            -       (9.8 )     -       (12.4 )
Net income
            160.5       44.0       326.2       257.5  
                                         
Add: Net loss attributable to the noncontrolling interest in subsidiaries
            -       0.1       -       0.2  
Net income attributable to Shire plc
            160.5       44.1       326.2       257.7  

(1)
Cost of product sales includes amortization of intangible assets relating to favorable manufacturing contracts of $0.4 million for three months to June 30, 2010 (2009: $0.4 million) and $0.9 million for the six months to June 30, 2010 (2009: $0.9 million). Selling, general and administrative costs includes amortization of intangible assets relating to intellectual property rights acquired of $33.8 million for the three months to June 30, 2010 (2009: $34.3 million) and $68.4 million for the six months to June 30, 2010 (2009: $66.8 million).
 
 
6

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (continued)


 
 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
Notes
 
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Earning per ordinary share - basic
 
 
 
   
 
   
 
   
 
 
 
 
 
 
   
 
   
 
   
 
 
Earnings from continuing operations attributable to Shire plc shareholders
 
    29.4 c     10.0 c     59.8 c     50.0 c
 
 
                               
Loss from discontinued operations attributable to Shire plc shareholders
 
    -       (1.8c )     -       (2.3c )
 
 
                               
Earnings per ordinary share attributable to Shire plc shareholders - basic
 
    29.4 c     8.2 c     59.8 c     47.7 c
 
 
                               
Earnings per ordinary share - diluted
 
                               
 
 
                               
Earnings from continuing operations attributable to Shire plc shareholders
 
    28.6 c     9.9 c     58.2 c     49.6 c
 
 
                               
Loss from discontinued operations attributable to Shire plc shareholders
 
    -       (1.8c )     -       (2.3c )
Earnings per ordinary share attributable to Shire plc shareholders - diluted
 
    28.6 c     8.1 c     58.2 c     47.3 c
 
 
                               
Weighted average number of shares (millions):
 
                               
Basic
17
    546.6       539.9       545.7       539.7  
Diluted
17
    590.0       543.4       589.1       545.0  


 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
 
    $’M       $’M       $’M       $’M  
Amounts attributable to Shire plc
                               
 
                               
Income from continuing operations, net of taxes
    160.5       53.9       326.2       270.1  
Loss from discontinued operations, net of taxes
    -       (9.8 )     -       (12.4 )
Net income attributable to Shire plc
    160.5       44.1       326.2       257.7  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
7

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

 
 
Shire plc shareholders equity
   
 
 
 
 
Common
stock
$'M
   
Common
stock
Number
of shares
M's
   
Additional
paid-in
capital
$’M
   
Treasury
stock
$'M
   
Accumulated
other
comprehensive
income
$'M
   
Accumulated
deficit
$'M
   
Total
equity
$'M
 
As at January 1, 2010
    55.6       561.5       2,677.6       (347.4 )     149.1       (622.4 )     1,912.5  
Net income
    -       -       -       -       -       326.2       326.2  
Foreign currency translation
    -       -       -       -       (82.2 )     -       (82.2 )
Options exercised
    0.1       0.6       1.5       -       -       -       1.6  
Share-based compensation
    -       -       28.3       -       -       -       28.3  
 
                                                       
Excess tax benefit associated with exercise of stock options
    -       -       4.4       -       -       -       4.4  
                                                         
Shares purchased by the Employee Share Ownership Trust ("ESOT")
    -       -       -       (1.7 )     -       -       (1.7 )
 
                                                       
Shares released by ESOT to satisfy exercise of stock options
    -       -       -       40.2       -       (40.0 )     0.2  
 
                                                       
Unrealized holding loss on available-for-sale securities, net of taxes
    -       -       -       -       (22.6 )     -       (22.6 )
                                                         
Other than temporary impairment of available-for-sale securities, net of taxes
    -       -       -       -       1.5       -       1.5  
Dividends
    -       -       -       -       -       (49.8 )     (49.8 )
As at June 30, 2010
    55.7       562.1       2,711.8       (308.9 )     45.8       (386.0 )     2,118.4  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
Dividends per share
 
During the six months to June 30, 2010 Shire plc declared and paid dividends of 9.250 US cents per ordinary share (equivalent to 27.750 US cents per American Depositary Share) totalling $49.8 million.
 
 
8

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2010
   
2009
   
2010
   
2009
 
 
 
$'M
   
$'M
   
$'M
   
$'M
 
 
 
 
   
 
   
 
   
 
 
Net income
    160.5       44.0       326.2       257.5  
Other comprehensive income:
                               
Foreign currency translation adjustments
    (47.1 )     (2.4 )     (82.2 )     11.4  
Unrealized holding (loss)/gain on available-for-sale securities (net of taxes of $1.6 million, $nil, $2.6 million and $nil)
    (15.9 )     10.7       (22.6 )     11.3  
Other than temporary impairment of available-for-sale securities (net of taxes of $nil, $nil, $nil and $nil)
    1.5       -       1.5       -  
Comprehensive income
    99.0       52.3       222.9       280.2  
Add: net loss attributable to the noncontrolling interest in subsidiaries
    -       0.1       -       0.2  
Comprehensive income attributable to Shire plc
    99.0       52.4       222.9       280.4  

The components of accumulated other comprehensive income as at June 30, 2010 and December 31, 2009 are as follows:
 
 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Foreign currency translation adjustments
    54.5       136.7  
Unrealized holding (loss)/gain on available-for-sale securities, net of taxes
    (8.7 )     12.4  
Accumulated other comprehensive income
    45.8       149.1  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
9

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
      $’M       $’M  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
    326.2       257.5  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Loss from discontinued operations
    -       12.4  
Depreciation and amortization
    129.1       117.7  
Share based compensation
    26.7       33.2  
Gain on sale of non-current investments
    (11.1 )     (55.2 )
Gain on sale of product rights
    (4.1 )     -  
Other
    11.0       6.3  
Movement in deferred taxes
    58.8       (45.7 )
Equity in earnings of equity method investees
    (0.5 )     (0.4 )
                 
Changes in operating assets and liabilities:
               
Increase in accounts receivable
    (43.9 )     (42.9 )
Increase in sales deduction accrual
    154.3       117.5  
Increase in inventory
    (50.1 )     (12.8 )
Increase in prepayments and other current assets
    (82.5 )     (33.8 )
(Increase)/decrease in other assets
    (0.8 )     4.4  
Decrease in accounts and notes payable and other liabilities
    (43.2 )     (101.2 )
Returns on investment from joint venture
    -       4.9  
Cash flows used in discontinued operations
    -       (5.9 )
Net cash provided by operating activities (A)
    469.9       256.0  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Movements in restricted cash
    6.0       (6.6 )
Purchases of subsidiary undertakings and businesses, net of cash acquired
    -       (75.5 )
Purchases of property, plant and equipment
    (208.1 )     (101.8 )
Purchases of intangible assets
    (2.7 )     (6.0 )
Proceeds from disposal of non-current investments and property plant and equipment
    2.1       19.6  
Proceeds from disposal of subsidiary undertakings
    -       6.7  
Returns from equity investments
    -       0.2  
Net cash used in investing activities (B)
    (202.7 )     (163.4 )
 
 
10

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
 
   
2010
   
2009
 
      $’M       $’M  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Payment under building financing obligation
    (1.3 )     (3.0 )
Extinguishment of building finance obligation
    (43.1 )     -  
Tax benefit of stock based compensation
    4.4       -  
Proceeds from exercise of options
    1.8       1.0  
Payment of dividend
    (49.8 )     (43.0 )
Payments to acquire shares by ESOT
    (1.7 )     (1.0 )
Net cash used in financing activities(C)
    (89.7 )     (46.0 )
Effect of foreign exchange rate changes on cash
               
and cash equivalents (D)
    6.1       (1.5 )
Net increase in cash and cash equivalents (A+B+C+D)
    183.6       45.1  
Cash and cash equivalents at beginning of period
    498.9       218.2  
Cash and cash equivalents at end of period
    682.5       263.3  

Supplemental information associated with continuing
 
 
   
 
 
operations:
 
 
   
 
 
 
 
 
   
 
 
 
 
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
 
               
Interest paid
    (13.0 )     (17.6 )
Income taxes paid
    (205.0 )     (119.2 )
 
               
Non cash investing and financing activities:
               
Equity in Vertex Pharmaceuticals, Inc. (“Vertex”) received as part consideration for disposal of
non-current investment
    9.1       50.8  
Building financing obligation
    -       7.1  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
11

 
 
SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.    Summary of Significant Accounting Policies

(a)   Basis of preparation
 
These interim financial statements of Shire plc and its subsidiaries (collectively “Shire” or the “Company”) and other financial information included in this Form 10-Q, are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and US Securities and Exchange Commission (“SEC”) regulations for interim reporting.
 
The balance sheet as of December 31, 2009 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 consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year to December 31, 2009.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period. Interim results are not necessarily indicative of results to be expected for the full year.
 
(b)   Use of estimates in interim financial statements

The preparation of interim financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, the valuation of equity investments, sales deductions, income taxes and provisions for litigation and legal proceedings.

(c)   New accounting pronouncements

Adopted during the period

Amendments to the Accounting and Disclosure Requirements for the Consolidation of Variable Interest Entities

On January 1, 2010 the Company adopted new guidance issued by the Financial Accounting Standard Board (“FASB”) on the consolidation of variable interest entities. This guidance changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to such involvement. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.

The effective date of these amendments has been deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies.

Accounting for Transfers of Financial Assets

On January 1, 2010 the Company adopted new guidance issued by the FASB on the accounting for transfers of financial assets. This guidance requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
 
 
12

 
 

Improving Disclosures about Fair Value Measurements
On January 1, 2010 the Company adopted new guidance issued by the FASB requiring new disclosures for amounts transferred in and out of Levels 1 and 2 and for activity in Level 3 of the hierarchy for fair value measurements.  The guidance also clarifies existing fair value measurement disclosures in respect of the level of disaggregation and disclosures about inputs and valuation techniques.  This guidance is effective for Shire from January 1, 2010, except for the additional disclosures about activity in Level 3 of the hierarchy for fair value measurements, which is effective from January 1, 2011 and for interim periods within that year.  The adoption of the guidance did not impact the Company’s disclosure on fair value measurement.

To be adopted in future periods

Revenue Recognition in Multiple Deliverable Revenue Arrangements

In September 2009, the FASB issued guidance on revenue recognition in multiple deliverable revenue arrangements. This amends the existing guidance on allocating consideration received between the elements in a multiple-deliverable arrangement and establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE or third party evidence is available. It replaces the term fair value in the revenue allocation with selling price to clarify that the allocation of revenue is based on entity specific assumptions rather then the assumptions of a market place participant. The guidance eliminates the residual method of allocation and requires that arrangement consideration be allocated using the relative selling price method. The guidance also significantly expands the disclosures related to a vendor’s multiple-deliverable revenue arrangements. It will be effective prospectively for revenue arrangements entered into or materially modified for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact of adopting this guidance.

Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades

In April 2010, the FASB issued guidance on the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity security trades.  This guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.  The guidance will be effective for fiscal years beginning on or after December 15, 2010. The Company does not currently expect the guidance to impact its consolidated financial position, results of operations or cash flows.

Milestone Method of Revenue Recognition

In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This guidance clarifies that: consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive; milestones should be considered substantive in their entirety and may not be bifurcated; an arrangement may contain both substantive and non substantive milestones; and each milestone should be evaluated individually to determine if it is substantive. The guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
 
2.    Business combinations

EQUASYM IR and XL
 
On March 31, 2009 the Company acquired the worldwide rights (excluding the US, Canada and Barbados) to EQUASYM IR and XL for the treatment of attention deficit and hyperactivity disorder (“ADHD”) from UCB Pharma Limited (“UCB”) for cash consideration of $72.8 million. Included within the recognized purchase price for the acquisition is further consideration of $18.2 million, of which $12.0 million was paid to UCB in the six months to June 30, 2010 and the remaining $6.2 million may become payable in 2011 if certain sales targets are met. This acquisition broadened the scope of Shire’s ADHD portfolio and facilitated immediate access to the European ADHD market as well as providing Shire the opportunity to enter additional markets around the world.
 
 
13

 
 

The acquisition of EQUASYM IR and XL was accounted for as a business combination. The purchase price was allocated to the currently marketed products acquired ($73.0 million), in process research and development (“IPR&D”) ($5.5 million), other liabilities ($0.7 million) and goodwill ($13.2 million).

3.    Reorganization costs

Establishment of Swiss Commercial Hub

In March 2010 the Company initiated plans to relocate certain commercial and research and development (“R&D”) operations to Switzerland to support its Human Genetic Therapies ("HGT") and Specialty Pharmaceuticals ("SP") businesses outside the US. In the six months to June 30, 2010, the Company incurred reorganization costs totaling $6.9 million relating to employee involuntary termination benefits and other re-organization costs. The transition to the Swiss commercial hub will be effected over 2010 and 2011.
 
Owings Mills

In March 2009 the Company initiated plans to phase out operations and close its SP manufacturing facility at Owings Mills, Maryland. Between 2009 and 2011, all products manufactured by Shire at this site will transition to DSM Pharmaceutical Products, and operations and employee numbers at the site will wind down over this period. During the six months to June 30, 2010 the Company incurred reorganization costs of $6.7 million which relate to employee involuntary termination benefits and other costs. The total reorganization costs incurred since March 2009 are $19.4 million.

As a result of the decision to transfer manufacturing from the Owings Mills site the Company revised the useful life of property, plant and equipment in the facility and in the six months to June 30, 2010 incurred accelerated depreciation of $12.1 million, which has been charged to Cost of product sales. Consequently, the Company estimates an accelerated depreciation charge, over the level which would have been charged absent the wind down of operations, of $11.5 million in the second half of 2010. The reorganization costs and accelerated depreciation have been recorded within the SP reportable segment.

Jerini non-core operations

In the second quarter of 2009 the operations of Jerini Ophthalmic, Inc, and certain other non-core pre-clinical operations acquired through the acquisition of Jerini AG (“Jerini”) were closed down, and the Company recorded a closure costs liability of $9.1 million, relating to employee involuntary termination benefits, contract termination costs and other closure costs. The Company has paid all remaining closure costs during the six months to June 30, 2010 and no liability for these closure costs remains at June 30, 2010.

The liability for reorganization costs arising on the establishment of the Swiss commercial hub, transfer of manufacturing from Owings Mills and the closure of Jerini non-core operations at June 30, 2010 is as follows:
 
 
14

 


 
 
Opening liability
   
Amount
   
 
   
Closing
 
 
 
at January 1,
   
charged to re-
   
 
   
liability at
 
 
 
2010
   
organization
   
Paid/Utilized
   
June 30, 2010
 
 
 
$'M
   
$'M
   
$'M
   
$'M
 
 
 
 
   
 
   
 
   
 
 
Involuntary termination benefits
    4.1       6.2       (2.4 )     7.9  
Contract termination costs
    2.8       -       (2.8 )     -  
Other termination costs
    -       7.4       (2.6 )     4.8  
 
    6.9       13.6       (7.8 )     12.7  

At June 30, 2010 the closing reorganization cost liability was recorded within accounts payable and accrued expenses ($8.7 million) and other non-current liabilities ($4.0 million).

4.    Accounts receivable, net

Accounts receivable at June 30, 2010 of $612.5 million (December 31, 2009: $597.5 million), are stated net of a provision for discounts and doubtful accounts of $22.8 million (December 31, 2009: $20.8 million).

Provision for discounts and doubtful accounts:

 
 
2010
   
2009
 
 
    $’M       $’M  
As at January 1,
    20.8       20.2  
Provision charged to operations
    85.2       54.1  
Provision utilization
    (83.2 )     (61.4 )
As at June 30,
    22.8       12.9  

At June 30, 2010 accounts receivable included $80.3 million (December 31, 2009: $92.4 million) of receivables related to royalty income.

5.    Inventories

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

 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Finished goods
    66.6       50.9  
Work-in-progress
    118.4       102.1  
Raw materials
    47.7       36.7  
 
    232.7       189.7  
 
 
15

 
 
At June 30, 2010 inventories included $nil (December 31, 2009: $18.8 million) for products which have not yet received regulatory approval. Pre-approval inventories at December 31, 2009 related to VPRIV, which was granted marketing approval by the US Food and Drug Administration (“FDA”) on February 26, 2010.

6.    Prepaid expenses and other current assets

 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Prepaid expenses
    37.8       44.9  
Income tax receivable
    112.1       -  
Value added taxes receivable
    15.4       37.3  
Other current assets
    29.8       33.0  
 
    195.1       115.2  

The income tax receivable of $112.1 million (December 31, 2009: $nil) includes taxes on inter-company sales (which are recorded as prepaid assets until the related inventory has been sold to a third party customer) and interim tax payments on account made during the six months to June 30, 2010.

7.    Investments

On March 12, 2009 the Company completed the disposal of its investment in Virochem Pharma Inc. (“Virochem”) to Vertex in a cash and stock transaction. The disposal was part of a transaction entered into by all the shareholders of Virochem with Vertex. The carrying amount of the Company’s investment in Virochem on March 12, 2009 was $14.8 million. In 2009 Shire received consideration of $19.2 million in cash and 2 million Vertex shares (valued at $50.8 million) from the disposal, recognizing a gain of $55.2 million in Other (expense)/income, net in the six months to June 30, 2009.

In the six months to June 30, 2010 the Company received further consideration of $2.0 million in cash and 0.2 million Vertex shares (valued at $9.1 million) which had been held in escrow until certain substantive conditions expired in March 2010. The Company recognized an additional gain on disposal of $11.1 million in Other (expense)/income, net in the six months to June 30, 2010.

The Vertex stock received has been accounted for as an available-for-sale investment.

8.    Property, plant and equipment, net
 

 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Land and buildings
    519.2       398.7  
Office furniture, fittings and equipment
    289.9       280.5  
Warehouse, laboratory and manufacturing equipment
    111.7       114.5  
Assets under construction
    242.5       193.2  
 
    1,163.3       986.9  
Less: Accumulated depreciation
    (362.2 )     (310.1 )
 
    801.1       676.8  
 
 
16

 
 
Depreciation expense for the six months to June 30, 2010 was $63.5 million (six months to June 30, 2009: $52.7 million). The expense included impairment losses of $5.0 million (six months to June 30, 2009: $2.6 million) in the six months to June 30, 2010.
 
Purchase of the Lexington Technology Park campus in Lexington, Massachusetts
 
On June 30, 2010 Shire completed the purchase of certain properties on the Lexington Technology Park campus in Lexington, Massachusetts, some of which the Company had previously leased, for a cash purchase price of $165.0 million paid during the six months to June 30, 2010. The purchase price of $165.0 million has been allocated to the acquired properties using a relative fair value approach: $121.9 million has been recorded as Property, plant and equipment, being land ($72.1 million) and buildings ($49.8 million). The remaining $43.1 million relates to the extinguishment of existing building finance obligations, and has been applied against the relevant financing obligations, (see note 12).
 
9.    Other intangible assets, net

 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Intellectual property rights acquired
               
Currently marketed products
    2,272.6       2,351.6  
IPR&D
    6.1       6.1  
Favorable manufacturing contracts
    8.7       8.7  
 
    2,287.4       2,366.4  
 
               
Less: Accumulated amortization
    (634.3 )     (575.7 )
 
    1,653.1       1,790.7  

At June 30, 2010 the net book value of intangible assets allocated to the SP segment was $1,160.5 million (December 31, 2009: $1,238.0 million) and in the HGT segment was $492.6 million (December 31, 2009: $552.7 million).

The change in the net book value of other intangible assets for the six months to June 30, 2010 is shown in the table below:

 
 
Other intangible
 
 
 
assets
 
 
    $’M  
 
       
As at January 1, 2010
    1,790.7  
Acquisitions
    2.7  
Amortization charged
    (69.3 )
Foreign currency translation
    (71.0 )
As at June 30, 2010
    1,653.1  
 
The weighted average amortization period for acquired currently marketed products is 10 years.
 
The Company reviews its intangible assets for impairment whenever events or circumstances suggest that they may not be recoverable. In the six months to June 30, 2010, the Company reviewed the recoverability of its DAYTRANA intangible asset, (carrying value $92 million), and based on estimates and intentions at June 30, 2010 the Company determined that its DAYTRANA intangible asset remained recoverable. However, it is reasonably possible that changes to circumstances, estimates or intentions existing at June 30, 2010 could result in impairment of the DAYTRANA intangible asset in future periods.
 
 
17

 
 
In August 2010 the Company’s Board of Directors approved the divestment of DAYTRANA.  Consequently in the third quarter of 2010 the held for sale criteria have been met, and the Company will re-measure the DAYTRANA intangible asset to the lower of its carrying amount or fair value less costs to sell. The Company currently anticipates that the divestment, to be effected through an asset sale, will be completed in the fourth quarter of 2010.
 
Management estimates that the annual amortization charge in respect of intangible assets held at June 30, 2010 will be approximately $140 million for each of the five years to June 30, 2015. Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of the acquired IPR&D projects, foreign exchange movements and the technological advancement and regulatory approval of competitor products.

10.   Accounts payable and accrued expenses
 
 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Trade accounts payable and accrued purchases
    164.7       170.6  
Accrued rebates – Medicaid
    334.2       188.2  
Accrued rebates – Managed care
    156.7       153.4  
Sales return reserve
    67.7       62.7  
Accrued bonuses
    51.6       66.8  
Accrued employee compensation and benefits payable
    49.3       42.6  
Research and development accruals
    49.7       53.1  
Marketing accruals
    27.3       31.5  
Deferred revenue
    16.3       52.2  
Other accrued expenses
    114.4       108.0  
 
    1,031.9       929.1  

Accrued Medicaid rebates have increased by $146.0 million to $334.2 million at June 30, 2010 (December 31, 2009: $188.2 million) due to higher Medicaid rebates on higher product sales in 2010, and timing of the payment of first quarter Medicaid rebates.
 
Deferred revenue has reduced by $35.9 million to $16.3 million (December 31, 2009: $52.2 million) due to the recognition into revenue in the six months to June 30, 2010 of INTUNIV launch stocking shipments which had initially been deferred.
 
11.   Other current liabilities

 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Income taxes payable
    -       46.7  
Value added taxes
    11.9       10.3  
Other accrued liabilities
    29.2       31.0  
 
    41.1       88.0  

12.   Other long-term debt

During 2007 and 2009 Shire entered into certain multi-year leases for its HGT business unit at North Reading and Lexington, Massachusetts. For some of these leases Shire was considered the in substance owner of these properties over their construction period and as a result Shire recorded assets (being the fair value of the building element at inception of the relevant lease) within Property, plant and equipment and the corresponding building financing obligations were recorded within other long term debt. The land element of these leases was accounted for as an operating lease.
 
 
18

 
 
On June 30, 2010, as outlined in note 8, Shire completed the purchase of certain properties on the Lexington Technology Park campus, including properties held under building finance obligations. Accordingly Shire applied $43.1 million of the purchase price for the Lexington campus to extinguish the existing building finance obligations, recognizing a loss of $3.6 million within Other (expense)/income, net in the six months to June 30, 2010.
 
13.   Other non-current liabilities
 
 
 
June 30,
   
December 31,
 
 
 
2010
   
2009
 
 
    $’M       $’M  
Income taxes payable
    166.8       170.4  
Deferred revenue
    15.7       20.0  
Deferred rent
    13.7       14.5  
Insurance provisions
    19.7       18.3  
Other accrued liabilities
    10.1       23.9  
 
    226.0       247.1  

14.   Commitments and contingencies

(a)    Leases

Future minimum lease payments under operating leases at June 30, 2010 are presented below:
 
 
 
Operating
 
 
 
leases
 
 
    $’M  
2010 
    16.6  
2011 
    30.1  
2012 
    16.8  
2013 
    14.4  
2014 
    13.9  
2015 
    11.7  
Thereafter
    17.9  
 
    121.4  

The Company leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2019. Lease and rental expense amounted to $16.6 million for the six months to June 30, 2010 (six months to June 30, 2009: $16.4 million), which is predominately included in Selling, general and administrative expenses in the consolidated statements of income.

(b)   Letters of credit and guarantees

At June 30, 2010 the Company had irrevocable standby letters of credit and guarantees with various banks totaling $10.4 million, providing security for the Company’s performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations and supply commitments. The Company has restricted cash of $9.2 million, as required by these letters of credit.

(c)   Collaborative arrangements

Details of significant collaborative arrangements are included below:
 
 
19

 
 
In-licensing arrangements

(i)    Research Collaboration with Santaris Pharma A/S (“Santaris”) on Locked Nucleic Acid (“LNA”) Drug Platform

On August 24, 2009 Shire announced that it had entered into a research collaboration with Santaris, to develop its proprietary LNA technology in a range of rare diseases. LNA technology has the benefit of shortened target validation and proof of concept, potentially increasing the speed and lowering the cost of development. As part of the joint research project Santaris will design, develop and deliver pre-clinical LNA oligonucleotides for Shire-selected orphan disease targets, and Shire will have the exclusive right to further develop and commercialize these candidate compounds on a worldwide basis.
 
Shire has remaining obligations to pay Santaris $13.5 million subject to certain success criteria, and development and sales milestones up to a maximum of $72 million for each indication. Shire will also pay single or double digit tiered royalties on net sales of the product.
 
Shire and Santaris have formed a joint research committee to monitor R&D activities through preclinical lead candidate selection at which point all development and commercialization costs will be the responsibility of Shire.
 
(ii)    JUVISTA

On June 19, 2007 Shire signed an agreement with Renovo Limited (“Renovo”) to develop and commercialize JUVISTA, Renovo’s novel drug candidate being investigated for the reduction of scarring in connection with surgery, outside of the European Union (“EU”). On March 1, 2010 the license agreement was revised.
 
In the revised license agreement, the rights to sell JUVISTA in all territories outside the US, Mexico and Canada were returned to Renovo. Milestone and royalty obligations remain unchanged from the original agreement except that Shire will pay Renovo an additional $5 million milestone if Shire elects to commence a clinical trial following Shire’s review of the clinical trial report from Renovo’s first EU Phase 3 clinical trial. Shire has remaining obligations to pay Renovo $25 million on the filing of JUVISTA with the FDA; up to $150 million on FDA approval; royalties on net sales of JUVISTA; and up to $525 million on the achievement of very significant sales targets.   
 
Under the revised agreement, each party is responsible for its own development costs but future development costs can be shared by agreement. Each party has free-of-charge access to the other party’s data to support regulatory filings in their respective territories. In the six months to June 30, 2010 Shire made a payment to Renovo of $3.2 million (2009: $0.5 million), being the final payment under the terms of the original license agreement.
 
Out-licensing arrangements

Shire has entered into various collaborative arrangements under which the Company has out-licensed certain product or intellectual property rights for consideration such as up-front payments, development milestones, sales milestones and/or royalty payments. In certain of these arrangements Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success. In the six months to June 30, 2010 Shire received milestone payments totaling $nil (2009: $4.0 million). In the six months to June 30, 2010 Shire recognized milestone income of $4.3 million (2009: $3.1 million) within Other revenues and $22.8 million (2009: $12.3 million) within Product sales for shipment of product to the relevant licensee.

Co-promotion agreements - VYVANSE

On March 31, 2009 Shire announced a three-year co-promotion agreement with GSK for VYVANSE in the US with the aim of improving recognition and treatment of ADHD in adults. The agreement is based on profit sharing above an agreed upon baseline and these profit share payments will be included within Selling, general and administrative costs.

(d)   Commitments

(i)    Clinical testing

At June 30, 2010 the Company had committed to pay approximately $166.6 million (December 31, 2009: $183.9 million) to contract vendors for administering and executing clinical trials. The Company expects to pay $104.1 million of these commitments in the remainder of 2010 (December 31, 2009: $104.1 million in 2010), however the timing of these payments is dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities.
 
 
20

 
 

(ii)    Contract manufacturing

At June 30, 2010 the Company had committed to pay approximately $133.5 million (December 31, 2009: $152.3 million) in respect of contract manufacturing. The Company expects to pay all of these commitments in the remainder of 2010 (December 31, 2009: $77.3 million in 2010).

(iii)   Other purchasing commitments

At June 30, 2010 the Company had committed to pay approximately $37.8 million (December 31, 2009: $22.9 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing and IT outsourcing. The Company expects to pay $31.0 million of these commitments in the remainder of 2010 (December 31, 2009: $21.0 million in 2010).

(iv)    Investment commitments

At June 30, 2010 the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $5.5 million (December 31, 2009: $5.4 million) which may all be payable in the remainder of 2010, depending on the timing of capital calls.

(v)    Capital commitments

At June 30, 2010 the Company had committed to spend $64.0 million (December 31, 2009: $41.4 million) on capital projects. This includes commitments for the expansion and modification of its offices and manufacturing facilities at the HGT campus in Lexington, Massachusetts.

(e)    Legal and other proceedings

General

The Company recognizes loss contingency provisions 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 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. At June 30, 2010 provisions for litigation losses, insurance claims and other disputes totaled $20.7 million (December 31, 2009: $20.1 million).
 
Specific

VYVANSE

On February 24, 2009 Actavis Elizabeth LLC brought a lawsuit in the US District Court for the District of Columbia (the “District Court”) against the FDA seeking to overturn the FDA's decision granting new chemical entity exclusivity to VYVANSE. Shire has intervened in the lawsuit. On October 23, 2009, following a period for public comment, the FDA issued a letter setting forth its analysis of the legal and regulatory issues and reaffirming its decision that VYVANSE is entitled to new chemical entity exclusivity.  A hearing on cross-motions for summary judgment was held on February 17, 2010. On March 4, 2010 the District Court upheld the FDA’s decision that VYVANSE is entitled to 5-year market exclusivity and confirmed that the FDA’s actions complied with federal administrative law standards as a reasonable exercise of the agency’s scientific expertise.  Actavis Elizabeth LLC has appealed the District Court’s ruling to the US Court of Appeals for the District of Columbia Circuit.  A hearing is scheduled for September 20, 2010.
 
 
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FOSRENOL

In February 2009 Shire was notified that three separate Abbreviated New Drug Applications (“ANDAs”) were submitted under the Hatch-Waxman Act seeking permission to market generic versions of 500mg, 750mg and 1,000mg strengths of FOSRENOL. The notices were received from Barr; Mylan, Inc., Mylan Pharmaceuticals, Inc. and Matrix Laboratories, Inc. (collectively “Mylan”); and Natco Pharma Limited (“Natco”). Within the requisite 45 day period, Shire filed lawsuits in the US District Court of the Southern District of New York against each of Barr, Mylan and Natco for infringement of certain of Shire’s FOSRENOL patents. The filing of the lawsuits triggered a stay of approval of these ANDAs for up to 30 months. The lawsuits have been consolidated into a single case. A Markman hearing was held on June 17, 2010.  No trial date has been set.
 
INTUNIV

In March and April, 2010 Shire was notified that three separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of 1mg, 2mg, 3mg, and 4mg strengths of INTUNIV. The notices were from Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries, Ltd (collectively “Teva”); Actavis Elizabeth LLC and Actavis Inc. (collectively “Actavis”); and Anchen Pharmaceuticals, Inc. and Anchen, Inc. (collectively "Anchen"). Within the requisite 45 days period, Shire filed lawsuits in the US District Court of the District of Delaware against each of Teva, Actavis and Anchen for infringement of certain of Shire’s INTUNIV patents. The filing of the lawsuits triggered a stay of approval of these ANDAs for up to 30 months. No trial date has been set.

REPLAGAL

Mt. Sinai School of Medicine of New York University (“Mt. Sinai”) initiated lawsuits against Shire in Sweden on April 14, 2010 and in Germany on April 20, 2010 alleging that Shire’s enzyme replacement therapy for Fabry disease, REPLAGAL, infringes Mt. Sinai’s European Patent No. 1 942 189, granted April 14, 2010. Mt. Sinai is seeking an injunction against the use of REPLAGAL in these jurisdictions until expiration of the patent on November 30, 2013. Shire will defend its right to commercialize REPLAGAL in these countries and will vigorously oppose the validity of this patent.

LIALDA/MEZAVANT

In May 2010 Shire was notified that an ANDA was submitted under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. The notice was received from Zydus Pharmaceuticals USA, Inc. (“Zydus”). Within the requisite 45 days period, Shire filed a lawsuit in the US District Court of the District of Delaware against Zydus and Cadila Healthcare Limited, doing business as Zydus Cadila. The filing of the lawsuits triggered a stay of approval of the ANDA for up to 30 months. No trial date has been set.
 
Subpoena related to ADDERALL XR, DAYTRANA and VYVANSE

On September 23, 2009 the Company received a subpoena from the US Department of Health and Human Services Office of Inspector General in coordination with the US Attorney for the Eastern District of Pennsylvania seeking production of documents related to the sales and marketing of ADDERALL XR, DAYTRANA and VYVANSE. The Company is cooperating with this investigation.

15.   Derivative instruments

Treasury policies and organization

The Company’s principal treasury operations are coordinated by its corporate treasury function. All treasury operations are conducted within a framework of policies and procedures approved annually by the Board of Directors. As a matter of policy, the Company does not undertake speculative transactions that would increase its currency or interest rate exposure.

Interest rate risk

The Company is exposed to interest rate risk on restricted cash, cash and cash equivalents and on foreign exchange contracts on which interest is at floating rates. This exposure is primarily to US dollar, Euro and Canadian dollar interest rates. As the Company maintains all of its cash and liquid investments and foreign exchange contracts on a short term basis for liquidity purposes, this risk is not actively managed. In the six months to June 30, 2010 the average interest rate received on cash and liquid investments was less than 1% per annum. The largest proportion of these cash and liquid investments was in money market and liquidity funds.
 
 
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The Company incurs interest at a fixed rate of 2.75% on Shire’s $1,100 million in principal amount convertible bonds due 2014. The building financing obligation of $7.3 million is also subject to a fixed interest rate over the lease term on the amount outstanding.

During the six months to June 30, 2010 the Company did not enter into any derivative instruments to manage interest rate exposure. The Company continues to review its interest rate risk and the policies in place to manage the risk.

Market risk of investments

As at June 30, 2010 the Company has $84.0 million of investments comprising available-for-sale investments in publicly quoted companies ($70.6 million), equity method investments ($9.5 million) and cost method investments in private companies ($3.9 million). The investments in publicly quoted companies and equity method investments, for certain investment funds which contain a mixed portfolio of public and private investments, are exposed to market risk. No financial instruments or derivatives have been employed to hedge this risk.

Credit risk

Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, trade accounts receivable (from product sales and royalty receipts) and derivative contracts. Cash is invested in short-term money market instruments, including money market and liquidity funds and bank term deposits. The money market and liquidity funds in which Shire invests are all triple A rated by both Standard & Poor’s and by Moody’s credit rating agencies.

The Company is exposed to the credit risk of the counterparties with which it enters into derivative contracts. The Company aims to limit this exposure through a system of internal credit limits which require counterparties to have a long term credit rating of A / A2 or better from the major rating agencies. The internal credit limits are approved by the Board of Directors and exposure against these limits is monitored by the corporate treasury function. The counterparties to the derivative contracts are major international financial institutions.

The Company has entered into many agreements with third parties for the provision of services to enable it to operate its business. If the third party can no longer provide the service on the agreed basis, the Company may not be able to continue the development or commercialization of its products as planned or on a commercial basis. Additionally, it may not be able to establish or maintain good relationships with suppliers.

Foreign exchange risk

The Company trades in numerous countries and as a consequence has transactional and translational foreign exchange exposure.

Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. The main trading currencies of the Company are the US dollar, the Canadian dollar, Pounds Sterling and the Euro. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency.

Where significant exposures remain, the Company uses foreign exchange contracts (being spot, forward and swap contracts) to manage the exposure in respect of balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary. These assets and liabilities relate predominantly to intercompany financing and accruals for royalty receipts. The Company utilizes these derivative instruments to manage currency risk on balance sheet foreign exchange exposures, but the foreign exchange contracts have not been designated as hedging instruments.

Translational foreign exchange exposure arises on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.

At June 30, 2010 the Company had 19 swap and forward foreign exchange contracts outstanding to manage currency risk. The swaps and forward contracts mature within 90 days. The Company did not have credit risk related contingent features or collateral linked to the derivatives. These foreign exchange contracts were classified in the consolidated balance sheet as follows:
 
 
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Fair value
   
Fair value
 
 
 
 
June 30,
   
December 31,
 
 
 
 
2010
   
2009
 
 
 
    $’M       $’M  
Assets
Prepaid expenses and other current assets
    2.3       5.4  
Liabilities
Other current liabilities
    5.8       1.2  

Net gains and losses (both realized and unrealized) arising on foreign exchange contracts have been classified in the consolidated statements of income as follows:

 
Location of net gain/(loss)
recognized in income
 
Amount of net gain/(loss)
recognized in income
 
Six months to
 
 
June 30,
   
June 30,
 
 
 
 
2010
   
2009
 
 
 
    $’M       $’M  
Foreign exchange contracts
Other (expense)/income, net
    38.5       (14.2 )

These net foreign exchange gains/(losses) are offset within Other (expense)/income, net by net foreign exchange (losses)/gains arising on the balance sheet items that these contracts were put in place to manage.

16.   Fair value measurement

Assets and liabilities that are measured at fair value on a recurring basis

The following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
 
   
Carrying
   
Fair value
 
   
value
   
 
   
 
   
 
   
 
 
   
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
   
$'M
   
$'M
   
$'M
   
$'M
   
$'M
 
Financial assets:
 
 
   
 
   
 
   
 
   
 
 
Available-for-sale securities(1)
    70.6       70.6       70.6       -       -  
Foreign exchange contracts
    2.3       2.3       -       2.3       -  
                                         
Financial liabilities:
                                       
Foreign exchange contracts
    5.8       5.8       -       5.8       -  
(1)     Available-for-sale securities are included within Investments in the consolidated balance sheet.

Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
 
 
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The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:

 
·
Available-for-sale securities – the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
 
·
Foreign exchange contracts – the fair values of the swap and forward foreign exchange contracts have been determined using an income approach based on current market expectations about the future cash flows.

Financial assets and liabilities that are not measured at fair value on a recurring basis

The carrying amounts and estimated fair values as at June 30, 2010 and December 31, 2009 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

 
 
June 30, 2010
   
December 31, 2009
 
 
 
Carrying
   
 
   
Carrying
   
 
 
 
 
amount
   
Fair value
   
amount
   
Fair value
 
 
    $’M       $’M       $’M       $’M  
 
                               
Financial liabilities:
                               
Convertible bonds
    1,100.0       1,067.6       1,100.0       1,067.0  
Building financing obligation
    7.3       8.4       46.7       47.3  

Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate to fair value because of the short-term maturity of these amounts.

The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
 
 
·
Convertible bonds – the fair value of Shire’s $1,100 million 2.75% convertible bonds due 2014 is estimated by reference to the market price of the instrument as the convertible bonds are publicly traded.

 
·
Building financing obligations - the fair value of building financing obligations are estimated based on the present value of future cash flows, and an estimate of the residual value of the underlying property at the end of the lease term, associated with these obligations.
 
 
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17.   Earnings per share

The following table reconciles net income attributable to Shire plc and the weighted average ordinary shares outstanding for basic and diluted earnings per share for the periods presented:

   
3 months to
   
3 months to
   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Amounts attributable to Shire plc shareholders
    $’M       $’M       $’M       $’M  
Numerator for basic earnings per share
    160.5       44.1       326.2       257.7  
Interest on convertible bonds, net of tax (1)
    8.4       -       16.8       -  
Numerator for diluted earnings per share
    168.9       44.1       343.0       257.7  
                                 
                                 
Weighted average number of shares:
                               
  
 
Millions
   
Millions
   
Millions
   
Millions
 
Basic(2)
    546.6       539.9       545.7       539.7  
Effect of dilutive shares:
                               
Stock based awards to employees(3)
    10.2       3.5       10.2       5.3  
Convertible bonds 2.75% due 2014(4)
    33.2       -       33.2       -  
Diluted
    590.0       543.4       589.1       545.0  

(1)
For the three and six month periods ended June 30, 2009 interest on the convertible bonds has not been added back as the effect would be anti-dilutive.
(2)
Excludes shares purchased by the ESOT and presented by the Company as treasury stock.
(3)
Calculated using the treasury stock method.
(4)
Calculated using the “if-converted” method.
 
 
The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:
 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2010 (1)
   
2009 (1) (2)
   
2010 (1)
   
2009 (1) (2)
 
 
 
No. of shares
   
No. of shares
   
No. of shares
   
No. of shares
 
 
 
Millions
   
Millions
   
Millions
   
Millions
 
Share options out of the money
    8.1       31.3       8.1       18.9  
Convertible bonds 2.75% due 2014
    -       32.7       -       32.7  

(1)
In the three and six months to June 30, 2010 and 2009 certain stock options have been excluded from the calculation of the diluted weighted average number of shares because their exercise prices exceeded Shire plc’s average share price during the calculation period.

(2)
In the three and six months to June 30, 2009 the ordinary shares underlying the convertible bonds have not been included in the calculation of the diluted weighted average number of shares, because the effect of their inclusion would be anti-dilutive.
 
 
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18.   Segmental reporting

Shire’s internal financial reporting is in line with its business unit and management reporting structure and includes two segments: SP and HGT. The SP and HGT reportable segments represent the Company’s revenues and costs for currently promoted and sold products, together with the costs of developing projects for future commercialization. ‘All Other’ has been included in the table below in order to reconcile the two operating segments to the total consolidated figures.

The Company evaluates performance based on revenue and operating income. The Company does not have inter-segment transactions. Assets that are directly attributable or allocable to the segments have been separately disclosed.

   
SP
   
HGT
   
All Other
   
Total
 
3 months to June 30, 2010
    $’M       $’M       $’M       $’M  
Product sales
    551.3       213.0       -       764.3  
Royalties
    44.2       -       38.5       82.7  
Other revenues
    0.5       0.6       1.3       2.4  
Total revenues
    596.0       213.6       39.8       849.4  
                                 
Cost of product sales(1)
    84.6       34.5       -       119.1  
Research and development(1)
    84.8       62.2       -       147.0  
Selling, general and administrative(1)
    236.6       61.9       55.9       354.4  
Gain on sale of product rights
    (4.1 )     -       -       (4.1 )
Reorganization costs
    3.3       -       5.3       8.6  
Total operating expenses