THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt about the contents of this document or the action you should take, you should immediately LR13.3.1(4) consult your stockbroker, bank manager, solicitor, accountant or other independent professional adviser duly authorised under the Financial Services and Markets Act 2000 if you are in the United Kingdom or, if not, from another appropriately authorised independent adviser.
If you have sold or otherwise transferred all your Shire Shares, please forward this document, together with the accompanying Form of Proxy as soon as possible to the purchaser or the transferee or to the stockbroker, bank LR13.3.1(6) or other agent through whom the sale or transfer was eÅected, for delivery to the purchaser or transferee. If you have sold part only of your holding of Shire Shares, please consult the bank, stockbroker or other agent through whom the sale or transfer was eÅected as to the action you should take.
Goldman Sachs International and Morgan Stanley & Co. International Limited are acting exclusively for Shire in relation to the matters described in this Circular and are not advising any other person and accordingly will not be responsible to any person other than to Shire for providing the protections aÅorded to the customers of Goldman Sachs International or Morgan Stanley & Co. International Limited or for providing advice in relation to the matters described in this document.
PRAnn1, 5.1.1
Shire plc (Incorporated and registered in England and Wales under the Companies Act 1985 with registered number 05492592) Proposed Acquisition of New River Pharmaceuticals Inc. and Notice of Extraordinary General Meeting
Your attention is drawn to the letter from the Chairman of Shire which is set out in Part I of this Circular. This letter contains the recommendation that you vote in favour of the resolution to be proposed at the Extraordinary General Meeting referred to below.
Notice of an Extraordinary General Meeting of Shire to be held at 12 noon at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on 16 April 2007 is set out at the end of this Circular. Shire Shareholders will Ñnd enclosed a Form of Proxy for use in connection with the resolution to be proposed at the Extraordinary General Meeting. Whether or not you intend to attend the Extraordinary General Meeting in person, you are requested to complete the Form of Proxy in accordance with the instructions printed on it and return it as soon as possible by post or (during normal business hours only) by hand but, in any event, so as to be received by the Company's Registrars Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 8ZW, no later than 12 noon on 14 April 2007.
If you hold Shire Ordinary Shares in CREST, you may appoint a proxy by completing and transmitting a CREST Proxy Instruction to the Company's Registrars, Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 8ZW, no later than 12 noon on 14 April 2007.
The proposals in this document are conditional on, among other things, the approval of Shire Shareholders at the Extraordinary General Meeting.
Your attention is drawn to the risk factors set out in Part II of this document.
A summary of the action to be taken by Shire Shareholders is set out on pages 10 to 11 of this document and in the accompanying Notice of Extraordinary General Meeting. The return of the completed Form of Proxy or CREST Proxy Instruction will not prevent you from attending the Extraordinary General Meeting and voting in person (in substitution for your proxy vote) if you wish to do so and are so entitled. CONTENTS
Page Expected Timetable of Principal Events ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3 Part I: Letter from the Chairman of Shire ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4 Part II: Risk Factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 Part III: Financial Information on New River ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34 Part IV: Unaudited Pro Forma Financial Information for the Enlarged GroupÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62 Part V: Description of Principal Transaction Documents to EÅect Acquisition ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 68 Part VI: Additional Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73 DeÑnitions, Glossary and List of Trademarks ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 88 Notice of Extraordinary General Meeting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 93
2 EXPECTED TIMETABLE OF PRINCIPAL EVENTS
Date of this document ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26 March 2007 Latest time and date for receipt of Forms of Proxy ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 noon on 14 April 2007 Extraordinary General Meeting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 April 2007
All references in this document are to London times unless otherwise stated
DTR 6.1.12 Total number of issued Shire Shares and Shire Deferred Ordinary Shares as at 22 March 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 551,265,961
Total number of Shire voting rights as at 22 March 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 555,122,426
3 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
Shire plc (registered in England and Wales with registered number 05492592)
Directors Registered oÇce Dr. James Cavanaugh Hampshire International Business Park Matthew Emmens Chineham Angus Russell Basingstoke Dr. Barry Price Hampshire The Hon. James Grant RG24 8EP Robin Buchanan David Kappler Patrick Langlois Kate Nealon Dr. JeÅrey Leiden
26 March 2007
To the holders of Shire Ordinary Shares, Shire Special Voting Shares, Shire ADSs and, for information only, to participants in Shire Employee Share Schemes
Dear Shareholder,
PROPOSED ACQUISITION OF NEW RIVER PHARMACEUTICALS INC.
1. Introduction
On 20 February 2007, Shire announced that it had agreed to acquire New River for $64 per share of New LR13.3.1(1) River common stock or approximately $2.6 billion in total, in an all cash transaction unanimously LR13.3.1(2) recommended by the boards of both companies (the ""Acquisition''). LR10.4.1(2)(a)
In January 2005, Shire entered into a collaboration agreement with New River to develop and co-promote VYVANSE (lisdexamfetamine dimesylate), for Attention DeÑcit and Hyperactivity Disorder (""ADHD''). On 23 February 2007, Shire and New River announced that marketing approval for the paediatric indication of VYVANSE had been received from the US Food and Drug Administration (the ""FDA'').
The Acquisition will allow Shire to capture the full economic value of VYVANSE and to gain full control of the future development and commercialisation of the product. This is consistent with Shire's already stated focus on the growing ADHD market and allows Shire to progress and beneÑt from its successful strategy of acquiring, developing and marketing specialty products. The Acquisition will also provide Shire with access to new specialty drug candidates and technology.
The Acquisition is structured as a tender oÅer for all outstanding shares of New River common stock followed by a merger of a subsidiary of Shire established for the purpose of eÅecting the Acquisition into New River. If the merger takes place New River will become an indirect wholly owned subsidiary of Shire. The Acquisition is subject to customary closing conditions, including there being validly tendered and not withdrawn prior to the expiration of the tender oÅer a majority of the outstanding New River shares on a fully-diluted basis. The tender oÅer is not subject to a Ñnancing condition. Shareholders owning a majority of the currently outstanding shares of New River common stock have entered into an agreement under which they have agreed to tender their shares in the tender oÅer.
4 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
In view of its size, the Acquisition is also conditional upon the approval of Shire Shareholders which is to LR10.4.1(2)(a) be sought at the Extraordinary General Meeting. The Extraordinary General Meeting is to be held at 12 noon at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on 16 April 2007. The approval, if given, will also sanction the borrowings of the Shire Group exceeding the current limits in the Articles of Association. The increase in borrowing is required for the purposes of Ñnancing the Acquisition. The purpose of this document is to provide you with details of and background to the Acquisition, to explain why the Directors believe that it is in the best interests of Shire Shareholders as a whole and to ask you to vote in favour of the EGM Resolution to approve the Acquisition and to increase the borrowing limit in the Articles of Association.
2. Background to and reasons for the Acquisition LR13.3.1(3) LR10.4.1(2)(f) VYVANSE is an innovative drug that addresses signiÑcant medical need. VYVANSE has been developed LR13.4.8 as a new ADHD medicine designed to provide lower potential for abuse, in which d-amphetamine is covalently linked to l-lysine, a naturally occurring amino acid. The combination is rapidly absorbed from the gastrointestinal tract and converted to d-amphetamine, which is responsible for VYVANSE's activity. VYVANSE is therapeutically inactive until metabolised in the body. The technology has the potential to limit absorption to doses within the therapeutic range and accordingly make it less suitable for abuse. The FDA has proposed that VYVANSE be classiÑed as a Schedule II controlled substance. This proposal was submitted to and accepted by the DEA. A Ñnal scheduling decision is expected from the DEA following a 30-day period for public comment. Pending Ñnal scheduling designation, product launch is anticipated in the second quarter of 2007. VYVANSE will be available for the paediatric indication in three dosage strengths: 30mg, 50mg and 70mg, all indicated for once-daily dosing. While both companies have jointly developed VYVANSE to date, a launch strategy driven by a single organisation with substantial experience in the ADHD market is designed to maximise the potential for the product. In particular, Shire's longstanding relationships with physicians and the patient community established over the last decade through the ADDERALL franchise will be fully leveraged to ensure optimal positioning of VYVANSE.
VYVANSE represents the future Öagship product for ADHD Shire is conÑdent in its ability to make VYVANSE the leading treatment in the ADHD market. Shire believes VYVANSE has advantages over current stimulant treatments for ADHD, including ADDERALL XR, currently Shire's leading treatment in the US market. Accordingly Shire is conÑdent that prescribers will Ñnd additional beneÑts in this next-generation product. VYVANSE is a New Chemical Entity and Shire believes that it is an important innovation in ADHD treatment. VYVANSE has a favourable therapeutic proÑle for paediatric ADHD patients. In clinical studies designed to measure duration of eÅect, VYVANSE provided signiÑcant eÇcacy compared with placebo for the full treatment day, up to, through and including 6:00 pm. In addition, in two clinical human drug abuse studies, VYVANSE produced subjective responses on a scale of ""Drug Liking EÅects'' (""DLE'') that were signiÑcantly less than d-amphetamines in the case of oral administration and less than d-amphetamines in the case of intravenous administration, at equivalent dosages in both studies. DLE is used in clinical abuse studies to measure relative preference among known substance abusers. VYVANSE has patent protection until June 2023 in the US and until June 2024 in Europe.
5 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
Opportunity for Shire to obtain full control of the commercialisation and development strategy for VYVANSE
If the Acquisition completes, Shire will have full control of VYVANSE, enabling it to leverage Shire's already strong ADHD position in the US. The Acquisition will enable Shire to deliver a consistent marketing program for VYVANSE through a single experienced sales organisation and to enhance Shire's existing excellent relationship with ADHD physicians and the patient community.
The Acquisition will also allow Shire to use its experience in ADHD treatments to maximise the future development potential of VYVANSE, including through pursuing further studies in ADHD and seeking additional product indications.
Attractive market opportunities
For the year ended 31 December 2006 the ADHD market in the US was worth $3.3 billion. Estimated annual market prescription volume growth in the US market is now 4 per cent and Shire expects this to rise to up to 6 per cent in 2007 with the introduction of new products to treat ADHD.
There is particular opportunity for growth in the US adult ADHD market. The current market share of this segment comprises close to 40 per cent of total prescriptions. Adult prescription volume grew 9 per cent in 2006 over 2005. In the US, recent market data estimates that 9.9 million adults suÅer from ADHD and that 75 per cent of the adult ADHD patient population remains undiagnosed, under-treated or untreated. VYVANSE has been developed for adult as well as for paediatric use and Shire expects to Ñle a supplemental NDA for the adult indication in the second quarter of 2007. If accepted, the review period is expected to be 10 months.
The ADHD market in Europe is also growing. Shire believes that there is a potential market for new ADHD treatments in Europe and therefore plans to Ñle VYVANSE for European approvals for the paediatric indication in 2009.
The Acquisition will allow Shire to capture all of the future proÑts of VYVANSE. It is expected to enhance Shire's medium and long-term earnings per share (EPS) growth
The Acquisition is expected to enhance Shire's operating margin through the elimination of the proÑt share and royalty payments which would be due to New River under the 2005 collaboration agreement between the two companies.
The Acquisition is expected to be cash EPS and US GAAP EPS neutral in 2009 and earnings enhancing from late 2009.
Following Shire's successful equity placing arranged on 20 February 2007, which raised gross proceeds of approximately $900 million through the private placement of 42,833,721 new Shire Ordinary Shares at 1,075 pence each and Shire's new $2.3 billion debt facilities pursuant to the Facilities Agreement, Shire will retain Ñnancial Öexibility following the Acquisition. This Öexibility may be used by Shire to make further acquisitions, should appropriately attractive opportunities become available.
The Acquisition will help Shire to maintain its strong ADHD portfolio and market position
Shire currently has a leading position in the US ADHD market with ADDERALL XR and DAYTRANA, and also has two additional ADHD products in registration Ì SPD465 (extended release triple-bead mixed- amphetamine salts for adult use) and SPD503 (guanfacine extended release, a non-stimulant for paediatric use). With VYVANSE expected to replace ADDERALL XR, the Acquisition should enable Shire's portfolio of ADHD products to continue to have a strong position in the growing US ADHD market.
6 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
3. Information on New River
New River is a specialty pharmaceutical company developing pharmaceuticals that are generational LR10.4.1(2)(b) improvements of widely prescribed drugs in large and growing markets. New River was founded in 1996 LR13.4.8 by R.J. Kirk, Chairman and Chief Executive OÇcer, who is the principal shareholder with control of 50.2 per cent of the outstanding shares of New River common stock (48.4 per cent on a fully diluted basis). New River is developing new molecular entities that are derivatives of public domain active compounds using its proprietary CARRIERWAVE technology. New River currently has three active programs in clinical or pre-clinical development stages: ‚ VYVANSE which was approved by the FDA on 23 February 2007 for the treatment of ADHD in paediatric populations; ‚ NRP290 (Phase 2) which is being developed to treat acute pain and is intended to be a safer, more abuse-resistant and more eÅective alternative to currently marketed opioids; and ‚ NRP409 (pre-clinical) which is being developed as a replacement or supplemental therapy in patients with primary hypo-thyroidism and other indications.
As at 31 December 2006 New River had total assets of $151,535,916. For the year ended 31 December LR10.4.1(2)(d) 2006 New River reported collaboration revenues of $34,333,097 (2005: $nil) and recorded an operating LR10.4.1(2)(e) loss of $55,774,907 (2005: $31,751,617 loss).
Further information on New River's products in development NRP290 (Phase 2) NRP290 is New River's most advanced compound in development after VYVANSE. It is a CBD (deÑned on page 8 below under ""New River's CARRIERWAVE technology'') of hydrocodone, an opioid widely used in combination with other non-opioid analgesics to treat acute pain. Acute pain usually lasts for a short time, typically not more than a month. Treatment for acute pain may consist of non-opioid analgesics and non-steroidal anti-inÖammatory drugs. In more severe cases of acute pain, opioids are commonly prescribed. While opioids are the most eÅective drugs available for treating pain, there is increasing concern with respect to their potential for abuse and propensity for addiction. Repeated administration of opioids, including hydrocodone, can create psychological addiction as well as increased tolerance resulting in the potential for overdose. Overdose can result in respiratory depression, coma, hypotension, cardiac arrest and death. On 28 June 2005, New River Ñled an IND application for NRP290 with the FDA. New River presented the results of its Ñrst clinical trial on NRP290 on 12 September 2005. Further clinical development is ongoing.
NRP409 (pre-clinical) NRP409 is being developed as a replacement or supplemental therapy in patients with primary hypo- thyroidism and other indications. New River's CARRIERWAVE triiodothyronine (T3) hormone is being developed as a replacement or supplemental therapy in patients with primary hypothyroidism and other indications. The leading thyroid Hormone Replacement Therapies (""HRTs'') are based on tetraiodothyronine (T4), and require deiodina- tion within the patient to convert to the more active hormone (T3). Patients demonstrate signiÑcant variability in their ability to convert the T4 hormone in the HRT into T3. This variability can arise as a function of age, stress or a variety of medical conditions. Commercially approved drugs based on T3, however, engender certain safety risks, most notably cardiovascular in nature.
7 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
NRP409 will mark a signiÑcant improvement in thyroid HRT by reducing the variability of T3's availability, while reducing the safety risk associated with other T3 based therapies. New River Ñled an IND application for NRP409 with the FDA in the second quarter of 2006.
New River's CARRIERWAVE technology In addition to the above products, the Acquisition will provide Shire with access to New River's CARRIERWAVE technology. This proprietary technology enables the design of proprietary compounds consisting of active pharmaceutical ingredients bound to adjuvants. The adjuvants are comprised of various substances such as peptides, amino acids, lipids and nucleic acids. New River believes that the breakdown of the active pharmaceutical ingredient from the adjuvant occurs at speciÑcally targeted sites of enzymatic activity in the body. In the case of its current CARRIERWAVE compounds, New River believes that the site of enzymatic activity is primarily in the gastrointestinal tract. At the target site, enzymes hydrolyze or cleave the adjuvant from the active pharmaceutical ingredient, releasing the active pharmaceutical ingredient into circulation. New River believes that the CARRIERWAVE technology has particular application in overcoming the drawbacks associated with drugs open to abuse and addiction, like amphetamines and opioids while providing eÇcacy similar to currently marketed versions. New River refers to its CARRIERWAVE compounds as ""Conditionally Bioreversible Derivatives'' (""CBDs''). CBDs are intended for oral delivery. In the case of amphetamines and opioids, CBDs are designed to limit the release of the active pharmaceutical ingredient from the CBD at greater than therapeutically prescribed amounts and to be inactive when administered other than orally.
4. Principal terms and conditions of the Acquisition LR10.4.1(2)(a) LR13.3.1(3) The Acquisition will be eÅected pursuant to the Merger Agreement. On 2 March 2007, pursuant to the terms of the Merger Agreement, a subsidiary of Shire commenced a tender oÅer for all outstanding shares of New River common stock at a price of $64 per share in cash. Following the completion of the tender oÅer, any remaining shares of New River will be acquired in a cash merger at the same price. The transaction values New River's share capital at $2.6 billion on a fully diluted basis. This Acquisition price represents a premium of approximately: ‚ 10 per cent to New River's closing share price of $58.35 on 16 February 2007 (being the last business day prior to the announcement of the Acquisition); and ‚ 14 per cent to $55.92, the average New River closing share price over the four weeks prior to the date of the announcement of the Acquisition. The Acquisition has been unanimously recommended by New River's board of directors. The Acquisition is subject to the approval of Shire Shareholders and customary conditions, including there being validly tendered and not withdrawn prior to the expiration of the tender oÅer a majority of the shares of New River common stock on a fully diluted basis. The tender oÅer is not subject to a Ñnancing condition. The Acquisition was also conditioned on regulatory clearance pursuant to the HSR Act. On 16 March 2007, the waiting period under the HSR Act applicable to the Acquisition expired and, therefore, this condition has been satisÑed. The Merger Agreement contains provisions relating to the payment of break fees by Shire and New River. New River is obliged to pay Shire $70 million and reimburse Shire for up to $8 million in expenses in the event that the merger is terminated in speciÑed circumstances. Shire is obliged to pay New River $70 million and reimburse New River for up to $8 million in expenses in the event that the Merger Agreement is terminated as a result of, among other things, (i) Shire Shareholders not approving the Acquisition, (ii) the Board of Shire changing its recommendation in respect of the Acquisition (or failing to timely publicly conÑrm its recommendation after being requested by New River to do so), or
8 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
(iii) the Board of Shire not complying with its obligations under the Merger Agreement to convene the Extraordinary General Meeting. Further details of the Merger Agreement are set out in Part V of this Circular. Randal J. Kirk, New River's President, Chief Executive OÇcer and Chairman and certain entities controlled by him, who collectively beneÑcially own 50.2 per cent of the outstanding shares of New River common stock (48.4 per cent on a fully diluted basis), have agreed pursuant to the Tender and Support Agreement with Shire to tender all shares beneÑcially owned by them in the tender oÅer. If the Merger Agreement is terminated, however, including by reason of New River accepting an oÅer from a third party that the New River board of directors deems to be superior to the transactions contemplated by the Merger Agreement, the Tender and Support Agreement will also terminate. Further details of the Tender and Support Agreement are set out in Part V of this Circular.
5. Financing of the Acquisition and increase in borrowing limit LR10.4.1(c)
The total consideration for the acquisition of New River amounts to approximately $2.6 billion in cash. Shire has entered into the Facilities Agreement to provide part of the Ñnance for the Acquisition. Further details of the Facilities Agreement, including the conditions to which it is subject, are set out in Part V of this Circular. The Acquisition is also to be part-funded by the proceeds of an equity placing which was arranged on 20 February 2007. Pursuant to the equity placing, 42,883,721 new Shire Ordinary Shares were issued to institutional investors at a price of 1,075 pence per Shire Ordinary Share, raising gross proceeds of approximately $900 million (461 million). The new Shire Ordinary Shares issued pursuant to the placing represented approximately 8.4 per cent of Shire's issued Ordinary Share capital prior to the placing. The new Shire Ordinary Shares were admitted to listing on the OÇcial List and admitted to trading by the London Stock Exchange plc on its main market for listed securities on 23 February 2007. Shire intends that, if the Acquisition is not completed, the proceeds from the equity placing will be returned to shareholders in as eÇcient a manner as possible. Article 101 of the Articles of Association states that the aggregate principal amount outstanding in respect of moneys borrowed (after deduction of cash and cash equivalents) by the Shire Group must not at any time, without the previous sanction of an ordinary resolution, exceed a sum equal to US $1.2 billion. This limit would be exceeded by virtue of the borrowings under the Facilities Agreement which (if fully drawn) would take the Shire Group's borrowings to $2.3 billion. The Articles of Association permit this limit to be exceeded with the sanction of an ordinary resolution. A resolution to increase this limit to $4 billion is accordingly proposed at the Extraordinary General Meeting in order to provide Shire with suÇcient Öexibility to drive future growth.
6. Financial eÅects of the Acquisition LR13.4.1(5) LR10.4.1(2)(f) The Acquisition will allow Shire to capture fully the future proÑts of VYVANSE and improve operating margin performance. Shire expects the Acquisition to be cash EPS and US GAAP EPS neutral in 2009 and earnings enhancing from late 2009. If the Acquisition is completed, Shire expects to value the paediatric indication of VYVANSE at approximately $1 billion, which will be recognised on Shire's balance sheet as an intangible asset, together with an associated deferred tax liability of approximately $0.4 billion. The intangible asset will be amortised over its useful economic life (approximately 20 years). Shire also expects to incur a one-time charge of approximately $2 billion on closing of the Acquisition relating mainly to the write-oÅ, under US GAAP, of the intangible asset value associated with the acquired in-process R&D pipeline (including the adult indication of VYVANSE), together with some integration and transaction costs.
9 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE
The new debt and equity Ñnancing described above enables Shire to acquire New River and to retain Ñnancial Öexibility to make further acquisitions to help drive Shire's growth.
7. Current trends in trading and prospects of Shire, New River and the Enlarged Shire Group PR Ann 1,12 Shire Shire announced its consolidated Ñnancial results for the year to 31 December 2006 on 20 February 2007, prepared under US GAAP. Revenues from continuing operations for the year to 31 December 2006 increased by 12 per cent to $1,796.5 million (2005: $1,599.3 million). Income from continuing operations before income taxes and equity in earnings/(losses) of equity method investees increased to $316.8 million (2005: loss of $491.7 million, due to the write-oÅ in 2005 of in-process research and development of $815.0 million following the acquisition of TKT). Shire's business continues to perform strongly. Revenue growth in 2007 is expected to be around 20 per cent (assuming prescription growth in the US ADHD market of 4-6 per cent). As in 2006, earnings in 2007 will continue to be impacted by the costs associated with the continued development and launch of new products.
New River New River announced its consolidated Ñnancial results for the year to 31 December 2006 on 13 March 2007, prepared under US GAAP. These results showed revenues arising from the collaboration agreement with Shire, for the year to 31 December 2006, of $34.3 million (2005: $nil). The operating loss for the year to 31 December 2006 has increased to $55.8 million (2005: $31.8 million). As at 31 December 2006 New River had $147.0 million in cash and cash equivalents and short term investments (2005: $52.8 million).
Enlarged Shire Group The Acquisition will enhance Shire's operating margin through the elimination of the proÑt share and royalty payments which would be due to New River under the 2005 collaboration agreement. The Acquisition is expected to be cash EPS and US GAAP EPS neutral in 2009 and earnings enhancing from late 2009. The Directors are conÑdent of the Ñnancial and trading prospects for the Enlarged Shire Group for the year ending 31 December 2007.
Unless otherwise stated, all Ñnancial information on New River and/or Shire contained in this Circular has LR13.5.6 been extracted from the latest audited Ñnancial statements of the relevant company Ñled with the US Securities and Exchange Commission, without material adjustments.
8. Risk factors
Shire Shareholders should consider fully and carefully the risk factors associated with New River and the PRAnn1,4 Shire Group. Your attention is drawn to the risk factors set out in Part II of this Circular.
9. Extraordinary General Meeting and action to be taken A notice convening the Extraordinary General Meeting to be held at 12 noon at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB on 16 April 2007 to consider the EGM Resolution is set out at the end of this Circular. You will Ñnd enclosed with this Circular a Form of Proxy for use at the Extraordinary General Meeting or at any adjournment thereof. Whether or not you intend to attend the Extraordinary General Meeting,
10 PART I Ì LETTER FROM THE CHAIRMAN OF SHIRE you are requested to complete a Form of Proxy in accordance with the instructions printed thereon and to return it as soon as possible, but in any event so as to be received by Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 8ZW, no later than 12 noon on 14 April 2007. The return of the Form of Proxy will not preclude you from attending and voting at the meeting in person if you so wish.
10. Further information Your attention is drawn to the additional information set out in Parts II to VI of this Circular.
11. Financial Advice The Directors, who have received Ñnancial advice from Goldman Sachs and Morgan Stanley, consider the terms of the Acquisition to be fair and reasonable. In providing the Ñnancial advice to the Directors, Goldman Sachs and Morgan Stanley have relied on the Directors' commercial assessment of the Acquisition.
12. Recommendation
The Board believes that the Acquisition is in the best interests of Shire and Shire Shareholders as LR13.3.1(5) a whole. The Board further believes that the proposal to sanction the Shire Group to exceed the borrowing limit prescribed in the Articles is in the best interests of Shire and Shire Shareholders as a whole. Accordingly, the Board unanimously recommends that you vote in favour of the EGM Resolution as each of the Directors intends to do in respect of their own beneÑcial shareholdings, amounting in aggregate to 592,735 Shire Ordinary Shares, representing approximately 0.108 per cent of the issued share capital of Shire as at 22 March 2007, being the latest practicable date before publication of this Circular.
Yours faithfully,
Dr. James Cavanaugh Chairman
11 PART II Ì RISK FACTORS
This Part II addresses certain risks to which the Shire Group and New River are exposed, which PRAnn1, 4 could adversely aÅect the business, results of operations, cash Öow, Ñnancial condition, turnover, proÑts, assets, liquidity and capital resources of the Shire Group and/or New River, as appropriate. Prior to voting on the Acquisition, Shire Shareholders should consider these risks fully and carefully, together with all the information set out in this Circular. Additional risks and uncertainties currently unknown to Shire, or which Shire currently deems immaterial may also have an adverse eÅect on the Ñnancial condition or business of the Shire Group and/or New River. The risks are not intended to be presented in any assumed order of priority.
Part A: RISKS ASSOCIATED WITH THE SHIRE GROUP
Any decrease in the sales of ADDERALL XR will signiÑcantly reduce revenues and earnings In 2006, sales of ADDERALL XR were $863.6 million, representing approximately 48 per cent of the Shire Group's revenues. Any factors that decrease sales of ADDERALL XR could signiÑcantly reduce revenue and earnings and have a material adverse eÅect on the Shire Group's Ñnancial condition and results of operations. These include: ‚ issues impacting the production of ADDERALL XR or the supply of amphetamine salts; ‚ development and marketing of competitive pharmaceuticals, including generic versions; ‚ technological advances (including the approval of new competing products for ADHD treatments); ‚ loss of patent protection or ability of competitors to challenge or circumvent the Shire Group's patents; ‚ changes in reimbursement policies of third-party payers; ‚ government action/intervention; ‚ marketing or pricing actions by competitors; ‚ public opinion towards ADHD treatments; ‚ any change in the label or other such regulatory intervention; ‚ product liability claims; or ‚ changes in prescription-writing practices.
Any decrease in the sales of 3TC could signiÑcantly reduce revenues and earnings The Shire Group receives royalties from GlaxoSmithKline plc (""GSK'') on the worldwide sales of 3TC. In 2006, the Shire Group's royalty income for 3TC sales was $150.9 million, representing approximately 8 per cent of total revenues. This income stream generates a larger proportion of net income relative to the Shire Group's own product sales as there are minimal costs associated with this income. Any factors that decrease sales of 3TC by GSK could signiÑcantly reduce the Shire Group's revenues and earnings. These include: ‚ reduction in production of 3TC; ‚ development and marketing of competitive pharmaceuticals; ‚ technological advances;
12 PART II Ì RISK FACTORS
‚ loss of patent protection or ability of competitors to challenge or circumvent patents; ‚ government action/intervention; ‚ marketing or pricing actions by GSK's competitors; ‚ any change in the label or other such regulatory intervention; ‚ public opinion towards AIDS treatments; or ‚ product liability claims.
VYVANSE and the Shire Group's other new products may not be a commercial success The commercial success of the Shire Group's new products will depend on their approval and acceptance by physicians, patients and other key decision-makers, as well as the timing of the receipt of marketing approvals, the scope of marketing approval as reÖected in the product's label, the countries in which such approvals are obtained, the authorisation of price and reimbursement in those countries where price and reimbursement is negotiated and safety, eÇcacy, convenience and cost-eÅectiveness of the product as compared to competitive products. In particular, the Shire Group may not be able to transition patients successfully from ADDERALL XR to VYVANSE, especially if any or all of the following occur: ‚ if physicians who are comfortable with an existing product are unwilling to prescribe a new product in its place; ‚ if patients who are comfortable with an existing product do not wish to take a new product in its place; ‚ if parents or caregivers who are comfortable with an existing product do not want their children to take a new product in its place; ‚ if third party payers are unwilling to pay for a new product; ‚ if the sales and marketing eÅorts behind VYVANSE are not eÅective in positioning VYVANSE and diÅerentiating it from ADDERALL XR; ‚ if the FDA approved label for VYVANSE is not seen as signiÑcantly diÅerentiating VYVANSE from currently marketed treatments for ADHD; or ‚ if competitive products are genericised and the impact on the market negatively aÅects the prescribing of branded treatments for ADHD. Further, if VYVANSE is not a commercial success, Shire will not experience the anticipated economic beneÑts from VYVANSE or from Shire's proposed acquisition of New River. If the Shire Group is unable to commercialise VYVANSE or any other new product successfully, there may be an adverse eÅect on the Shire Group's revenues, Ñnancial condition and results of operations.
The introduction of new products by competitors may impact future revenues The manufacture and sale of pharmaceuticals is highly competitive. Many of the Shire Group's competitors are large, well-known pharmaceutical, biotechnology, chemical and healthcare companies with considerable resources. Companies with more resources and larger R&D expenditures have a greater ability to fund clinical trials and other development work necessary for regulatory applications. They may also be more successful than the Shire Group in acquiring or licensing new products for development and commercialisation. Further, they may also have an improved likelihood of obtaining approval of drugs that may compete with those marketed or under development by the Shire Group. If
13 PART II Ì RISK FACTORS any product that competes with one of the Shire Group's principal drugs is approved, the Shire Group's sales of that drug could fall. The pharmaceutical and biotechnology industries are also characterised by continuous product develop- ment and technological change. The Shire Group's products could, therefore, be rendered obsolete or uneconomic through the development of new products, technological advances in manufacturing or production by its competitors.
The failure to obtain and maintain reimbursement, or an adequate level of reimbursement, by third- party payers in a timely manner for certain of the Shire Group's products may impact future revenues The prices for certain of the Shire Group's products when commercialised, including, in particular, products for the treatment of rare genetic diseases, may be high compared to other pharmaceutical products. The Shire Group may encounter particular diÇculty in obtaining satisfactory pricing and reimbursement for its products, including those that are likely to have a high annual cost of therapy. The failure to obtain and maintain pricing and reimbursement at satisfactory levels for such products may adversely aÅect revenues.
A disruption to the product supply chain may result in the Shire Group being unable to continue marketing or developing a product or may result in the Shire Group being unable to do so on a commercially viable basis The Shire Group has its own manufacturing capability for certain products and has also entered into supply agreements with third party contract manufacturers. In the event of either the Shire Group's failure or the failure of any third party contract manufacturer to comply with mandatory manufacturing practices (often referred to as "Current Good Manufacturing Practices', or ""GMP'') in the countries in which the Shire Group intends to sell or have its products sold, the Shire Group may experience a delay in supply or be unable to market or develop its products. The Shire Group dual-sources certain key products and/or active ingredients. However, there is currently reliance on a single source for production of the Ñnal drug product for each of CARBATROL, AGRYLIN, XAGRID, REMINYL, REPLAGAL, DYNEPO, DAYTRANA and ELAPRASE and reliance on a single active ingredient source for each of PENTASA, REPLAGAL, FOSRENOL, AGRYLIN, XAGRID, DAYTRANA, DYNEPO, ELAPRASE and REMINYL. In the event of Ñnancial failure of a third party contract manufacturer, the Shire Group may experience a delay in supply or be unable to market or develop its products. This could have a material adverse eÅect on the Shire Group's Ñnancial condition and results of operations.
There is no assurance that suppliers will continue to supply on commercially viable terms, or be able to supply components that meet regulatory requirements. The Shire Group is also subject to the risk that suppliers will not be able to make the quantities needed to meet market requirements The Shire Group has its own warehousing and distribution capability for certain products and has entered into distribution agreements with third party distributors for certain services. The failure of either the Shire Group's or a third party's service could result in the Shire Group being unable to continue to distribute its products. The development and approval of the Shire Group's products depends on the ability to procure active ingredients and special packaging materials from sources approved by regulatory authorities. As the marketing approval process requires manufacturers to specify their own proposed suppliers of active ingredients and special packaging materials in their applications, regulatory approval of a new supplier would be required if active ingredients or such packaging materials were no longer available from the
14 PART II Ì RISK FACTORS supplier speciÑed in the marketing approval. The need to qualify a new supplier could delay the Shire Group's development and commercialisation eÅorts. The Shire Group uses bovine-derived serum sourced from New Zealand and North America in some of its manufacturing processes. The discovery of additional cattle in North America or the discovery of cattle in New Zealand with bovine spongiform encephalopathy, or mad cow disease, could cause the regulatory agencies in some countries to impose restrictions on certain of the Shire Group's products, or prohibit the Shire Group from using its products at all in such countries.
Fluctuations in wholesale buying patterns may inÖuence net sales and growth comparisons A signiÑcant portion of the Shire Group's product sales are made to major pharmaceutical wholesale distributors as well as to large pharmacies in both the United States and Europe. Consequently, product sales and growth comparisons may be aÅected by Öuctuations in the buying patterns of major distributors and other trade buyers. These Öuctuations may result from seasonality, pricing, wholesaler buying decisions or other factors.
In the event of Ñnancial failure of certain customers, the Shire Group may suÅer Ñnancial loss and a decline in revenues For the Ñnancial year ended 31 December 2006, the three largest trade customers, McKesson Corp., Cardinal Health Inc., and Amerisource Bergen Corp., accounted for approximately 43 per cent, 29 per cent and 11 per cent of the Shire Group's product sales, respectively. The Ñnancial failure of any one of these customers could have a material adverse eÅect on the Shire Group's Ñnancial condition and results of operations.
The actions of certain customers can aÅect the Shire Group's ability to sell or market products proÑtably A small number of large wholesale distributors control a signiÑcant share of the United States and European markets. In 2006, for example, approximately 83 per cent of the Shire Group's product sales were attributable to three customers. In addition, the number of independent drug stores and small chains has decreased as retail pharmacy consolidation has occurred. Consolidation or Ñnancial diÇculties could cause customers to reduce their inventory levels, or otherwise reduce purchases of the Shire Group's products. Such actions could have an adverse eÅect on the Shire Group's revenues, Ñnancial condition and results of operations. A signiÑcant portion of the Shire Group's revenues for certain products for treatment of rare genetic diseases are concentrated with a small number of customers. Changes in the buying patterns of those customers may have an adverse eÅect on the Shire Group's Ñnancial condition and results of operations.
The actions of governments, industry regulators and the economic environments in which the Shire Group operates may adversely aÅect its ability to develop and market its products proÑtably Changes to laws or regulations impacting the pharmaceutical industry, which are made in any country in which the Shire Group conducts its business, may adversely impact the Shire Group's sales, Ñnancial condition and results of operations. In particular, changes to the regulations relating to orphan drug status may aÅect the exclusivity granted to products with such designation. Changes in the general economic conditions in any of the Shire Group's major markets may also aÅect the Shire Group's sales, Ñnancial condition and results of operations. The Shire Group's revenues are partly dependent on the level of reimbursement provided to the Shire Group by governmental reimbursement schemes for pharmaceutical products. Changes to governmental policy or practices could adversely aÅect the Shire Group's sales, Ñnancial condition and results of
15 PART II Ì RISK FACTORS operations. In addition, the cost of treatment established by health care providers, private health insurers and other organisations, such as health maintenance organisations and managed care organisations are under downward pressure and this, in turn, could impact on the prices at which the Shire Group can sell its products.
The market for pharmaceutical products could be signiÑcantly inÖuenced by the following, which could result in lower prices for the Shire Group's products and/or a reduced demand for the Shire Group's products:
‚ the ongoing trend toward managed health care, particularly in the United States;
‚ legislative proposals to reform health care and government insurance programs in many of the Shire Group's markets; or
‚ price controls and non-reimbursement of new and highly priced medicines for which the economic and therapeutic rationales are not established.
Parallel importation occurs when an importer Ñnds a cheaper price for a product or equivalent product on the world market and imports that product from the lower price jurisdiction to the higher price jurisdiction. If the parallel importation of lower priced drugs is permitted in the United States, it could have the eÅect of reducing sales of equivalent drugs in the United States. To the extent that parallel importation increases, the Shire Group may receive less revenue from its commercialised products.
The parallel importation of prescription drugs is relatively common within the EU.
If the Shire Group's projects or clinical trials for the development of products are unsuccessful, its products will not receive authorisation for manufacture and sale
Due to the complexity of the formulation and development of pharmaceuticals, the Shire Group cannot be certain that it will complete successfully the development of new products, or, if successful, that such products will be commercially viable.
Before obtaining regulatory approvals for the commercial sale of each product under development, the Shire Group must demonstrate through clinical and other studies that the product is of appropriate quality and is safe and eÅective for the claimed use. Clinical trials of any product under development may not demonstrate the quality, safety and eÇcacy required to result in an approvable or a marketable product. Failure to demonstrate adequately the quality, safety and eÇcacy of a therapeutic drug under develop- ment would delay or prevent regulatory approval of the product. In addition, regulatory authorities in Europe, the United States, Canada and other countries may require additional studies, which could result in (a) increased costs and signiÑcant development delays, or (b) termination of a project if it would no longer be economically viable. The completion rate of clinical trials is dependent upon, among other factors, obtaining adequate clinical supplies and recruiting patients. Delays in patient enrolment in clinical trials may also result in increased costs and program delays. Additional delays can occur in instances in which the Shire Group shares control over the planning and execution of product development with collaborative partners. The Shire Group cannot be certain that, if clinical trials are completed, either the Shire Group or its collaborative partners will Ñle for, or receive, required authorisations to manufacture and/or market potential products in a timely manner.
16 PART II Ì RISK FACTORS
If the Shire Group is unable to meet the requirements of regulators in relation to a particular product, it may be unable to develop the product or obtain or retain the necessary marketing approvals Drug companies are required to obtain regulatory approval before manufacturing and marketing most drug products. Regulatory approval is generally based on the results of: ‚ quality testing (chemistry, manufacturing and controls); ‚ non-clinical testing; and ‚ clinical testing. The clinical development, manufacture, marketing and sale of pharmaceutical products is subject to extensive regulation, including separate regulation by each member state of the EU, the EMEA and federal, state and local regulation in the United States. Unanticipated legislative and other regulatory actions and developments concerning various aspects of the Shire Group's operations and products may restrict its ability to sell one or more of its products or to sell those products at a proÑt. The generation of data is regulated and any generated data is susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Required regulatory approvals may not be obtained in a timely manner, if at all. In addition, other regulatory requirements for any such proposed products may not be met. Even if the Shire Group obtains regulatory approvals, the terms of any product approval, including labelling, may be more restrictive than desired and could aÅect the marketability of its products. Regulatory authorities have the power among other things, to: ‚ revoke or suspend approvals of previously approved products; ‚ require the recall of products that fail to meet regulatory requirements; and ‚ close manufacturing plants that do not operate in conformity with GMP and/or other regulatory requirements or approvals. Such delays or actions could aÅect the Shire Group's ability to manufacture and sell its products.
The failure of a strategic partner to develop and commercialise products could result in delays in approval or loss of revenue The Shire Group enters into strategic partnerships with other companies in areas such as product development and sales and marketing. In these partnerships, the Shire Group is dependent on its partner to deliver results. While these partnerships are supported by contracts, the Shire Group does not exercise direct control. If a partner fails to perform or experiences Ñnancial diÇculties, the Shire Group may suÅer delay in the development, a delay in the approval or a reduction in sales or royalties of a product.
The failure to secure new products or compounds for development, either through in-licensing, acquisition or internal research and development eÅorts, may have an adverse impact on the Shire Group's future results The Shire Group's future results will depend, to a signiÑcant extent, upon its ability to in-license, acquire or develop new products or compounds. The failure to in-license or acquire new products or compounds, on a commercially viable basis, could have a material adverse eÅect on the Shire Group's Ñnancial position. The Shire Group also expends signiÑcant resources on research and development. The failure of these eÅorts to result in the development of products appropriate for testing in human clinical trials could have a material adverse eÅect on the Shire Group's revenues, Ñnancial condition and results of operations.
17 PART II Ì RISK FACTORS
The Shire Group may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business The Shire Group's success depends upon its ability and the ability of its partners and licensors to protect their intellectual property rights. Where possible, the Shire Group's strategy is to register intellectual property rights, such as patents and trademarks. The Shire Group also relies variously on trade secrets, unpatented know-how and technological innovations and contractual arrangements with third parties to maintain its competitive position. Patents and patent applications covering a number of the technologies and processes owned or licensed to the Shire Group have been granted, or are pending in various countries, including the United States, Canada, major European countries and Japan. The Shire Group intends to enforce vigorously its patent rights and believes that its partners intend to enforce vigorously patent rights they have licensed to the Shire Group. However, patent rights may not prevent other entities from developing, using or commercial- ising products that are similar or functionally equivalent to the Shire Group's products or technologies or processes for formulating or manufacturing similar or functionally equivalent products. The Shire Group's patent rights may be successfully challenged in the future or laws providing such rights may be changed or withdrawn. The Shire Group cannot assure investors that its patents and patent applications or those of its third party manufacturers will provide valid patent protection suÇciently broad to protect the Shire Group's products and technology or that such patents will not be challenged, revoked, invalidated, infringed or circumvented by third parties. In the regular course of business, the Shire Group is party to litigation or other proceedings relating to intellectual property rights (see section 7 of Part VI of this Circular). Additionally, the Shire Group's products, or the technologies or processes used to formulate or manufacture those products may now, or in the future, infringe the patent rights of third parties. It is also possible that third parties will obtain patent or other proprietary rights that might be necessary or useful for the development, manufacture or sale of the Shire Group's products. If third parties are the Ñrst to invent a particular product or technology, it is possible that those parties will obtain patent rights that will be suÇciently broad to prevent the Shire Group or its strategic partners from developing, manufacturing or selling its products. The Shire Group may need to obtain licences for intellectual property rights from others to develop, manufacture and market commercially viable products and may not be able to obtain these licences on commercially reasonable terms, if at all. In addition, any licensed patents or proprietary rights may not be valid and enforceable. The Shire Group also relies on trade secrets and other un-patented proprietary information, which it generally seeks to protect by conÑdentiality and nondisclosure agreements with its employees, consul- tants, advisers and partners. These agreements may not eÅectively prevent disclosure of conÑdential information and may not provide the Shire Group with an adequate remedy in the event of unauthorised disclosure of such information. If the Shire Group's employees, scientiÑc consultants or partners develop inventions or processes that may be applicable to the Shire Group's products under development, such inventions and processes will not necessarily become the Shire Group's property, but may remain the property of those persons or their employers. Protracted and costly litigation could be necessary to enforce and determine the scope of the Shire Group's proprietary rights. The failure to obtain or maintain patent and trade secret protection, for any reason, could allow other companies to make competing products and reduce the Shire Group's product sales. The Shire Group has Ñled applications to register various trademarks for use in connection with its products in various countries including the United States and countries in Europe and Latin America and intends to trademark new product names as new products are developed. In addition, with respect to certain products, the Shire Group relies on the trademarks of third parties. These trademarks may not aÅord adequate protection or the Shire Group or the third parties may not have the Ñnancial resources to enforce any rights under any of these trademarks. The Shire Group's inability or the inability of these third
18 PART II Ì RISK FACTORS parties to protect their trademarks because of successful third party claims to those trademarks could allow others to use the Shire Group's trademarks and dilute their value.
If a marketed product fails to work eÅectively or causes adverse side eÅects, this could result in damage to the Shire Group's reputation, the withdrawal of the product and legal action against the Shire Group The Shire Group's ability to sell pharmaceutical products after the receipt of regulatory approval will depend on the acceptance of those products by physicians and patients. Unanticipated side eÅects or unfavourable publicity concerning any of the Shire Group's products, or those of its competitors, could have an adverse eÅect on the Shire Group's ability to obtain or maintain regulatory approvals or successfully market its products. Future results of operations will also depend on continued market acceptance of current products and the lack of substitutes that are cheaper or more eÅective. The testing, manufacturing, marketing and sales of pharmaceutical products entails a risk of product liability claims, product recalls, litigation and associated adverse publicity. The cost of defending against such claims is expensive even when the claims are not merited. A successful product liability claim against the Shire Group could require the Shire Group to pay a substantial monetary award. If, in the absence of adequate insurance coverage, the Shire Group does not have suÇcient Ñnancial resources to satisfy a liability resulting from such a claim or to fund the legal defence of such a claim, it could become insolvent. Product liability insurance coverage is expensive, diÇcult to obtain and may not be available in the future on acceptable terms. Although the Shire Group carries product liability insurance, this coverage may not be adequate. In addition, it cannot be certain that insurance coverage for present or future products will be available. Moreover, an adverse judgment in a product liability suit, even if insured or eventually overturned on appeal, could generate substantial negative publicity about the Shire Group's products and business and inhibit or prevent commercialisation of other products.
Monitoring or enforcement action by regulatory authorities or law enforcement agencies in the highly regulated markets in which the Shire Group operates may result in the distraction of senior management, signiÑcant legal costs and the payment of substantial compensation or Ñnes The Shire Group engages in various marketing, promotional and educational activities pertaining to, as well the sale of, pharmaceutical products in a number of jurisdictions around the world. The promotion, marketing and sale of pharmaceutical products is highly regulated and the operations of market participants, such as the Shire Group, are closely supervised by regulatory authorities and law enforcement agencies, including the FDA, the US Department of Justice and the DEA in the US. Any inquiries or investigations into the operations of, or enforcement or other regulatory action against, the Shire Group by such regulatory authorities could result in the distraction of senior management for prolonged periods of time, signiÑcant defence costs and substantial monetary penalties.
The outsourcing of services can create a signiÑcant dependency on third parties, the failure of whom can aÅect the ability to operate the Shire Group's business and to develop and market products The Shire Group 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 Shire Group may not be able to continue the development or commercialisation of its products as planned or on a commercial basis. Additionally, it may not be able to establish or maintain good relationships with the suppliers. The Shire Group has also entered into licensing and co-development agreements with a number of parties. There is a risk that, upon expiration or termination of a third party agreement, the Shire Group may not be able to renew or extend the agreement with the third party as commercial interests may no
19 PART II Ì RISK FACTORS longer coincide. In such circumstances, the Shire Group may be unable to continue to develop or market its products as planned and could be required to abandon or divest a product line.
Loss of highly qualiÑed management and scientiÑc personnel could cause the Shire Group subsequent Ñnancial loss The Shire Group faces intense competition for highly qualiÑed management and scientiÑc personnel from other companies, academic institutions, government entities and other organisations. It may not be able to successfully attract and retain such personnel. The Shire Group has agreements with a number of its key scientiÑc and management personnel for periods of one year or less. The loss of such personnel, or the inability to attract and retain the additional, highly skilled employees required for its activities could have an adverse eÅect on the Shire Group's business.
In the event of breakdown, failure or breach of security on any of the Shire Group's information technology systems, the Shire Group may be unable to maintain its business operations The Shire Group operates several complex information systems upon which it is dependent. The Shire Group has back-up procedures and disaster recovery plans in place to enable the business to continue its normal operations and to mitigate any loss in the event of a failure. However, in the event of breakdown, failure or breach of security of any of these systems or the associated suppliers, the Shire Group may be unable to maintain its business operations. This could lead to loss of revenue and delay in product development. In addition, the Shire Group is in the process of installing enterprise-wide information systems in its operations throughout the world. Any failure in the operation of these systems could have an adverse eÅect on the Shire Group's business operations.
The Shire Group may incur unexpected expenditure in order to comply with US environmental laws The Shire Group's manufacturing sites are situated in the United States and are subject to national, state and local environmental laws. Compliance with environmental laws requires ongoing expenditure and any spillage or contamination found to be caused by the Shire Group may result in clean up costs and Ñnancial penalties for the Shire Group which could adversely aÅect the Shire Group's revenues, Ñnancial condition and results of operations.
Contracts are used in all areas of operation of the business. They may contain provisions that do not protect the Shire Group's position or with which it cannot comply Contracts form the basis of agreement in many key activities such as mergers and acquisitions, arrangements with suppliers, outsourcing, product licensing and marketing. These contracts may contain provisions that impose duties on the parties involved or may fail to contain adequate conditions to protect the Shire Group's position. The Shire Group may be unable to meet its obligations under a contract or may be unable to require other parties to comply with their obligations and, therefore, may suÅer Ñnancial loss or penalty.
Part B: RISKS ASSOCIATED WITH NEW RIVER
New River has a history of operating losses and may never achieve proÑtability Since the end of 1998, New River has incurred losses in each year of its operations. These operating losses have adversely aÅected and may continue to adversely aÅect working capital, total assets and shareholders' equity. Any such operating losses will not be suÇcient so as to aÅect the ability of Shire to make the working capital statement set out at section 10 of Part VI of this Circular.
20 PART II Ì RISK FACTORS
The process of developing products requires signiÑcant clinical development and laboratory testing and clinical trials. In addition, commercialisation of product candidates requires New River to obtain necessary regulatory approvals and establish sales, marketing and manufacturing capabilities, either through internal hiring or through contractual relationships with others. New River's proÑtability in 2007 may be materially adversely aÅected by costs incurred in anticipation of the commercial launch of VYVANSE, anticipated increases in research and development costs, including costs associated with conducting preclinical testing and clinical trials, regulatory compliance activities and developing its sales and marketing capabilities. New River incurred operating losses of approximately $55.8 million for the Ñscal year ended 31 December 2006, approximately $31.8 million for the Ñscal year ended 1 January 2006 and approximately $16.3 million for the Ñscal year ended 2 January 2005. As of 31 December 2006 New River had an accumulated deÑcit of approximately $127 million. The ability of New River to generate revenues and achieve proÑtability will depend on numerous factors, including success in: ‚ developing and testing product candidates; ‚ receiving regulatory approvals; ‚ commercialising products; and ‚ establishing a favourable competitive position. Many of these factors will depend on circumstances beyond New River's control. New River cannot be sure that it will have another product, other than VYVANSE, approved by the FDA, that it will bring any product to market or, if it is successful in doing so, that it will ever become proÑtable.
New River's product candidates are based on a technology that could ultimately prove ineÅective or unsafe New River's product candidates are created using its proprietary Carrierwave technology. Test results to date are limited to clinical studies in humans and preclinical studies in animals with respect to VYVANSE and NRP290 and laboratory tests and preclinical trials in animals with respect to other product candidates. New River has not fully characterised the mechanism of absorption of CBDs. Ultimately, New River's research and preclinical Ñndings, which currently indicate that Carrierwave technology possesses beneÑcial properties, may prove to be incorrect, in which case the product candidates created using Carrierwave technology may not diÅer substantially from competing drugs and may in fact be inferior to them. If these products are substantially identical or inferior to drugs already available, the market for Carrierwave drugs would be reduced or eliminated. Based on preclinical and clinical studies to date, New River believes its lead product candidates are safe and have no known side eÅects other than those associated generally with therapeutic amounts of amphetamine and opioids. However, New River may not be able to prove that product candidates are safe. No assessment of the eÇcacy, safety or side eÅects of a product candidate can be considered complete until all clinical trials needed to support a submission for marketing approval are complete. Other than VYVANSE, which received regulatory approval on 23 February 2007, New River's product candidates will require additional laboratory, animal and human testing prior to approval. In addition New River is conducting studies of VYVANSE in the adult ADHD population and has agreed to a request by the FDA that it conducts studies in adolescents. Success in earlier clinical and preclinical trials does not mean that subsequent trials will conÑrm the earlier Ñndings, or that experience with use of a product in large-scale commercial distribution will not identify additional safety or eÇcacy issues. If it is found that any products are not safe, or if eÇcacy of the products cannot be consistently demonstrated, New River may not be able to commercialise the product, or may be required to cease distribution of the relevant products. The safety of Carrierwave formulations may vary with each drug and the ingredients used in
21 PART II Ì RISK FACTORS each formulation and therefore, even if safety and eÅectiveness is established for one of the CBDs, this would not necessarily be predictive of the safety or eÅectiveness of any other product candidates, which would need to be separately established.
If New River is unable to develop and commercialise its product candidates it may never achieve proÑtability New River has not commercialised any products or recognised any revenue from product sales utilising Carrierwave technology. All of the compounds produced using Carrierwave technology, other than VYVANSE, are in early stages of development. New River must conduct signiÑcant additional research and development activities before it is able to apply for regulatory approval to commercialise any other products utilising Carrierwave technology. New River must successfully complete adequate and well-controlled studies designed to demonstrate the safety and eÇcacy of the product candidates and obtain regulatory approval before it is able to commercialise product candidates. There is no guarantee that New River will receive regulatory approval with respect to any of its product candidates other than VYVANSE, which received regulatory approval on 23 February 2007. Even if New River succeeds in commercialising VYVANSE or in developing and commercialising one or more other product candidates utilising Carrierwave technology, it may never generate suÇcient or sustainable revenue to enable it to be proÑtable.
New River faces intense competition in the markets targeted by its lead product candidates. Many of its competitors have substantially greater resources than it does, and New River expects that all of its product candidates under development will face intense competition from existing or future drugs New River has devoted substantial research eÅorts and capital to the development of its Carrierwave technology and lead product candidates. New River expects that all of its product candidates, if approved, will face intense competition from existing and future drugs marketed by other companies. The markets for amphetamines and other stimulants to treat ADHD and opioids to treat pain are well developed and populated with established drugs marketed by large pharmaceutical, biotechnology and generic drug companies. Amphetamines or other stimulants currently marketed for ADHD include Ritalin and Focalin (Novartis AG), Concerta (McNeil Consumer & Specialty Pharmaceuticals), Dexedrine (GlaxoSmithKline PLC), Dextrostat (Shire), Cylert (Abbott Laboratories. Inc.) and Adderall XR (Shire). In addition, Eli Lilly and Company markets a non-stimulant drug, Strattera, for ADHD. Opioids currently marketed for acute pain include Anexsia (Mallinckrodt Inc.), Endocet (Endo Laboratories), Hydrocet (Amarin Pharmaceuticals, Inc.), Lortab (UCB Pharma Inc.), Norco (Watson Pharmaceuticals, Inc.) and Vicodin (Abbott Laboratories, Inc.). Opioids currently marketed for chronic pain include OxyContin (Purdue Pharmaceuticals LP), Duragesic (Janssen Pharmaceutical Products, L.P.), MSContin (Purdue Frederick Company) and Avinza (Ligand Pharmaceuticals Inc.). Each of these companies has signiÑ- cantly greater Ñnancial and other resources than New River. In addition, generic equivalent versions of many of these existing drug products are available and these products are therefore subject to substantial price competition. If New River obtains regulatory approval to market any one or more of its product candidates, it will compete with these established brand and generic drugs and will need to show that its drugs have safety or eÇcacy advantages in order to take market share and be successful. Currently, and as a direct consequence of the public debate of the social and economic costs of illegal diversion and abuse of, addiction to, and overdose from stimulants and narcotics, several companies are pursuing formulations that are less prone to abuse and are less toxic. Companies speciÑcally engaged in developing abuse resistant drugs include Purdue Phamia LP, Nastech Pharmaceutical Company Inc. and Pain Therapeutics Inc. Other companies, including Johnson & Johnson and Noven Pharmaceuticals, Inc., are investigating alternative delivery mechanisms to control the delivery and availability of scheduled
22 PART II Ì RISK FACTORS drugs. These technologies include transdermal skin patches, metered dose inhalers and extended release subcutaneous injections and implants. These competitors may: ‚ successfully market products that compete with New River's products; ‚ successfully identify drug candidates or develop products earlier than New River does; or ‚ develop products that are more eÅective, have fewer side eÅects or cost less than New River's products. Additionally, if a competitor receives FDA approval before New River does for a drug that is similar to one of its product candidates, FDA approval for its product candidate may be precluded or delayed due to periods of non-patent exclusivity and/or the listing with the FDA by the competitor of patents covering its newly-approved drug product. Periods of non-patent exclusivity for new versions of existing drugs such as New River's current product candidates can extend for up to three and a half years. These competitive factors could require New River to conduct substantial new research and development activities to establish new product targets, which would be costly and time consuming. These activities would adversely aÅect New River's ability to commercialise products and achieve revenue and proÑts.
If New River fails to protect its intellectual property rights, its ability to pursue the development of its technologies and products would be negatively aÅected New River's success will depend in part on its ability to obtain patents and maintain adequate protection of its technologies and products. If it does not adequately protect its intellectual property, competitors may be able to use its technologies to produce and market drugs in direct competition with New River and erode its competitive advantage. Some foreign countries lack rules and methods for defending intellectual property rights and do not protect proprietary rights to the same extent as the United States. Many companies have had diÇculty protecting their proprietary rights in these foreign countries. New River may not be able to prevent misappropriation of its proprietary rights. Patent positions can be uncertain and involve complex legal and factual questions. New River can protect its proprietary rights from unauthorised use by third parties only to the extent that its proprietary technologies are covered by valid and enforceable patents or are eÅectively maintained as trade secrets. As of 28 February 2007, New River held two issued US patents relating to its generic Carrierwave technology, one issued US patent covering NRP290, one US patent covering Carrierwave technology applied to oxycodone and one issued US Patent covering VYVANSE. In addition, as of 28 February 2007, New River held four US patents directed to iodothyronine stability and delivery. New River has applied for additional patents relating to its technologies and its products and plans to Ñle additional patent applications in the future. Pending US patent applications cover each of its product candidates. Additionally, New River has Patent Cooperation Treaty applications pending covering abuse resistant aspects of its technology, as well as national stage applications pending in up to 18 countries depending on the speciÑc product candidate. New River also has national stage applications covering its core technology platform in Europe, Japan, China, South Korea, Canada, Australia, India and Israel. Third parties may challenge New River's patents, or its patent applications may not result in issued patents. Moreover, any patents issued to New River may not provide New River with meaningful protection, or others may challenge, circumvent or force New River to narrow the scope of its patent claims. Third parties may also independently develop products similar to New River's products, duplicate its unpatented products or design around any patents on products New River develops. Additionally, extensive time is required for development, testing and regulatory review of a potential product. While extensions of patent term due to regulatory delays may be available, it is possible that, before any product candidates can be commercialised, any related patent, even with an extension, may expire or remain in force for only a short period following commercialisation, thereby reducing any advantages of the patent.
23 PART II Ì RISK FACTORS
In addition to patents, New River relies on a combination of trade secrets, conÑdentiality, nondisclosure and other contractual provisions and security measures to protect its conÑdential and proprietary information. These measures may not adequately protect its trade secrets or other proprietary information. If they do not adequately protect its rights, third parties could use New River's technology and it could lose any competitive advantage it may have. In addition, others may independently develop similar proprietary information or techniques or otherwise gain access to New River's trade secrets, which could impair any competitive advantage New River may have.
New River has not commissioned an extensive investigation concerning its freedom to practice or the validity or enforceability of its Carrierwave technology and has only recently commissioned an investigation concerning its freedom to practice or the validity or enforceability of its product candidates. New River may also be held to infringe the intellectual property rights of others
New River's ability to freely practise its product candidates is dependent upon the duration and scope of patents held by third parties. New River's patent, prior art and infringement investigations have been conducted primarily by New River. Although New River has consulted with its patent counsel in connection with its intellectual property investigations, its patent counsel has only recently undertaken an extensive independent analysis to determine whether its product candidates infringe upon any issued patents or whether its issued patents or patent applications relating to product candidates could be invalidated or rendered unenforceable for any reason or could be subject to interference proceedings. Further, New River has not commissioned patent counsel to undertake an extensive independent analysis to determine whether its Carrierwave technology could infringe upon any issued patents or whether its issued patents or patent applications relating to its Carrierwave technology could be invalidated or rendered unenforceable for any reason or could be subject to interference proceedings.
There may be patents or patent applications of which New River is unaware and avoiding patent infringement may be diÇcult. New River may inadvertently infringe third party patents. Third party patents may impair or block New River's ability to conduct its business. There are no unresolved communications, allegations, complaints or threats of litigation related to the possibility that New River may infringe patents held by others.
Claims may be asserted against New River that its products or technology infringes patents or other intellectual property owned by others. New River may be exposed to future litigation by third parties based on claims that its products or activities infringe the intellectual property rights of others. In the event of litigation, any claims may not be resolved in favour of New River. Any litigation or claims against New River, whether or not valid, may result in substantial costs and may result in an award of damages, lost proÑts, attorneys fees and tripling of those damages in the event that a court Ñnds an infringement to have been wilful. A lawsuit could also place a signiÑcant strain on New River's Ñnancial resources, divert the attention of management and harm its reputation. In addition, intellectual property litigation or third party infringement claims could force New River to do one or more of the following:
‚ cease making, using, selling, oÅering to sell or importing any products that infringe a third party's intellectual property through an injunction;
‚ obtain a licence or an assignment from the holder of the infringed intellectual property right, which licence or assignment may be costly or may not be available on reasonable terms, if at all; or
‚ redesign its products, which would be costly and time-consuming and may not be possible.
24 PART II Ì RISK FACTORS
New River may be involved in lawsuits to protect or enforce its patents, which could be expensive and time consuming As at 28 February 2007, New River's intellectual property included nine US patents, two foreign patents and 124 pending US (including provisionals, divisionals, continuations and continuations-in-part applica- tions), Patent Cooperation Treaty and national applications. New River has licensed aspects of its Carrierwave technology with respect to VYVANSE pursuant to its collaboration agreement with Shire. As at 28 February 2007, New River had 77 applications worldwide covering anti-abuse compounds, compositions and methods for amphetamine, hydrocodone and oxycodone and other commonly abused substances both speciÑcally and generally. Of these, worldwide prosecution is being focused on amphetamine in 22 applications, hydrocodone in 25 applications and oxycodone in 29 applications. Additionally, iodothyronine compounds are the focus of seven applications worldwide. Competitors may infringe New River's patents, and New River may Ñle infringement claims to counter infringement or unauthorised use. This can be expensive, particularly for a company of New River's size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a New River patent is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that New River's patents do not cover its technology. An adverse determination of any litigation or defence proceedings could put one or more of New River's patents at risk of being invalidated or interpreted narrowly. Also, a third party may assert that New River's patents are invalid and/or unenforceable. There are no unresolved communications, allegations, complaints or threats of litigation related to the possibility that New River's patents are invalid or unenforceable. Any litigation or claims against New River, whether or not merited, may result in substantial costs, place a signiÑcant strain on its Ñnancial resources, divert the attention of management and harm its reputation. An adverse decision in a litigation could result in inadequate protection for New River's product candidates and/or reduce the value of any licence agreements it has with third parties. Interference proceedings brought before the US Patent and Trademark OÇce may be necessary to determine priority of invention with respect to New River's patents or patent applications. During an interference proceeding, it may be determined that New River does not have priority of invention for one or more aspects in its patents or patent applications and could result in the invalidation in part or whole of a patent or could put a patent application at risk of not issuing. Even if successful, an interference may result in substantial costs and distraction to the New River management. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation or interference proceedings, there is a risk that some of the conÑdential information belonging to New River could be compromised by disclosure. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments.
If preclinical testing or clinical trials for New River's product candidates are unsuccessful or delayed, New River will be unable to meet its anticipated development and commercialisation timelines Other than VYVANSE, New River's potential drug candidates require preclinical testing and clinical trials prior to submission of any regulatory application for commercial sales. Additional clinical study require- ments could be imposed on New River either prior to approval or as post-approval requirements. In addition, New River is conducting studies of VYVANSE in the adult ADHD population and has agreed to a request by the FDA that it conducts studies in adolescents (aged 13-17). New River currently employs two clinical trial managers. New River relies and expects to continue to rely on third parties, including clinical research organisations and outside consultants, to conduct, supervise or monitor some or all aspects of preclinical testing or clinical trials involving its product candidates. New River has less control over the timing and other aspects of these preclinical testing or clinical trials than if it performed the
25 PART II Ì RISK FACTORS monitoring and supervision entirely on its own. Third parties may not perform their responsibilities for preclinical testing or clinical trials on New River's anticipated schedule or, for clinical trials, consistent with a clinical trial protocol. Delays in preclinical and clinical testing could signiÑcantly increase product development costs and delay product commercialisation. In addition, many of the factors that may cause, or lead to, a delay in the clinical trials may also ultimately lead to denial of regulatory approval of a product candidate. The commencement of clinical trials can be delayed for a variety of reasons, including delays in: ‚ demonstrating suÇcient safety and eÇcacy to obtain regulatory approval to commence a clinical trial; ‚ reaching agreement on acceptable terms with prospective contract research organisations and trial sites; ‚ manufacturing suÇcient quantities of a product candidate; and ‚ obtaining institutional review board approval to conduct a clinical trial at a prospective site. Once a clinical trial has begun, it may be delayed, suspended or terminated by New River or the FDA or other regulatory authorities due to a number of factors, including: ‚ ongoing discussions with the FDA or other regulatory authorities regarding the scope or design of clinical trials; ‚ failure to conduct clinical trials in accordance with regulatory requirements; ‚ lower than anticipated recruitment or retention rate of patients in clinical trials; ‚ inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold; ‚ lack of adequate funding to continue clinical trials; ‚ adverse eÅects or safety issues; or ‚ negative results of clinical trials. If clinical trials are unsuccessful, and New River is not able to obtain regulatory approvals for its product candidates under development, it will not be able to commercialise these products, and therefore may not be able to generate suÇcient revenues to support the business.
If the FDA does not accept New River's Ñling for NRP290 under Section 505(b)(1) and New River is unable to Ñle for approval under Section 505(b)(2) of the US Federal Food, Drug and Cosmetic Act or if New River is required to generate additional data related to safety and eÇcacy in order to obtain approval under Section 505(b)(1) or 505(b)(2) of the US Federal Food, Drug and Cosmetic Act, New River may be unable to meet its anticipated development and commercialisation timelines New River's current plans for Ñling NDAs for its product candidates include eÅorts to minimise the data it will be required to generate in order to obtain marketing approval for its product candidates and therefore possibly obtain a shortened review period for the applications. The FDA accepted New River's NDA for VYVANSE under Section 505(b)(1) and it believes the FDA may also accept its planned NDA for NRP290 under Section 505(b)(1) as well. The FDA could change its determination on this issue, however, and require that New River either generates additional data to support an approval under Section 505(b)(1) or submits or converts an application to a Section 505(b)(2) application so that New River can rely on data generated by third parties, to which it does not have a right of reference. If New River is required to rely on data generated with products already approved by the FDA and covered
26 PART II Ì RISK FACTORS by third party patents it would be required to certify that it does not infringe the listed patents for those products or that such patents are invalid or unenforceable. As a result of such a certiÑcation, the third party would have 45 days from notiÑcation of New River's certiÑcation to initiate an action for patent infringement against it. In the event that an action is brought in response to such a certiÑcation, the approval of New River's NDA could be subject to a stay of up to 30 months or more while it defends against such a suit. Approval of New River's product candidates may therefore be delayed until patent exclusivity expires or until New River successfully challenges the applicability of those patents to its product candidates. Alternatively, New River may elect to generate suÇcient additional clinical data of its own so that it can maintain its application under Section 505(b)(1). Even if no exclusivity periods apply to its applications, the FDA has broad discretion to require New River to generate additional data on the safety and eÇcacy of its product candidates to supplement third party data on which it may be permitted to rely. In either event, New River could be required, before obtaining marketing approval for any of its product candidates, to conduct substantial new research and development activities beyond those it currently plans to engage in order to obtain approval of product candidates. Such additional new research and development activities would be costly and time consuming. If New River is required to generate additional data to support approval, it may be unable to meet its anticipated development and commercialisation timelines, may be unable to generate the additional data at a reasonable cost, or at all, and may be unable to obtain marketing approval of New River's product candidates.
New River will be unable to begin commercial sale of VYVANSE until the DEA concludes proceedings to place the drug in Schedule II under the Controlled Substance Act. On 6 October 2006, New River received an approvable letter from the FDA which indicated that the Controlled Substance StaÅ of the FDA has initially recommended that VYVANSE be placed in Schedule II of the US Controlled Substance Act (""CSA''). Subsequently, the FDA forwarded to the DEA, through the Assistant Secretary for Health of the Department of Health and Human Services, its medical and scientiÑc Ñndings, and its recommendation that the drug be placed in Schedule II. The DEA has published a notice in the Federal Register of a proposal to implement that recommendation. Interested persons had until 26 March 2007 to comment on the proposal and to request a hearing. After consideration of the comments received, and potentially the holding of a formal administrative hearing, the DEA will then publish a regulation placing the drug in the appropriate CSA schedule. New River has committed to the FDA not to commence sale of the drug until it is placed in an appropriate CSA schedule by the DEA. New River believes that DEA will act promptly to complete the scheduling of the drug after the close of the comment period on 26 March 2007. Because of the opportunity for public participation in the process, however, New River cannot predict how long the DEA may take to conclude any further procedures and complete scheduling action with respect to the drug that they may believe are warranted.
The potential market for VYVANSE may be limited by the placement of the drug in Schedule II The drug products with which VYVANSE is expected to compete are amphetamine products currently classiÑed by the DEA under the CSA on Schedule II, the most restrictive schedule applicable to drug products marketed for legitimate medical use. Because of the decision by FDA and DEA to place the active ingredient in VYVANSE in Schedule II, there will be no scheduling advantage for VYVANSE, at least at launch, in comparison with other competing products. Marketing plans and strategies for VYVANSE are now being Ñnalised in light of the newly approved labelling for the product and the anticipated placement of the active ingredient by the DEA in Schedule II. There can be no assurance that these marketing plans and strategies will be implemented eÅectively or will result in signiÑcant sales for the drug.
27 PART II Ì RISK FACTORS
In addition, New River's ability to promote VYVANSE based on diÅerences in the abuse potential and abuse liability of the drug in comparison with other competing drug products may be limited by the Schedule II status of the drug and by the FDA-approved labelling for the drug.
New River has engaged in extensive Ñnancial and operational transactions with Randal J. Kirk, Chairman, President and Chief Executive OÇcer, and his aÇliates and therefore these transactions may not be as favourable to New River as if it had negotiated them with unaÇliated third parties New River was formed by, and has historically been controlled and managed and, prior to the initial public oÅering of its common stock, principally funded by, Randal J. Kirk, the Chairman, President and Chief Executive OÇcer, and aÇliates of Mr. Kirk. As a result, New River has engaged in a variety of Ñnancial and operational transactions with Mr. Kirk and these aÇliates. New River believes that each of these transactions was on terms no less favourable to New River than terms it could have obtained from unaÇliated third parties. Their terms may not be as favourable to New River as if it had negotiated them with unaÇliated third parties. It is the intention of New River to ensure that all future transactions, if any, between New River and its oÇcers, directors, principal shareholders and their aÇliates, are approved by the audit committee or a majority of the independent and disinterested members of the board of directors, and are on terms no less favourable to New River than those that New River could obtain from unaÇliated third parties. If the Acquisition is completed, Mr. Kirk will cease to hold shares in, or sit on the board of directors of, New River and will cease to have any involvement in its management. All agreements and arrangements with Mr. Kirk will be terminated upon completion.
As at 6 March 2007 Randal J. Kirk controlled approximately 50.2 per cent of the outstanding shares of New River common stock (48.4 per cent on a fully diluted basis) and is able to control or signiÑcantly inÖuence corporate actions, which may result in Mr. Kirk taking actions that advance his interests to the detriment of New River's other shareholders As at 6 March 2007 Randal J. Kirk. Chairman, President and Chief Executive OÇcer, and shareholders aÇliated with him, controlled approximately 50.2 per cent of New River's common stock. Mr. Kirk is able to control or signiÑcantly inÖuence all matters requiring approval by New River's shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of Mr. Kirk may not always coincide with the interests of other shareholders, and he may take actions that advance his interests to the detriment of New River's other shareholders. Mr. Kirk has agreed, pursuant to the Tender and Support Agreement, that he will tender all his New River shares in the oÅer. If the Acquisition is completed, Mr. Kirk will cease to hold any shares of New River common stock.
New River relies on third parties to manufacture the compounds used in its trials, and intends to rely on them for the manufacture of any approved products for commercial sale. If these third parties do not manufacture New River's product candidates in suÇcient quantities and at an acceptable cost, clinical development and commercialisation of product candidates could be delayed, prevented or impaired New River has no manufacturing facilities and no experience in the clinical or commercial-scale manufacture of drugs or in designing drug manufacturing processes. Certain specialised manufacturers provide New River with modiÑed and unmodiÑed pharmaceutical compounds, including Ñnished products, for use in preclinical and clinical studies. If New River fails to contract for manufacturing on acceptable terms or if third party manufacturers do not perform as New River expects, its development programs could be materially adversely aÅected. This may result in delays in Ñling for and receiving FDA approval for one or more of its products. Any such delays could cause its prospects to suÅer signiÑcantly. New River intends to rely on third parties to manufacture some or all of its products that reach commercialisation. New River believes that there are a variety of manufacturers that it may be able to
28 PART II Ì RISK FACTORS retain to produce these products. However, once New River retains a manufacturing source, if its manufacturers do not perform in a satisfactory manner, it may not be able to develop or commercialise potential products as planned.
Failure by third-party manufacturers to comply with the regulatory guidelines set forth by the FDA and DEA with respect to New River's product candidates could delay or prevent the completion of clinical trials, the approval of any product candidates or the commercialisation of products New River's reliance on third-party manufacturers exposes it to the following additional risks, any of which could delay or prevent the completion of clinical trials, the approval of product candidates by the FDA or other regulatory agencies, the commercialisation of products, result in higher costs or deprive New River of potential product revenues: ‚ Manufacturers are obligated to operate in accordance with the requirements of FDA-mandated current GMP (cGMP). A failure of any of New River's third-party manufacturers to establish and follow cGMP requirements and to document their adherence to such practices may lead to signiÑcant delays in the availability of material for clinical trials, may delay or prevent Ñling or approval of marketing applications for its products and may cause delays or interruptions in the availability of its products for commercial distribution following FDA approval. ‚ Replacing third party manufacturers or contracting with additional manufacturers may require re- validation of the manufacturing processes and procedures in accordance with cGMP and compliance with supplemental approval requirements. Any such necessary re-validation and supplemental approvals may be costly and time-consuming. Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA, the DEA and corresponding state and foreign agencies to ensure strict compliance with cGMP requirements and other requirements under federal drug laws, other government regulations and corresponding foreign stan- dards. If third-party manufacturers or New River fail to comply with applicable regulations, sanctions could be imposed on New River, including Ñnes, injunctions, civil penalties, failure by the government to grant marketing approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions.
New River may need additional capital in the future. If additional capital is not available or is available on unattractive terms, New River may be forced to delay, reduce the scope of or eliminate its research and development programs, reduce commercialisation eÅorts or curtail operations In order to develop and bring product candidates to market, New River must commit substantial resources to costly and time-consuming research, preclinical and clinical trials and marketing activities. New River anticipates that existing cash and cash equivalents and short-term investments will enable it to maintain its current planned operations for at least the next 15 months. New River anticipates using cash and cash equivalents and short-term investments to fund further research and development with respect to lead product candidates and commercialisation activities. New River may, however, need to raise additional funding sooner if its business or operations change in a manner that consumes available resources more rapidly than it anticipates. New River's requirements for additional capital will depend on many factors, including: ‚ successful commercialisation of product candidates; ‚ continued progress of research and development of product candidates utilising Carrierwave technology; ‚ the time and costs involved in obtaining regulatory approval for product candidates;
29 PART II Ì RISK FACTORS
‚ costs associated with protecting intellectual property rights; ‚ development of marketing and sales capabilities; ‚ payments received under the collaboration agreements with Shire and any future collaboration agreements, if any; and ‚ market acceptance of products. The factors raised above do not aÅect the ability of Shire to make the working capital statement set out at section 10 of Part VI of this Circular.
Even if New River obtains regulatory approval to market its product candidates, its product candidates may not be accepted by the market Even if New River obtains regulatory approval to market its product candidates, its product candidates may not gain market acceptance among physicians, patients, healthcare payers and the medical community. The degree of market acceptance of any pharmaceutical product that New River develops will depend on a number of factors, including: ‚ cost-eÅectiveness; ‚ the safety and eÅectiveness of its products, including any potential side eÅects, as compared to alternative products or treatment methods; ‚ the timing of market entry as compared to competitive products; ‚ the rate of adoption of its products by doctors and nurses; ‚ product labelling or product insert required by the FDA for each of its products; ‚ determination of scheduled or unscheduled status by the FDA and DEA; ‚ reimbursement policies of government and third party payers; ‚ eÅectiveness of sales, marketing and distribution capabilities and the eÅectiveness of such capabilities of collaboration partners; and ‚ unfavourable publicity concerning products or any similar products. New River's product candidates, if successfully developed, will compete with a number of products manufactured and marketed by major pharmaceutical companies, biotechnology companies and manu- facturers of generic drugs. New River's products may also compete with new products currently under development by others. Physicians, patients, third-party payers and the medical community may not accept and utilise any of New River's product candidates. Physicians may not be inclined to prescribe the drugs created using Carrierwave technology unless such drugs bring substantial and demonstrable advantages over other drugs currently marketed for the same indications. If New River's products do not achieve market acceptance, New River will not be able to generate signiÑcant revenues or become proÑtable.
If New River fails to establish marketing, sales and distribution capabilities, or fails to enter into arrangements with third parties to do this on its behalf, New River will not be able to create a market for its product candidates Currently, New River does not have any signiÑcant sales, marketing or distribution capabilities. On 25 July 2006, under the terms of its collaboration agreement with Shire, New River exercised its right to co- promote VYVANSE in the United States. In order to generate sales of any product candidates that receive regulatory approval, New River must either acquire or develop an internal marketing and sales force with technical expertise and with supporting distribution capabilities or make arrangements with third parties
30 PART II Ì RISK FACTORS to perform these services for it. The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the attention of management and key personnel and defer product development eÅorts. To the extent that New River enters into marketing and sales arrangements with other companies, its revenues will depend on the eÅorts of others. These eÅorts may not be successful. If New River fails to develop sales, marketing and distribution channels, or enter into arrangements with third parties, it will experience delays in product sales and incur increased costs. Upon entering into the Merger Agreement on 20 February 2007, New River ceased activities associated with the co-promotion option to market VYVANSE. If the Acquisition does not complete, then New River's ability to successfully execute its responsibilities under the co-promotion option would be signiÑcantly delayed and New River's revenues would be negatively impacted.
In the event that New River is successful in bringing any products to market, revenues may be adversely aÅected if it fails to obtain acceptable prices or adequate reimbursement for its products from third party payers
New River's ability to commercialise pharmaceutical products successfully may depend in part on the availability of reimbursement for New River's products from:
‚ government and health administration authorities;
‚ private health insurers; and
‚ other third party payers, including Medicare in the US.
New River cannot predict the availability of reimbursement for newly approved health care products. Third party payers, including Medicare, are challenging the prices charged for medical products and services. Government and other third-party payers increasingly are limiting both coverage and the level of reimbursement for new drugs. Third-party insurance coverage may not be available to patients for any of its products.
The continuing eÅorts of government and third party payers to contain or reduce the costs of health care may limit New River's commercial opportunity. If government and other third-party payers do not provide adequate coverage and reimbursement for any prescription product New River brings to market, doctors may not prescribe them or patients may ask to have their physicians prescribe competing drugs with more favourable reimbursement. In some foreign markets, pricing and proÑtability of prescription pharmaceuticals are subject to government control. In the United States, New River expects that there will continue to be federal and state proposals for similar controls. In addition, New River expects that increasing emphasis on managed care in the United States will continue to put pressure on the pricing of pharmaceutical products. Cost-control initiatives could decrease the price that New River receives for any products in the future. Further, cost-control initiatives could impair New River's ability to commercialise products and its ability to earn revenues from this commercialisation.
New River could be forced to pay substantial damages awards if product liability claims that may be brought against it are successful
The use of any product candidates in clinical trials and the sale of any approved products, may expose New River to liability claims and Ñnancial losses resulting from the use or sale of its products. New River has obtained limited product liability insurance coverage for its clinical trials of $20 million per occurrence and in the aggregate, subject to a deductible of $100,000 per occurrence and $1 million per year in the aggregate. However, such insurance may not be adequate to cover any claims made against New River. In addition, New River may not be able to maintain insurance coverage at a reasonable cost or in suÇcient amounts or scope to protect it against losses.
31 PART II Ì RISK FACTORS
New River uses hazardous chemicals in its business. Potential claims relating to improper handling, storage or disposal of these chemicals could be time consuming and costly New River's research and development processes involve the controlled use of hazardous chemicals. These hazardous chemicals are reagents and solvents typically found in a chemistry laboratory. New River's operations also produce hazardous waste products. US federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. While New River attempts to comply with all environmental laws and regulations, including those relating to the outsourcing of the disposal of all hazardous chemicals and waste products, it cannot eliminate the risk of accidental contamination from or discharge of hazardous materials and any resultant injury. Compliance with environmental laws and regulations may be expensive. Current or future environmental regulations may impair New River's research, development or production eÅorts. New River might have to pay civil damages in the event of an improper or unauthorised release of, or exposure of individuals to, hazardous materials. New River is not insured against these environmental risks. New River's collaborative partners might also work with hazardous materials in connection with the collaborations. New River may agree to indemnify its collaborators in some circumstances against damages and other liabilities arising out of development activities or products produced in connection with these collaborations.
New River's indebtedness could adversely aÅect its Ñnancial health and limit its ability to react to changes in the industry or to implement New River's strategic initiatives New River's indebtedness could have important consequences. For example, it could: ‚ require New River to dedicate a substantial portion of its cash Öow from operations to payments of its indebtedness, thereby reducing the availability of its cash Öow to fund New River's business activities, including its research and development programs; ‚ limit New River's ability to secure additional Ñnancing to implement its strategic initiatives; ‚ increase New River's vulnerability to general adverse economic and industry conditions; ‚ limit New River's Öexibility in planning for, or reacting to, changes in its business and the industry in which it operates; ‚ place New River at a disadvantage compared to its competitors that may have proportionately less debt; and ‚ restrict New River from making strategic acquisitions, introducing new technologies or otherwise exploiting business opportunities. New River cannot be sure that it will be able to generate suÇcient cash Öow to pay the interest on its debt, or that future working capital, borrowings or equity Ñnancing will be available to pay or reÑnance any such debt.
Certain provisions of Virginia law, and New River's amended and restated articles of incorporation and amended and restated bylaws could make it more diÇcult for New River's shareholders to remove its board of directors and management Certain provisions of Virginia law, the state in which New River is incorporated and its amended and restated articles of incorporation and amended and restated bylaws could make it more diÇcult for its shareholders, should they choose to do so, to remove New River's board of directors or management. These provisions include: ‚ a provision allowing the board of directors to issue preferred stock with rights senior to those of the common stock without any vote or action by the holders of New River common stock. The issuance
32 PART II Ì RISK FACTORS
of preferred stock could adversely aÅect the rights and powers, including voting rights, of the holders of common stock; ‚ a provision allowing the removal of directors only for cause; ‚ the requirement in New River's bylaws that shareholders provide advance notice when nominating new directors or submitting other shareholder proposals; and ‚ the inability of shareholders to convene a shareholders' meeting without the chairman of the board, the chief executive director or a majority of the board of directors Ñrst calling the meeting.
33 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Part IIIA Comparative Tables
The Ñnancial information on New River in this section does not constitute the statutory accounts of New 10.38(c) River within the meaning of section 240 of the Act. The information in this section has been extracted 12.09 12.19 without material adjustment from the audited Ñnancial statements of New River for the Ñscal years ended 13.5.4(1) 31 December 2006, 1 January 2006 and 2 January 2005, audited by KPMG LLP, each of which received 13.5.4(6) an unqualiÑed opinion. 13.5.7(1) (2) NEW RIVER (3) 10.31(d) CONSOLIDATED BALANCE SHEETS 13.5.13(1) 31 December 2006, 13.5.14(1) 1 January 2006 and 2 January 2005. 13.5.14(2) 13.5.18(1) 2006 2005 2004 $$$ Assets Current assets: Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87,006,357 3,515,572 4,018,556 Short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60,000,000 49,250,000 21,150,000 Other receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 214,208 135,755 24,747 Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏ 1,089,903 798,090 315,644 Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 148,310,468 53,699,417 25,508,947 Property and equipment: Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114,644 94,609 76,860 Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,544,473 819,472 686,895 Construction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,208,825 Ì Ì 2,867,942 914,081 763,755 Less accumulated depreciation and amortisation ÏÏÏÏ 709,732 653,427 502,890 Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,158,210 260,654 260,865 Deferred tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,067,238 Ì Ì Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 151,535,916 53,960,071 25,769,812 Liabilities and Shareholders' (DeÑcit)/Equity Current liabilities: Capital lease obligation, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24,941 22,298 Ì Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,737,665 1,548,473 701,175 Unpaid and accrued research and development expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,120,473 3,201,732 2,100,421 Accrued compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,697,147 2,203,898 1,506,413 Due to aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 253,511 34,138 76,920 Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 310,666 Ì Ì Deferred tax liability, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,067,238 Ì Ì Interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,071,750 Ì Ì Deferred revenue, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,146,355 Ì Ì Convertible notes, current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,750,000 Ì Ì Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167,179,746 7,010,539 4,384,929 Capital lease obligation, non-current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,207 27,148 Ì Accrued stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,536,098 3,404,435 Ì Deferred revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 59,520,548 50,000,000 Ì Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 261,238,599 60,442,122 4,384,929
34 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
NEW RIVER CONSOLIDATED BALANCE SHEETS
31 December 2006, 1 January 2006 and 2 January 2005. 2006 2005 2004 $$$ Shareholders' (deÑcit)/equity Preferred stock, par value $0.001 per share Authorised 25,000,000 shares; none issued and outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Common stock, par value $0.001 per share. Authorised 150,000,000 shares; issued and outstanding 36,957,064 shares in 2006, 36,367,064 shares in 2005 and 35,549,108 shares in 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,957 36,367 35,549 Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,532,590 63,326,824 61,328,256 Accumulated deÑcit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (127,272,230) (69,845,242) (39,978,922) Total shareholders' (deÑcit)/equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (109,702,683) (6,482,051) 21,384,883 Commitments and contingencies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities and shareholders' (deÑcit)/equity ÏÏÏ 151,535,916 53,960,071 25,769,812
See accompanying notes to consolidated Ñnancial statements.
35 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
NEW RIVER
CONSOLIDATED STATEMENTS OF OPERATIONS 13.5.18(2)
Fiscal years ended 31 December 2006, 1 January 2006 and 2 January 2005. 2006 2005 2004 $$$ Collaboration revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,333,097 Ì Ì Operating costs and expenses: Selling, general, and administrative ÏÏÏÏÏÏÏÏÏÏÏÏÏ 48,992,486 13,228,644 5,932,839 Research and developmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40,962,678 18,366,376 10,235,111 Depreciation and amortisation of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,840 156,597 119,450 Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90,108,004 31,751,617 16,287,400 Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (55,774,907) (31,751,617) (16,287,400) Other income (expense): Gain on settlement of litigationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,764,043 Loss on disposal of property and equipmentÏÏÏÏÏ (10,226) Ì (18,776) Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,349,216) (4,976) (11,422) Write-oÅ of debt issuance costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (4,254,890) Ì Ì Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,983,814 1,890,273 218,645 Total other income (expense), net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (630,518) 1,885,297 1,952,490 Loss before income taxes and cumulative eÅect of change in accounting principleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (56,405,425) (29,866,320) (14,334,910) Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 310,666 Ì Ì Loss before cumulative eÅect of change in accounting principle ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (56,716,091) (29,866,320) (14,334,910) Cumulative eÅect of change in accounting principle (710,897) Ì Ì Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (57,426,988) (29,866,320) (14,334,910) Net loss per share: Basic and diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.60) (0.83) (0.48)
See accompanying notes to consolidated Ñnancial statements.
36 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
NEW RIVER
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)/EQUITY 13.5.18(4)
Fiscal years ended 31 December 2006, 1 January 2006 and 2 January 2005 Common Stock Additional Accumulated Shares Dollars paid-in capital DeÑcit Total #$ $ $ $ Balances at 28 December 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25,185,776 25,186 24,479,789 (25,644,012) (1,139,037) Issuance of common stock- prior to initial public oÅering ($2.50 per share)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,940,000 1,940 4,848,060 Ì 4,850,000 Stock-based compensation Ì Ì 1,386,000 Ì 1,386,000 Contribution of services by related party ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 576,229 Ì 576,229 Initial public oÅering ($4.00 per share), net of issuance costsÏÏÏÏÏÏÏÏÏÏ 8,400,000 8,400 29,969,036 Ì 29,977,436 Exercise of stock options ÏÏ 23,332 23 69,142 Ì 69,165 Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (14,334,910) (14,334,910) Balances at 2 January 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,549,108 35,549 61,328,256 (39,978,922) 21,384,883 Stock-based compensation Ì Ì 680,887 Ì 680,887 Exercise of stock options ÏÏ 817,956 818 1,317,681 Ì 1,318,499 Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (29,866,320) (29,866,320) Balances at 1 January 2006 36,367,064 36,367 63,326,824 (69,845,242) (6,482,051) Stock-based compensation Ì Ì 7,008,496 Ì 7,008,496 Exercise of stock options ÏÏ 590,000 590 2,247,770 Ì 2,248,360 Prepaid forward purchase of common stockÏÏÏÏÏÏÏÏÏÏ Ì Ì (41,000,000) Ì (41,000,000) Purchase of convertible note hedgeÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (43,529,000) Ì (43,529,000) Issuance of warrants ÏÏÏÏÏÏ Ì Ì 29,478,500 Ì 29,478,500 Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì (57,426,988) (57,426,988) Balances at 31 December 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,957,064 36,957 17,532,590 (127,272,230) (109,702,683)
See accompanying notes to consolidated Ñnancial statements.
37 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
NEW RIVER
CONSOLIDATED STATEMENTS OF CASH FLOWS 13.5.18(3)
Fiscal years ended 31 December 2006, 1 January 2006 and 2 January 2005. 2006 2005 2004 $$$ Cash Öows from operating activities: Cumulative eÅect of change in accounting principleÏÏÏ 710,897 Ì Ì Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (57,426,988) (29,866,320) (14,334,910) Loss before cumulative eÅect of change in accounting principle (56,716,091) (29,866,320) (14,334,910) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortisation of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 152,840 156,597 119,450 Amortization of debt issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 277,308 Ì Ì Write-oÅ of debt issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,254,620 Ì Ì Loss on disposal of property and equipment ÏÏÏÏÏÏÏ 10,226 Ì 18,776 Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,008,496 680,887 1,386,000 Contribution of services by related party ÏÏÏÏÏÏÏÏÏÏ Ì Ì 576,229 Changes in operating assets and liabilities: Due from aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 88,381 Other receivablesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (78,453) (111,008) (24,747) Prepaid expenses and other current assets ÏÏÏÏÏÏ (291,813) (482,446) (315,644) Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,189,192 847,298 233,433 Unpaid and accrued research and development expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,918,741 1,101,311 1,192,916 Accrued compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 493,249 697,485 1,469,640 Due to aÇliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 219,373 (42,782) 64,237 Income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 310,666 Ì Ì Accrued interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,071,750 Ì Ì Accrued stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏ 32,762,701 3,404,435 Ì Exercise of stock appreciation rights ÏÏÏÏÏÏÏÏÏÏÏÏ (2,341,935) Ì Ì Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,666,903 50,000,000 Ì Net cash provided by (used in) operating activities 15,907,773 26,385,457 (9,526,239) Cash Öows from investing activities: Proceeds from sale of short-term investmentsÏÏÏÏÏÏ 91,550,000 66,125,000 6,000,000 Purchases of short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (102,300,000) (94,225,000) (27,150,000) Proceeds from sale of property and equipmentÏÏÏÏÏ Ì 91 7,545 Purchases of property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,060,622) (87,499) (123,744) Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (12,810,622) (28,187,408) (21,266,199)
38 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
NEW RIVER CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended 31 December 2006, 1 January 2006 and 2 January 2005. 2006 2005 2004 $$$ Cash Öows from Ñnancing activities: Proceeds from notes payable to shareholder ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 1,450,000 Repayment of notes payable to shareholder ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (1,800,000) Proceeds from issuance of warrantsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,478,500 Ì Ì Prepaid forward purchase of Company stock ÏÏÏÏÏÏÏÏÏÏÏ (41,000,000) Ì Ì Proceeds from convertible notes oÅering, net of issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 137,750,000 Ì Ì Payment of convertible notes issuance costs ÏÏÏÏÏÏÏÏÏÏÏ (4,531,928) Ì Ì Purchase of convertible note hedges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (43,529,000) Ì Ì Principal payments on capital lease obligation ÏÏÏÏÏÏÏÏÏÏ (22,298) (19,532) Ì Net proceeds from issuance of common stock prior to initial public oÅering of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 4,850,000 Net proceeds from initial public oÅering of common stock Ì Ì 29,977,436 Net proceeds from issuances of common stock from exercise of stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,248,360 1,318,499 69,165 Net cash provided by Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80,393,634 1,298,967 34,546,601 Net increase (decrease) in cash and cash equivalents ÏÏ 83,490,785 (502,984) 3,754,163 Cash and cash equivalents at beginning of period ÏÏÏÏÏÏÏÏ 3,515,572 4,018,556 264,393 Cash and cash equivalents at end of periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 87,006,357 3,515,572 4,018,556 Supplemental cash Öow information: Interest paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,439 4,976 11,422
Non-cash investing and Ñnancing activities:
In Ñscal 2005, New River Ñnanced the purchase of equipment totalling $68,978 with a capital lease.
See accompanying notes to consolidated Ñnancial statements.
39 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
1. ORGANISATION AND NATURE OF BUSINESS
Organisation
New River Pharmaceuticals Inc. (""New River''), a Virginia corporation, was formed in 1996. New River 12.19 has a wholly-owned subsidiary, Lotus Biochemical (Bermuda) Ltd. (""Lotus Bermuda''), which exists to hold pharmaceutical intellectual property. While Lotus Bermuda has held such forms of intellectual 12.20 property in the past, at 31 December 2006 Lotus Bermuda holds no such assets. However, Lotus Bermuda may be used again for such purpose in the future. Alternatively, New River may decide to 13.5.18(5) dissolve Lotus Bermuda at some time in the future. 13.5.18(6)
Nature of Business
New River is a specialty pharmaceutical company developing generational improvements of widely- prescribed drugs in large and growing markets. Utilising its proprietary Carrierwave technology, New River is developing new molecular entities that are derivatives of public domain pharmaceutical active ingredients and attempts to address certain deÑciencies associated with currently marketed drugs. On 23 February 2007 the FDA granted marketing approval for VYVANSE, formerly know as NRP104, for the treatment of Attention DeÑcit Hyperactivity Disorder (""ADHD''). The FDA has proposed VYVANSE be classiÑed as a Schedule II controlled substance. This proposal was submitted to and accepted by the DEA. A Ñnal scheduling decision is expected from the DEA in March 2007. Pending Ñnal scheduling designation, New River anticipates the commercial launch of VYVANSE in the second quarter of 2007. The product in New River's pipeline that is the most advanced in its development is NRP290, which is a conditionally bioversible derivative (""CBD'') of hydrocodine designed to treat acute pain. NRP290 is designed to provide overdose protection, less potential for abuse and less potential for addiction while aÅording comparable eÇcacy.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated Ñnancial statements include the accounts of New River and its wholly- owned subsidiary. All signiÑcant intercompany balances and transactions have been eliminated in consolidation.
Fiscal Year
New River maintains its books using a 52/53-week Ñscal year ending on the Sunday nearest the last day of December. Fiscal year 2006 ended on 31 December 2006 and included 52 weeks. Fiscal years 2005 and 2004 ended on 1 January 2006 and 2 January 2005, respectively, and included 52 and 53 weeks, respectively. Reference to years in the consolidated Ñnancial statements and accompanying notes relate to Ñscal years rather than calendar years.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash Öows, New River considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consisted of money market accounts and commercial paper of $12,977,348 and $71,712,019, respectively at 31 December 2006, of money market accounts and commercial paper of $299,264 and $3,155,253, respectively, at 1 January 2006 and money market accounts of $22,759 at 2 January 2005.
40 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Short-term Investments
Short-term investments are classiÑed in accordance with the provisions of Statement of Financial Accounting Standards (""SFAS'') No. 115, ""Accounting for Certain Investments in Debt and Equity Securities.'' At 31 December 2006, 1 January 2006 and 2 January 2005, New River's short-term investments consisted of $60,000,000, $49,250,000 and $21,150,000, respectively, of auction rate municipal bonds which are classiÑed as available-for-sale. New River records its investment in these securities at cost, which approximates fair market value due to their variable interest rates, which typically reset every 28 to 35 days, and, the fact that, despite the long-term nature of their stated contractual maturities, New River has the ability to liquidate readily these securities. As a result, New River had no cumulative gross unrealised gains (losses) from its investments in these securities at 2 January 2005, 1 January 2006 and 31 December 2006. All income generated from these investments is recorded as interest income.
Inventories
In accordance with SFAS No. 2, ""Accounting for Research and Development Costs,'' the costs of producing inventory in the reporting periods prior to the receipt of regulatory approval or clearance are recorded as research and development expense. Since New River did not have any products on the market, nor any products approved by the FDA or other regulatory body for production as at 31 December 2006, New River did not have any inventory at 2 January 2005, 1 January 2006 or 31 December 2006.
EÅective 18 May 2006, New River entered into an Active Pharmaceutical Ingredient Supply Agreement with Organichem Corporation (""Organichem'') for the non exclusive manufacture and supply of VYVANSE by Organichem for New River. Under the terms of this agreement, Organichem is to manufacture validation batches and commercial batches once regulatory approval is obtained.
EÅective 18 August 2006, New River entered into a Manufacturing Services and Supply Agreement with Patheon Pharmaceuticals Inc (""Patheon'') for the non exclusive manufacture and supply of VYVANSE capsules by Patheon for New River. Under the terms of this agreement, Patheon is to manufacture validation batches and commercial batches upon receipt of regulatory approval. In accordance with New River's policy, expenses in connection with validation batches manufactured prior to regulatory New River approval are recorded as research and development expenses. As of 31 December 2006, New River had outstanding purchase orders that had been issued to Organichem and Patheon for commercial production of VYVANSE in anticipation of regulatory approval of VYVANSE, which was received from the FDA on 23 February 2007. These purchase orders totaled $6,427,000.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortisation. Depreciation is computed on the straight-line method over the estimated useful lives of the various assets. Assets under capital leases and leasehold improvements are amortised over the shorter of their estimated useful lives or the terms of the associated leases unless such leases have been capitalised due to a bargain purchase element contained in the leases or there is a transfer of ownership at the end of the lease term. In such instances, the assets are amortised over their estimated useful lives. Estimated useful lives are Ñve years for machinery and equipment and assets under capital leases and three years for leasehold improvements. The costs of major improvements are capitalised, while the costs of maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed when incurred. Costs incurred during the construction phase of certain leasehold improvements are capitalised as construction in progress and are not depreciated until placed in service.
41 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Impairment or Disposal of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future cash Öows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash Öows, an impairment charge is recognised by the amount by which the carrying amount of the assets exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated Ñnancial statements and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated.
Fair Value of Financial Instruments
The carrying values of cash, cash equivalents, short-term investments, other receivables, accounts payable and accrued expenses approximate the respective fair values. The market value of New River's convertible notes was approximately $236.6 million as compared to a carrying value of approximately $137.8 million based on quoted market values.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognised for the future tax consequences attributable to diÅerences between the Ñnancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realised. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary diÅerences are expected to be recovered or settled. The eÅect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes the enactment date.
Revenue Recognition, Cost of Goods Sold and Sales Returns
Although at 31 December 2006, New River had no products available for sale, it does anticipate having products available for sale in the future. New River anticipates that some of its sales will be to wholesalers who have the right to return purchased product. In accordance with SFAS No. 48, ""Revenue Recognition When the Right of Return Exists'', until New River has suÇcient sales history to estimate product returns, it will have to defer recognition of revenue on such sales until the products are dispensed through patient prescriptions. Once New River has obtained suÇcient sales history to estimate product returns, under SFAS No. 48, it will be able to recognise revenue on product shipments, net of a reasonable allowance for estimated returns relating to these shipments.
New River's strategy includes entering into collaboration agreements with strategic partners for the development and commercialisation of its product candidates. Such collaboration agreements may have multiple deliverables. New River evaluates multiple deliverable arrangements pursuant to Emerging Issue Task Force, (""EITF''), 00-21, ""Revenue Arrangements with Multiple Deliverables'' (""EITF 00-21''). Pursuant to EITF 00-21, in arrangements with multiple deliverables where New River has continuing performance obligations, contract, milestone and licence fees are recognised together with any up-front payments over the term of the arrangement as performance obligations are completed, unless the deliverable has stand alone value and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash Öows from the arrangement are considered in the determination of all revenue to be recognised. Cash received in advance of revenue recognition is recorded as deferred revenue.
42 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Research and Development Research and development expenses consist of direct costs and indirect costs. Direct research and development costs include salaries and related costs of research and development personnel and the costs of consultants, facilities, materials and supplies associated with research and development projects as well as various laboratory studies. Indirect research and development costs include depreciation and other indirect overhead expenses. New River believes that regulatory and other uncertainties inherent in the research and development of new products preclude it from capitalising such costs. This treatment includes up-front and milestone payments made to third parties in connection with research and development collaborations. At 31 December 2006, New River had research and development commit- ments with third parties totalling approximately $36,455,000, of which approximately $9,416,000 had not yet been incurred. The commitments are generally cancellable by New River at any time upon written notice. Costs related to Ñling and prosecuting patent applications are recorded as selling, general and administrative expenses as incurred as recoverability of such expenditures is uncertain.
Stock-Based Compensation EÅective 2 January 2006, New River adopted the provisions of SFAS No. 123(R), ""Share-Based Payment,'' (SFAS No. 123(R)) and related interpretations, using the modiÑed prospective method. SFAS No. 123(R) requires companies to expense the grant-date fair value of employee equity awards over the vesting period. Using the modiÑed prospective method of adopting SFAS 123(R), New River began recognising compensation expense for the remaining unvested portions of stock options and stock appreciation rights (""SARs'') settled in stock granted prior to 2 January 2006. New River also has outstanding SARs that are to be settled in cash. In accordance with SFAS 123(R), these instruments are measured at fair value and are recorded as a liability at the end of each reporting period until settled. Upon adoption of SFAS 123(R), New River recognised a cumulative eÅect accounting adjustment related to SARs that are to be settled in cash. Prior to the adoption of SFAS 123(R), such awards were accounted for as liabilities based on the intrinsic value of such awards, rather than the fair value, at the end of the reporting period. Stock-based compensation expense recognised under SFAS 123(R) in the consolidated statements of operations for the Ñscal year ended 31 December 2006 for all awards was $39,771,198, of which $28,770,701 was recorded as selling, general, and administrative expenses and $11,000,497 was recorded as research and development expenses. The estimated fair value of New River's stock option and SAR awards to be settled New River common stock, less estimated forfeitures, is amortised over the awards' vesting period on an accelerated basis. For stock options and SARs to be settled in stock that were granted prior to the adoption of SFAS 123(R), the eÅect on net loss and earnings per share if New River had applied the fair value
43 PART III Ì FINANCIAL INFORMATION ON NEW RIVER recognition provisions of SFAS 123(R) to these awards would have been as follows for the years to 1 January 2006 and 2 January 2005:
Fiscal year ended Fiscal year ended 1 January 2006 2 January 2005 $$ Net loss As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (29,866,320) (14,334,910) Add stock-based employee compensation expense included in reported net loss, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 680,887 3,600 Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,738,634) (458,381) Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (31,924,067) (14,789,691) Net loss per share: Basic and diluted: As reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.83) (0.48) Pro formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (0.89) (0.50) The fair value of options and SARs is determined by using the Black-Scholes option pricing model. Expected volatility was based on a combination of historical volatility of New River's stock and comparisons to volatilities of common stock of peer group companies. Comparison to peer group companies was necessary because New River's common stock has only been publicly traded for a limited time (since August 2004). The expected term for stock options represents the period of time that the options granted are expected to be outstanding based on the simpliÑed method provided in StaÅ Accounting Bulletin No. 107 (SAB 107), which averages an award's weighted average vesting period and its contractual term for ""plain vanilla'' share options. The expected term for all SARs is the vesting period or such time at which New River estimates the SARs will be exercisable. The per share weighted average fair value of stock options granted during the Ñscal years 2006, 2005 and 2004 was $19.94, $11.64 and $2.87, respectively. The per share weighted average fair value of SARs to be settled in common stock granted during the year ended 31 December 2006 was $18.06 on the date of grant. On 24 August 2006, the Board approved the modiÑcation of the outstanding options and SARs held by an executive oÇcer by accelerating the vesting of such awards. This modiÑcation resulted in the majority of such awards being treated for accounting purposes as new awards. Accordingly, the awards were measured on the date of the modiÑcation as follows: (i) expense that was recognised on the initial grant of the awards though the date of the modiÑcation was reversed and (ii) the fair value of the award on the modiÑcation date was expensed in full because these awards were fully vested at that date. The total stock-based compensation expense recognised for awards for which vesting was accelerated was approximately $9.9 million for the year ended 31 December 2006. For all SARs to be settled in cash, which are classiÑed as liabilities, the per share weighted average fair market value was $40.46 at the end
44 PART III Ì FINANCIAL INFORMATION ON NEW RIVER of the reporting period. The per share weighted averages were determined utilising the Black-Scholes option pricing model with the following weighted average assumptions:
Fiscal years ended 31 December 1 January 2 January 2006 2006 2005 Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0% 0% 0% Risk-free interest rate Ì all awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.07%-4.91% 4.25%-4.61% 4.10%-4.53% Expected life of options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5.5-6.5 years 6-10 years 10 years Expected life of SARs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.25-5 years 3-5 years Ì Expected volatility Ì all awards* ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60%-70% 70% 70%
* The expected volatility assumption for options issued during the Ñscal year ended 2 January 2005 prior to New River's initial public oÅering that was completed on 10 August 2004 was 0%. The volatility assumption in the table represents the assumption used for options issued upon or subsequent to the completion of New River's initial public oÅering.
Net Loss Per Share
Basic net loss per share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share does not reÖect the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net loss of New River because to do so would be anti-dilutive.
ReclassiÑcations
Certain reclassiÑcations have been made to the consolidated Ñnancial statements for the Ñscal years ended 1 January 2006 and 2 January 2005, to place them on a basis comparable to the consolidated Ñnancial statements for the Ñscal year ended 31 December 2006.
Use of Estimates
The preparation of consolidated Ñnancial statements in conformity with US generally accepted account- ing principles requires management to make estimates and assumptions that aÅect certain reported amounts. Actual results could diÅer from management's estimates.
3. COLLABORATION ARRANGEMENT AND OTHER AGREEMENTS
On 31 January 2005, New River entered into a collaboration agreement with Shire Pharmaceuticals Group plc (""Shire'') relating to the global commercialisation of VYVANSE for treatment of attention deÑcit hyperactivity disorder (""ADHD'') and other potential indications. On 31 March 2005, New River and Shire split this agreement into two agreements by entering into a United States Collaboration Agreement and a rest of world (""ROW'') Territory License Agreement (together the ""Shire Agree- ment'') to replace the initial collaboration agreement. Shire paid New River an upfront fee of $50 million on 11 February 2005 and a milestone payment of $50 million on 6 February 2006 as a result of notice from the FDA on 26 January 2006 of its acceptance of New River's NDA Ñling for VYVANSE. Of the $100 million received through 31 December 2006, up to $50 million remains refundable in the event that regulatory approval for VYVANSE is not obtained by certain dates as follows: $25 million on 31 December 2007; an additional $12.5 million on 31 December 2008; and the remaining $12.5 million on 31 December 2009. On 23 February 2007, VYVANSE received regulatory approval from the FDA.
45 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
New River evaluated the Shire Agreement in accordance with EITF 00-21 and determined that it was an arrangement with multiple deliverables. The Shire Agreement also provides for additional payments to New River in the event that certain additional milestones are achieved. These potential payments include an amount of up to $300 million following the Ñrst commercial sale of the product, depending on the characteristics of the FDA-approved product labelling, and $100 million upon achieving a signiÑcant sales target. The maximum amount of upfront and milestone payments under the terms of the Shire Agreement is $505 million. Under the Shire Agreement, New River will provide product development for three indications for VYVANSE: paediatric, adult and adolescent. New River determined that the licence and research and development should be combined and considered as a single unit of accounting. Accordingly, the upfront licence fee and all milestone payments will be recognised over the estimated product development period. New River estimated the total proportional eÅort required for the develop- ment of each of these three indications. This proportional revenue model is then applied to all upfront and milestone payments which are no longer subject to refund. New River recognised approximately $34.3 million of collaboration revenue for the Ñscal year ended 31 December 2006 based on this model. The amount recognised includes amounts that would have otherwise been recognised in prior periods had such amount not been fully refundable in certain circumstances at the end of those periods. The Shire Agreement provides New River, at its option, the right to co-promote VYVANSE in the US (including its territories and possessions). On 25 July 2006, New River exercised this right. The co- promotion activities of New River are to commence in six months from the date of the exercise of the co- promotion option or upon the commercial launch of VYVANSE, whichever occurs later. In exercising its option to co-promote VYVANSE, New River committed to co-promote the product for at least 24 months and to provide 25% of the total details for the product during the 24-month period. The Shire Agreement also provides for proÑt sharing on US product sales when and if the product is approved by the FDA. New River and Shire will divide operating proÑts as follows if VYVANSE has a Schedule III, IV or V classiÑcation or is unscheduled (""favourable scheduling''): New River will receive 25% of proÑts for the Ñrst two years following launch, and New River and Shire will share the proÑts equally thereafter. However, the Shire Agreement allows for an alternative proÑt-sharing scheme in the event that VYVANSE receives a Ñnal Schedule II classiÑcation. Under this scenario, New River's share of US product proÑts for the Ñrst two years will be at least 25%, though it may increase to a value determined by a preset formula. After the Ñrst two years, it will be at least 50%, though it may increase to a value determined by a preset formula. On 23 February 2007, the FDA granted marketing approval for VYVANSE and proposed that VYVANSE be classiÑed as a Schedule II controlled substance. New River submitted this proposal to the DEA and the proposal has been accepted by the DEA. A Ñnal scheduling decision is expected from the DEA in March 2007. Pending Ñnal scheduling designation, New River anticipates product launch in the second quarter of 2007. For product sales in the rest of the world, Shire will pay New River a royalty. The Shire Agreement provides for certain termination rights. Shire may for instance terminate within 30 days of receiving the Ñrst regulatory approval and under some circum- stances be entitled to a termination fee of $50 million. In addition, each party may terminate in the event of an uncured, deÑned, material breach by the other party, entitling the non-breaching party the right to purchase the interests of the breaching party. Subject to certain conditions, either party is entitled to terminate in the event that governmental action restricts or prohibits the transactions contemplated by the Shire Agreement under the laws of the United States or European Union. On 6 June 2005, New River entered into a development and license agreement with Depomed, Inc. (""Depomed'') to create pharmaceutical products using Depomed's patented oral drug delivery technol- ogy with New River's proprietary drug compounds. Under terms of the agreement, New River may acquire worldwide rights to use Depomed's Gastric Retention oral drug delivery technology in up to three of New River's proprietary compounds. Once a compound is named and entered into development, Depomed will perform feasibility studies through an initial Phase I trial. In return, New River will reimburse Depomed on a cost-plus basis for expenses as deÑned in each project budget. Once preclinical and
46 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Phase I testing is completed, New River may exercise an option to license each product candidate and advance the product into additional clinical trials. At that time, New River will make an initial milestone payment, with additional milestone payments for each product candidate at later stages of product development. Upon ultimate commercialisation of product candidates developed under this agreement, New River will pay Depomed royalties on net sales of each product. Through 31 December 2006, New River had incurred no development costs under this agreement. On 29 June 2005, New River entered into a letter agreement with Optimer Pharmaceuticals, Inc. (""Optimer'') for the development of one or more proprietary pharmaceutical products comprising carbohydrate conjugates of iron for administration by injection using Optimer's proprietary carbohydrate synthesis technology. On 8 July 2005, New River entered into an exclusive licensing agreement with the Ernest Gallo Clinic Research Centre at the University of California, San Francisco to investigate a new approach toward improving the use of opioid analgesics in the treatment of pain by reducing the development of tolerance. During October 2006, New River executed its right to terminate each of these agreements.
4. CONVERTIBLE NOTES
On 19 July 2006, New River entered into a purchase agreement (the ""Purchase Agreement'') under which it agreed to sell $125.0 million aggregate principal amount of its 3.50% Convertible Subordinated Notes due 2013 (the ""Initial Notes'') to Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and W.R. Hambrech ° Co., LLC (collectively, the ""Initial Purchasers''). New River also granted the Initial Purchasers an option to purchase up to an additional $18.75 million aggregate principal amount of the Notes to cover over-allotments, if any. On 24 July 2006 and on 7 August 2006, the Initial Purchasers exercised in part their over-allotment option and purchased an additional $10.0 million and $2.75 million, respectively, aggregate principal amount of the notes (the ""Option Notes'' and together with the Initial Notes, the ""Notes''). The Initial Purchaser's remaining option to purchase up to an additional $6.0 million aggregate principal amount of the Notes to cover over-allotments expired unexercised on 7 August 2006. The net proceeds from the oÅering (including the proceeds from the exercise of $12.75 million of the over-allotment options) after deducting the initial Purchaser's discount of $4.1 million and the oÅering expenses payable by New River, were approximately $133.2 million.
The closing of the sale of the Notes (including the additional $10.0 million of Notes for the partial exercise of the over-allotment option) occurred on 25 July 2006. The closing of the sale of the additional $2.75 million of Notes for the second partial exercise of the overallotment option was on 10 August 2006. The Notes and the shares of New River's common stock issuable in certain circumstances upon conversion of the Notes, as described below and as more fully set forth in the Indenture (as deÑned below) were not initially registered under the Securities Act of 1933, as amended (the ""Securities Act'') as New River oÅered and sold the Notes to the Initial Purchasers in reliance on the exemption from registration provided in Section 4(2) of the Securities Act. The Initial Purchasers then sold the Notes to qualiÑed institutional buyers pursuant to the exemption from registration provided by Rule 144A under the Securities Act. New River relied on these exemptions from registration based in part on representations made by the Initial Purchasers in the Purchase Agreement.
The Notes are governed by an indenture, dated as of 25 July 2006 (the ""Indenture''), between New River and Wilmington Trust Company, as trustee.
The notes will be convertible only under certain circumstances, as described below, at an initial conversion rate of 29.0803 shares of common stock per $1,000 principal amount of Notes (equivalent to a conversion price of approximately $34.39 per share), subject to adjustment. Upon conversion of a Note, in lieu of shares of common stock, a holder will receive cash in an amount equal to the lesser of $1,000 and the conversion value of the Note (determined in accordance with the terms of the Indenture) and, if the conversion value is greater than $1,000, payment of the excess value, at New River's option, in
47 PART III Ì FINANCIAL INFORMATION ON NEW RIVER the form of cash, shares of common stock or a combination of cash and common stock. Holders may convert their Notes prior to the close of business on the business day before the Ñnal maturity date based on the applicable conversion rate only under the following circumstances: (1) during any calendar quarter beginning after 1 October 2006 (and only during such calendar quarter), if the closing price of the common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 120% of the applicable conversion price per share, which is $1,000 divided by the then applicable conversion rate; (2) during any Ñve business day period after any Ñve consecutive trading day period in which the trading price per $1,000 principal amount of Notes for each day of that period was less than 98% of the product of the closing price of the common stock for each day in that period and the conversion rate per $1,000 principal amount of Notes; (3) if speciÑed distributions to holders of the common stock are made or speciÑed corporate transactions occur, in each case as set forth in the Indenture; (4) if a fundamental change occurs (a ""fundamental change'' will be deemed to have occurred upon a change of control or a termination of trading, each as deÑned in the Indenture); or (5) during the one month period from, and including, 1 July 2013 to, but excluding, the maturity date. In the event of a fundamental change as speciÑed in the Indenture, New River will increase the conversion rate as to Notes converted in connection with the fundamental change as described in the Indenture. As of 31 December 2006 the closing price of the common stock for at least 20 trading days in the 30 consecutive trading days ending on 29 December 2006, was in excess of 120% of the applicable conversion price per share. Accordingly, the Notes became convertible and have been classiÑed as a current liability in our consolidated balance sheet as of 31 December 2006 and the related debt issuance costs of $4,254,620 were written oÅ. The Notes will remain convertible until at least 31 March 2007, which is the next measurement date for determining whether the Notes will be convertible for the next calendar quarter. Through 12 March 2007, none of the holders of the Notes had elected to convert their Notes. In the event that signiÑcant conversion did occur, New River believes that it has the ability to fund the payment of principal amounts due through a combination of utilisation of existing cash and cash equivalents and short-term investments, raising money in the capital markets and exercising the call option under the terms of the convertible note hedge instruments. The holders of the Notes who convert their Notes in connection with a fundamental change (as deÑned in the Indenture) may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, if a fundamental change occurs, holders of the Notes may require New River to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date. The Notes will bear interest at a rate of 3.50% per year, payable semi-annually in arrears in cash on 1 February and 1 August of each year, beginning on 1 February 2007. The Notes will mature on 1 August 2013. The Notes are New River's direct, unsecured, subordinated obligations, will rank junior in rights of payment to all of New River's existing and future senior indebtedness and are eÅectively junior to any existing and future indebtedness and other liabilities, including trade payables, of New River's existing subsidiary and future subsidiaries. In connection with the closing of the sale of the Notes, on 25 July 2006, New River entered into a registration rights agreement with the Initial Purchasers (the ""Registration Rights Agreement''). Under the Registration Rights Agreement, New River agreed, for the beneÑt of the holders of the Notes, to Ñle a shelf registration statement with respect to the resale of the Notes and the shares of common stock issuable upon conversion of the Notes no later than 120 days after the original issuance of the Notes and to use its commercially reasonable eÅorts to cause such shelf registration statement to become eÅective as promptly as practicable, but in no event later than 210 days after the original issuance of the Notes.
48 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
On 16 November 2006 New River Ñled a registration statement for the Notes under the Securities Act on Form S-3 ASR. The registration statement on Form S-3 ASR became eÅective upon Ñling. New River also has agreed to use its commercially reasonable eÅorts to keep the shelf registration statement continu- ously eÅective until the earliest of (1) the sale pursuant to the shelf registration statement of the Notes and all of the shares of common stock issuable upon conversion of the Notes, (2) the expiration of the holding period applicable to such securities held by non-aÇliates under Rule 144(k) under the Securities Act or any successor provision, subject to certain permitted exceptions, and (3) the date that is two years from the original issuance of the Notes, subject to certain exceptions set forth in the Registration Rights Agreement. Additional interest will accrue on the Notes if the shelf registration statement shall cease to be eÅective or fail to be usable without being succeeded within seven business days by a post- eÅective amendment or a report Ñled with the SEC pursuant to the Exchange Act of 1934, as amended, that cures the failure of the shelf registration statement to be eÅective or usable, or the use of the prospectus included in the shelf registration statement has been suspended for longer than the permitted period, subject to certain exceptions and limitations as set forth in the Registration Rights Agreement. If a holder has converted some or all of its Notes into common stock, the holder will not be entitled to receive any additional interest with respect to such common stock or the principal amount of the Notes converted.
In connection with the sale of the Notes, New River entered into a prepaid forward purchase contract (the ""Forward Purchase Contract'') with an aÇliate of Merrill Lynch & Co. (the ""Dealer''). Pursuant to the Forward Purchase Contract, and or through one or more block-trades with aÇliates of the Dealer, New River repurchased contemporaneously with the sale of the Notes, an aggregate of $41.0 million of shares of common stock from the Dealer (1,490,367 shares of its common stock at $27.51, the last quoted sale price of New River's common stock on 19 July 2006). The Dealer may deliver the shares pursuant to the Forward Purchase Contract at its discretion, in full or in part, over a period of seven years from the date of the contract. As of 31 December 2006 the Dealer had not delivered any shares. Shares purchased pursuant to the Forward Purchase Contract are treated as retired for purposes of New River's basic and diluted earnings per share calculations. Additionally, New River's Board of Directors authorised a stock repurchase program whereby management may direct the repurchase of up to $10 million in common stock. There have been no repurchases under this program.
In connection with the sale of the Notes, New River also entered into convertible note hedge transactions with respect to its common stock (the ""Purchased Call Options'') with the Dealer. The Purchased Call Options cover, subject to customary anti-dilution adjustments, 4,005,811 shares of common stock at strike prices which correspond to the initial conversion prices of the Notes. New River used $43,529,000 of the proceeds from the sale of the Notes to purchase the Purchased Call Options. The net cost of the convertible note hedges are recorded in shareholders' equity.
New River also entered into separate warrant transactions whereby New River has sold to the Dealer warrants to acquire, subject to customary anti-dilution adjustments, 4,005,811 shares of common stock (the ""Sold Warrants''). New River oÅered and sold the Sold Warrants to the Dealer in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. The Sold Warrants will be exercisable following maturity of the Notes and have a strike price of $41.27 and expire in October and November 2013. New River received aggregate proceeds of $29,478,500 from the sale of the Sold Warrants. The net proceeds from the warrants are recorded in shareholders' equity.
The Forward Purchase Contract, Purchased Call Options and Sold Warrants are separate contracts entered into by New River with the Dealer, are not part of the terms of the Notes and will not aÅect the holders' rights under the Notes. The Purchased Call Options are expected to oÅset the potential dilution upon conversion of the Notes in the event that the market value per share of the common stock at the time of exercise is greater than the strike price of the Purchased Call Options, which correspond to the initial conversion price of the Notes and are simultaneously subject to certain customary adjustments.
49 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
If the market value per share of the common stock at the time of conversion of the Notes is above the strike price of the applicable Purchased Call Options, the Purchased Call Options entitle New River to receive from the Dealer net shares of common stock, cash or a combination of shares of common stock and cash, depending on the consideration paid on the underlying Notes, based on the excess of the then current market price of the common stock over the strike price of the Purchased Call Options. Additionally, if the market price of the common stock at the time of exercise of the applicable Sold Warrants exceeds the strike price of the Sold Warrants, New River will owe the Dealer net shares of common stock or cash, not oÅset by the Purchased Call Options, in an amount based on the excess of the then current market price of the common stock over the strike price of the applicable Sold Warrants. When the average market price of New River's common stock for the applicable reporting period exceeds the strike price of the Sold Warrants, potential shares issuable pursuant to the Sold Warrants will be dilutive and will be included in New River's diluted earnings per share calculation, provided that New River does not have a net loss at such time.
5. LIQUIDITY AND INITIAL PUBLIC OFFERING New River's future capital requirements will depend on the progress of its research on and development of product candidates; the timing and outcomes of regulatory approvals; the costs involved in preparing, Ñling, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights; the status of competitive products; the availability of Ñnancing; and New River's and or its collaboration partners success in developing markets for its product candidates (see note 3). As further discussed in note 4, the Notes are convertible and have been classiÑed as a current liability in New River's consolidated balance sheet as of 31 December 2006. The Notes will remain convertible until at least 31 March 2007, which is the next measurement date for determining whether the Notes will be convertible for the next calendar quarter. Through 12 March 2007, none of the holders of the Notes had elected to convert their Notes. In February and March 2004, New River received a total of $1,400,000 and, in April 2004, New River received $50,000 from KirkÑeld, L.L.C., a related party, in exchange for a series of promissory demand notes. These notes, along with an additional promissory demand note issued in exchange for $350,000 received from KirkÑeld, L.L.C. in February 2003, were due, along with accrued interest at the prime rate, upon demand of the holder or in the event of default (as deÑned) by New River. On 26 March 2004 New River entered into a Subscription Agreement with New River Management III, LP (the ""Fund''), an aÇliated private equity fund, pursuant to which New River agreed to sell, and the Fund agreed to purchase 906,666 shares of New River's common stock on or before 9 April 2004, 313,334 shares on or before 10 May 2004, 300,000 shares on or before 9 June 2004, and 300,000 shares on or before 12 July 2004 at $2.50 per share. On 16 April 2004, New River repaid the outstanding balances of the notes payable to KirkÑeld, L.L.C., totalling $1,800,000 plus accrued interest, using a portion of the $2,266,665 proceeds received from the sale of common stock to the Fund, which was originally due on 9 April 2004 and which was received on 14 April 2004. The proceeds from the 10 May 2004, 9 June 2004 and 12 July 2004 stock issuances totaled $783,335, $750,000 and $750,000, respectively, and were received on 14 May 2004, 10 June 2004 and 12 July 2004, respectively. On 3 May 2004, New River also issued 120,000 shares of common stock to a member of the Board of Directors of New River (the ""Board'') and received proceeds of $300,000 from this sale. New River also issued 10,000 stock options to the same member of the Board on 3 May 2004. The stock options vested immediately and had an exercise price of $2.50 per share. In connection with the sales of 1,940,000 shares of common stock and the issuance of 10,000 stock options at $2.50 per share described in the previous paragraph, New River recorded $1,386,000 of stock-based compensation expense during the Ñscal year ended 2 January 2005. This expense represents the diÅerence between the sales price of $2.50 per share and the estimated fair value of the common stock on the various dates of issuance, which was $2.86 for the shares and options issued on
50 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
14 April 2004, 3 May 2004 and 14 May 2004 and $4.00 for shares issued on 10 June 2004 and 12 July 2004. On 23 April 2004, New River entered into a credit agreement with Randal J. Kirk (2000) Limited Partnership (the ""Partnership''), an entity controlled by New River's current Chairman, President and Chief Executive OÇcer, Randal J. Kirk. Under the terms of the credit agreement, the Partnership provided an irrevocable line of credit to New River for up to the principal amount of $5 million. The proceeds from the credit line were to be used by New River for general working capital and operating expenses. Amounts advanced to New River under this credit agreement were to bear interest at 12% and payments made by New River were to be applied Ñrst to any accrued interest. This credit agreement expired in accordance with its terms on 10 August 2004, which was the completion of the initial public oÅering of New River's common stock. New River made no borrowings under this credit agreement during the time it was in eÅect. In April 2004, the Board of New River authorised New River to Ñle a registration statement with the SEC covering the proposed sale by New River of its common stock to the public. On 25 June 2004, the Board approved, subject to shareholder approval, the amendment and restatement of New River's Articles of Incorporation to provide for, among other things, an increase in the number of authorised shares of common stock and preferred stock to 150,000,000 shares and 25,000,000 shares, respectively, and a one-for-two reverse stock split of New River's common stock. On 10 August 2004, New River completed the initial public oÅering of its common stock in which New River sold 8,400,000 shares of common stock at $4.00 per share resulting in gross proceeds of $33.6 million. In connection with this oÅering, New River paid approximately $2.4 million in underwriting discounts and commissions and incurred estimated other oÅering expenses of approximately $1.2 million. The net proceeds from the oÅering were approximately $30 million.
6. ROYALTY OBLIGATIONS
EÅective 30 June 2004, New River entered into an agreement (the ""Agreement'') with Innovative Technologies, L.L.C. (""Innovative Technologies'') which eÅectively amended New River's obligation in its entirety under previous existing agreements with Innovative Technologies. The previous agreements were executed in connection with New River's acquisition of certain of its intellectual property from Innovative Technologies in prior years. The Agreement provides for an upfront fee of $200,000, which was paid on 1 July 2004, and a 1% royalty on net sales (as deÑned in the Agreement) for a period of 10 years for up to a total of $1,000,000, whichever comes Ñrst. No royalties were paid under this Agreement through 31 December 2006. In January 2007, New River entered into a Settlement Agreement and Mutual Release with Innovative Technologies and Keith R. Latham (hereinafter collec- tively referred to as ""Innovative'') providing for the payment to Innovative of the sum of $950,000, the satisfaction of all royalty and payment obligations of New River to Innovative under the Agreement, and the settlement and dismissal of a declaratory judgment suit relating to the timing of payments under the Agreement. This amount is recorded in selling, general and administrative expenses in the Consolidated Statement of Operations for the Ñscal year ended 31 December 2006.
7. LEASES
New River leases its research and development facilities pursuant to an operating lease that is subject to annual renewals. Monthly payments under the lease are approximately $24,000. The existing lease expires 31 May 2007. New River has a lease agreement with Third Security, LLC, (""Third Security'') an entity controlled by New River's current Chairman, CEO and President, Randal J. Kirk, for certain executive and administrative oÇce space. The current monthly rental is $6,210. New River also has leased certain equipment under operating leases for total monthly payments of $2,312. Total rent expense under operating leases was $350,379, $262,331, and $210,931 for the years ended 31 Decem-
51 PART III Ì FINANCIAL INFORMATION ON NEW RIVER ber 2006, 1 January 2006, and 2 January 2005, respectively. Future minimum lease payments under non- cancellable operating leases for Ñscal year 2007 are estimated to be approximately $140,000.
8. RELATED PARTY TRANSACTIONS In addition to the lease agreement with Third Security (see note 7), New River also has an administrative services agreement with Third Security, pursuant to which Third Security provides certain administrative services for a fee. The monthly fee is based on an hourly billing rate for each individual who provides services multiplied by the number of hours of services performed by such individual. The agreement may be terminated upon written notice at any time by New River. During August 2006, New River exercised one year options under both the lease and administrative services agreements. New River recognised, $321,233, $355,950 and $116,140 of expense under the administrative services agreement for the years ended 31 December 2006, 1 January 2006 and 2 January 2005, respectively. The unpaid portion of these amounts are included in Due to AÇliates in the accompanying consolidated balance sheets as of 31 December 2006, 1 January 2006 and 2 January 2005. During the period in 2004 prior to the closing of New River's initial public oÅering of 10 August 2004, Third Security provided certain administrative services to New River at no charge to New River. The estimated cost of these services was $576,000 and was recorded as a selling, general and administrative expense and a capital contribution to New River.
9. INCOME TAXES Total current income tax expense for the year ended 31 December 2006 was $310,666. The expense was comprised of federal expense of $280,741 and state expense of $29,925. The current expense is due primarily to limitations on the utilisation of net operating loss carryforwards for purposes of the federal alternative minimum tax. There was no income tax beneÑt recognised for the Ñscal years ended 1 January 2006 and 2 January 2005, due to New River's history of net losses combined with no current ability to conÑrm recovery of the tax beneÑts of New River's losses and other net deferred tax assets. Income tax beneÑt for the Ñscal years ended 31 December 2006, 1 January 2006 and 2 January 2005 diÅered from amounts computed by applying the applicable US Federal corporate income tax rate of 34% to loss before income taxes and cumulative eÅect of change in accounting principle as a result of the following: Fiscal years ended 31 December 1 January 2 January 2006 2006 2005 $$$ Computed ""expected'' income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏÏ (19,177,845) (10,154,548) (4,873,869) (Increased) reduction in income tax beneÑt resulting from: State income tax beneÑt, net of eÅect of federal income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,120,653) (1,138,369) (489,830) Change in eÅective state income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (241,817) Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 796,169 Ì 470,016 Non-deductible compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 248,913 375,595 Ì Contribution of services from related partyÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 195,917 R&D tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,414,010) (1,191,106) (141,496) Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,442 5,082 28,310 Change in valuation allowance for deferred tax assetÏÏÏ 22,970,650 12,103,346 5,052,769 Total income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 310,666 Ì Ì
The table above excludes the impact of the tax beneÑt from the excess tax deduction over recognised stock-based compensation expense. Such beneÑt is recorded as an increase to Additional Paid in
52 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Capital. The increase in the deferred tax valuation allowance that relates to this excess beneÑt is recorded as a reduction in Additional Paid in Capital to the extent that such valuation allowance was determined to be necessary at the time the excess deduction was generated.
The tax eÅects of temporary diÅerences that comprise the deferred tax assets and deferred tax liabilities at 31 December 2006, 1 January 2006 and 2 January 2005 follows:
Fiscal years ended 31 December 1 January 2 January 2006 2006 2005 $$$ Deferred tax assets: Other receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 97,091 Ì Ì Property and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 234,526 218,405 199,235 Debt issuance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,672,586 Ì Ì Stock-based compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,180,411 1,729,146 550,191 Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 353,367 Ì Ì Deferred revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,980,000 Ì Ì Federal alternative minimum tax credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 280,741 251,934 622,705 Research tax credit carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,746,612 1,332,602 141,496 Net operating loss carryforwards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,006,960 27,379,579 12,726,430 Total gross deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,552,294 30,911,666 14,240,057 Less valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (61,477,616) (30,676,079) (14,152,852) Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,074,678 235,587 87,205 Deferred tax liabilities: Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (328,530) (235,587) (87,205) Convertible notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (746,148) Ì Ì Net deferred tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì
In assessing the realisability of deferred tax assets, New River's management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realised. The ultimate realisation of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary diÅerences become deductible. New River's management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to New River's history of net losses, no income tax beneÑt has been recorded and the corresponding deferred tax assets have been fully reserved as New River cannot suÇciently be assured that these deferred tax assets will be realised in accordance with the provisions of SFAS No. 109, ""Accounting for Income Taxes.'' The valuation allowance increased $30,801,537, $16,523,227 and $5,052,769 in 2006, 2005 and 2004 respectively; the change in each year oÅsetting the change in net deferred tax assets.
At 31 December 2006, New River has a loss carryforward for income tax purposes of approximately $58 million available to oÅset future taxable income, of which approximately $3.5 million expires in 2022, approximately $4.7 million expires in 2023, approximately $11.2 million expires in 2024, and approxi- mately $38.6 million expires in 2025. New River also has tax credit carryforwards of $3,746,612 for qualiÑed research activity, of which $141,496 expires in 2023, $431,733 expires in 2024, $1,320,316 expires in 2025 and $1,853,067 expires in 2026.
53 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
10. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators of the net loss per share computations for the periods presented:
Net loss Shares Per share (numerator) (denominator) amount Fiscal year ended 2 January 2005: Basic net loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(14,334,910) 29,694,742 $(0.48) EÅect of dilutive stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Diluted net loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(14,334,910) 29,694,742 $(0.48) Fiscal year ended 1 January 2006: Basic net loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(29,866,320) 35,943,596 $(0.83) EÅect of dilutive stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Diluted net loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(29,866,320) 35,943,596 $(0.83) Fiscal year ended 31 December 2006: Basic net loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(57,426,988) 36,009,295 $(1.60) EÅect of dilutive stock options and SARs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Diluted net loss per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(57,426,988) 36,009,295 $(1.60)
The computation of basic and diluted net loss per share for the Ñscal year ended 31 December 2006 includes a reduction for 1,490,367 shares of common stock purchased pursuant to the Forward Purchase Contract (see note 4). The total number of potential shares of common stock to be issued pursuant to the exercise of stock options and SARs would dilute net loss per share. Therefore, these potential shares, which totalled 805,704, 1,069,118 and 974,780 for the Ñscal years ended 31 December 2006, 1 January 2006 and 2 January 2005, respectively, were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive.
11. STOCK-BASED COMPENSATION
EÅective 25 June 2004 the New River Board approved the 2004 Incentive Compensation Plan (the ""Plan''), subject to approval by New River's shareholders. EÅective 2 July 2004, New River's sharehold- ers approved the Plan. The Plan was eÅective upon the completion of New River's initial public oÅering on 10 August 2004. The Plan permits the award of options (both incentive stock options and non-qualiÑed options), stock appreciation rights, stock awards and incentive awards to eligible persons. Eligible persons include employees, employees of aÇliates, any person who provides services to New River or to an aÇliate, members of the Board and members of the board of directors of an aÇliate. The Plan amends and restates New River's prior Employee Stock Option Plan (the ""Prior Plan''), which permitted the grant of options to employees, directors and consultants. The Plan also replaces the former Stock Appreciation Rights Plan, which permitted the grant of stock appreciation rights, which are awards with a value based on appreciation in the common stock of New River. Options granted under the Prior Plan remain subject to the terms of that plan. The terms of the Prior Plan are substantially similar to the terms of the Plan, except that, under the Plan, stock appreciation rights, stock awards and incentive awards (payable in cash or shares) may be granted in addition to options. The maximum aggregate number of shares of common stock that may be issued under the Plan, including shares issued upon the exercise of options granted under the Prior Plan, is 3,240,000 shares, but no more than 1,620,000 shares of common stock may be issued as stock awards.
The term of each stock option issued under the Plan is Ñxed, but no option shall be exercisable more than 10 years after the date the option is granted. Certain options granted under the Plan are exercisable at
54 PART III Ì FINANCIAL INFORMATION ON NEW RIVER the date of grant. All other options vest in accordance with the vesting schedule established by the Compensation Committee of the Board at the time such options are granted. Stock option activity during the Ñscal years ended 31 December 2006, 1 January 2006 and 2 January 2005 was as follows:
Weighted Number of average shares exercise price Balance at 28 December 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,328,126 1.55 Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 417,000 4.09 Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (23,332) 2.96 Balance at 2 January 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,721,794 2.15 Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 343,000 16.34 Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (817,956) 1.61 Expired or Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (30,002) 2.55 Balance at 1 January 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,216,836 6.50 Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 208,250 30.73 Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (590,000) 3.81 Expired or Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (43,000) 29.12 Balance at 31 December 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 792,086 13.65
At 31 December 2006, the number, weighted-average exercise price and weighted-average remaining contractual life of outstanding options and the number and weighted-average exercise price of options currently exercisable are as follows:
Options outstanding Options exercisable Remaining Range of Number of Weighted-average contractual life Number of Weighted-average exercise prices options exercise price (in years) options exercise price $1.25-$1.29 53,626 $ 1.29 4.31 53,626 $ 1.29 $3.33-$4.00 302,700 $ 3.93 7.26 229,367 $ 3.91 $7.11-$11.60 157,168 $11.47 8.22 154,834 $11.53 $22.31-$26.17 143,342 $23.55 8.99 17,009 $22.87 $28.67-$33.55 135,000 $32.32 9.15 Ì Ì $49.31 250 $49.31 9.93 Ì Ì 792,086 $13.65 7.89 454,836 $ 6.91
Aggregate intrinsic value of options outstanding and options exercisable at 31 December 2006 was approximately $32.5 million and $21.7 million, respectively. Aggregate intrinsic value represents the positive diÅerence between New River's closing stock price on the last trading day of the Ñscal period, which was $54.71 as of 29 December 2006, and the exercise price multiplied by the number of options outstanding. The aggregate intrinsic value of stock options exercised during the Ñscal year ended 31 December 2006 was approximately $20.5 million. As of 31 December 2006, there was approximately $2.4 million of total unrecognised compensation cost related to unvested stock options. That cost is expected to be recognised over a weighted-average period of approximately 19.3 months. EÅective 29 March 2005, the Compensation Committee of New River's Board granted a total of 1,278,000 SARs to New River's three executive oÇcers. Of these SARs, 600,000 were granted under the Plan and 678,000 were granted under stand alone agreements not covered by the Plan. These SARs, of
55 PART III Ì FINANCIAL INFORMATION ON NEW RIVER which 958,500 are payable in cash and 319,500 are payable in common stock, have an exercise price of $12.00, which was the closing price of New River's common stock on the date of grant and vest on the third anniversary of the date of grant. On 19 January 2006, the Compensation Committee of the Board granted a total of 639,000 SARs to the same three executive oÇcers. Of these SARs, 519,500 were granted under the Plan and 119,500 were granted under stand-alone agreements not covered by the Plan. These SARs, of which 479,250 are payable in cash and 159,750 are payable in common stock, have an exercise price of $32.71, which was the closing price of New River's common stock on the date of grant and vest over a three year period in equal annual instalments. The common stock issued upon the vesting of all stock-based SARs will vest upon the second anniversary following the exercise of the SARs. On 24 August 2006, in recognition of employee performance, the Board approved a modiÑcation to the SARs to be settled in common stock and in cash held by an executive oÇcer by accelerating the vesting to fully vested status. In the case of SARs to be settled in common stock upon the exercise of the SARs, the two year holding requirement was waived. New River has established an objective formula that takes into consideration New River's Ñnancial position and historical operating cash requirements that must be met as a condition of exercise for the SARs payable in cash. New River reviews the likelihood of meeting the condition established by the formula when assessing the accounting treatment for the SARs payable in cash. Currently, New River's assessment is that it is probable that the condition to exercise established by the formula will be met, and therefore, New River has accrued the projected obligation for these SARs. In the event that New River deems the likelihood of meeting the condition to exercise established by the formula to be remote, then it would no longer continue to accrue the projected obligation for the SARs payable in cash. New River recognised total stock-based compensation expense of approximately $32.8 million and $3.1 million related to the SARs to be settled in cash and SARs to be settled in common stock, respectively, during the Ñscal year ended 31 December 2006. Aggregate intrinsic value of outstanding SARs to be settled in cash and in common stock at 31 December 2006 was approximately $48.8 million and $17.2 million, respectively. Aggregate intrinsic value of vested SARs to be settled in cash and in common stock at 31 December 2006 was approximately $4.1 million and $6.9 million, respectively. As of 31 December 2006, there was approximately $21.0 million and $2.2 million of total unrecognised compensation cost related to SARs to be settled in cash and in common stock, respectively. These costs are expected to be recognised over weighted-average periods of approximately 16.1 and 39.0 months, respectively.
12. CONTINGENCIES In May 2002, New River Ñled suit against DSM Pharmaceuticals, Inc. (""DSM''), alleging breach of contract and misrepresentations by DSM and failure of consideration by DSM. The parties reached an agreement for the settlement of all claims and counterclaims associated with the litigation, mutual releases between the parties and their aÇliates, and the payment of $1,300,000 to New River by DSM. An Agreed Order of Dismissal with Prejudice evidencing the dismissal of all claims associated with the litigation was signed by counsel for both parties and submitted to the court for entry upon New River's receipt of the settlement amount of $1,300,000 million from DSM on 4 May 2004. As a result of this settlement, New River recognised a gain of $1,764,043 in April 2004, including reversing outstanding invoices payable of $464,043. From time to time, New River may become involved in other litigation in the normal course of business. Management believes that any costs resulting from such litigation will not have a signiÑcant adverse eÅect on New River's consolidated Ñnancial condition, results of operations or liquidity. In the normal course of business, New River may enter into agreements which incorporate indemniÑcation provisions. While the maximum amount to which New River may be exposed under such agreements
56 PART III Ì FINANCIAL INFORMATION ON NEW RIVER cannot be reasonably estimated, New River maintains insurance coverage that management believes will eÅectively mitigate New River's obligations under these indemniÑcation provisions. No amounts have been recorded in the consolidated Ñnancial statements with respect to New River's obligations under such agreements.
13. STOCK SPLIT On 20 December 2005, New River's Board of Directors approved a two-for-one split of New River's common stock, to be eÅected in the form of a stock dividend. Each shareholder of record at the close of business on 30 December 2005, was to be issued one additional share of common stock for each issued and outstanding share owned as of that date. The distribution was made on 12 January 2006. All references in the consolidated Ñnancial statements to common shares, common stock options, common share prices and per common share amounts have been adjusted retroactively for all periods presented to reÖect this two-for-one split.
14. DEFINITIVE AGREEMENT OF MERGER (SUBSEQUENT EVENT) On 20 February 2007, New River announced that it had signed a deÑnitive merger agreement with Shire under which Shire has agreed to acquire New River and will pay $64.00 in cash for each share of New River's common stock. The acquisition will be eÅected by means of a cash tender oÅer for all outstanding shares of New River, followed by a merger in which each remaining untendered share of New River would be converted into the same $64.00 cash per share price paid in the tender oÅer. The transaction has been unanimously approved by New River's Board of Directors. The tender oÅer commenced on 2 March 2007 and is expected to close early in the second quarter. Consummation of the tender oÅer is subject to approval of the transaction by Shire's shareholders, as well as the satisfaction of certain customary conditions, including the tender of a majority of the outstanding New River shares on a fully diluted basis and the expiration or earlier termination of the Hart-Scott-Rodino waiting period. Randal J. Kirk, New River's Chairman, CEO and President, has agreed to tender all shares of New River beneÑcially owned by him, representing approximately 50.2% of the currently outstanding shares. The Merger Agreement contains certain termination rights for both parties and further provides for a termination fee to Shire of $70 million and up to $8 million in the aggregate for reimbursement of documented out-of-pocket transaction related expenses if the transaction is terminated under certain circumstances.
57 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Part IIIB Ì Reconciliation to Shire Accounting Policies
1. BASIS OF PREPARATION 15.5.27(2)a The following unaudited reconciliations summarise the material adjustments which reconcile New River's 15.5.27(2)b consolidated net loss for the each of the Ñscal years ended 31 December 2006, 1 January 2006 and 2 January 2005 and its consolidated shareholders' (deÑcit)/equity as at the end of those periods as previously reported by New River, to estimates of the consolidated net loss and consolidated sharehold- ers' (deÑcit)/equity that would have been reported had New River followed Shire's accounting policies in the preparation of its Ñnancial statements for the year ended 31 December 2006, as required by Listing Rule 13.5.27(2). The Financial Information previously reported by New River was prepared under US GAAP. Shire also prepares its Ñnancial statements under US GAAP. The adjustment to net loss in each period represents the eÅect for that reporting period only. The adjustment to New River's consolidated shareholders' equity/(deÑcit) at the end of each period represents the cumulative eÅect of those adjustments.
2. RECONCILIATION OF NEW RIVER'S FINANCIAL INFORMATION TO A BASIS CONSISTENT WITH THE ACCOUNTING POLICIES OF SHIRE Consolidated net loss Year Year Year ended ended ended 31 December 1 January 2 January Note 2006 2006 2005 $'000 $'000 $'000 Consolidated net loss under US GAAP as reported(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (57,427) (29,866) (14,335) Accounting policy adjustments Share based compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ a Ì (2,058) (455) Consolidated net loss attributable to New River under the accounting policies of the Company ÏÏÏ (57,427) (31,924) (14,790)
(1) As reported in Ñlings with the SEC on Forms 10-K in respect of the years ending 2 January 2005, 1 January 2006 and 31 December 2006.
Consolidated shareholders' (deÑcit)/equity As at As at As at 31 December 1 January 2 January Note 2006 2006 2005 $'000 $'000 $'000 Consolidated shareholders' (deÑcit)/equity under US GAAP as reported(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (109,703) (6,482) 21,385 Accounting policy adjustments Share based compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ a Ì Ì Ì Consolidated shareholders' (deÑcit)/ equity attributable to New River under the accounting policies of the Company ÏÏÏÏÏÏÏÏÏÏÏÏÏ (109,703) (6,482) 21,385
(1) As reported in Ñlings with the SEC on Forms 10-K in respect of the years ending 2 January 2005, 1 January 2006 and 31 December 2006.
58 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
Accounting policy adjustments (a) Share based compensation New River adopted SFAS 123(R), Share based payment, using the modiÑed prospective method, whereby compensation expense was recognised during the year to 31 December 2006 for the remaining unvested portions of stock options and stock appreciation rights (SARs) settled in stock granted prior to 2 January 2006. For the years to 2 January 2005 and 1 January 2006, New River recognised stock based compensation according to the provisions of APB 25, Accounting for Stock Issued to Employees, and related interpretations including FIN 44, Accounting for Certain Transactions Involving Stock Compensa- tion, an interpretation of APB Opinion No. 25, and FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Shire elected to adopt SFAS 123(R) using the modiÑed retrospective method, which permits companies to retrospectively adjust all prior periods presented, based on amounts previously disclosed for pro forma purposes under SFAS 123, Accounting for Stock Based Compensation. Under Shire's accounting policies, New River would have adjusted the years to 2 January 2005 and 1 January 2006 to retrospectively include in net loss amounts previously disclosed by New River for pro forma purposes under SFAS 123. This adjustment does not aÅect consolidated shareholders' (deÑcit)/equity as at 2 January 2005 and 1 January 2006, as the oÅset to the incremental charge is recorded to additional paid in capital within consolidated shareholders' (deÑcit)/equity.
59 PART III Ì FINANCIAL INFORMATION ON NEW RIVER
REPORTING ACCOUNTANT'S OPINION RELATING TO RECONCILIATION 13.5.22(1) 13.5.22(2) 13.5.23 The Directors Morgan Stanley & Co. International Limited Shire plc 25 Cabot Square Hampshire International Business Park Canary Wharf Chineham London Basingstoke E14 4QA Hampshire RG24 8EP
26 March 2007
Dear Sirs,
Shire plc (the ""Company'')
Proposed acquisition of New River Pharmaceuticals Inc. (""New River'')
We report on the reconciliations of the consolidated net loss for each of the years in the three-year period ended 31 December 2006, and of the consolidated shareholders equity/(deÑcit) as at 2 January 2005, 1 January 2006 and 31 December 2006, as reported in the Ñnancial statements of New River prepared under United States Generally Accepted Accounting Principles, on the basis of the accounting policies of the Company (the ""Reconciliations''), and on the adjustments set out therein, set out in Part III of the class 1 circular of the Company dated 26 March 2007. This report is required by Listing Rule 13.5.27R(2)(b) of the Financial Services Authority and is given for the purpose of complying with that Listing Rule and for no other purpose.
Responsibilities
It is the responsibility of the directors of Shire plc (the ""Directors'') to prepare the Reconciliations in accordance with Listing Rule 13.5.27R(2)(a).
It is our responsibility to form an opinion as required by Listing Rule 13.5.27R(2)(b) as to whether the:
(a) Reconciliations have been properly compiled on the stated basis; and
(b) adjustments are appropriate for the purpose of presenting the Ñnancial information (as adjusted) on a basis consistent in all material respects with the accounting policies of the Company.
Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to ordinary shareholders as a result of the inclusion of this report in the class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suÅered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6), consenting to its inclusion in the class 1 circular.
Basis of Opinion
We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making
60 PART III Ì FINANCIAL INFORMATION ON NEW RIVER this report, which involved no independent examination of any of the underlying Ñnancial information, consisted primarily of:
‚ assessing whether the unadjusted Ñnancial information of New River has been extracted from an appropriate source;
‚ obtaining an understanding of New River's accounting policies by discussing them with its oÇcials and directors, and management and auditors;
‚ obtaining and evaluating evidence supporting the adjustments; and
‚ discussing the Reconciliations with the Directors.
The Reconciliations are based on the audited balance sheets as at 2 January 2005, 1 January 2006 and 31 December 2006 and the audited statement of operations for each of the years in the three-year period ended 31 December 2006 of New River which were the responsibility of the directors of New River and were audited by another Ñrm of accountants. We do not accept any responsibility for any of the historical Ñnancial statements of New River, nor do we express any opinion on those Ñnancial statements.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Reconciliations have been properly compiled on the basis stated and that the adjustments are appropriate for the purpose of presenting the Ñnancial information (as adjusted) on a basis consistent in all material respects with the Company's accounting policies.
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America or other jurisdictions outside of the United Kingdom and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
Opinion
In our opinion:
(a) the Reconciliations have been properly compiled on the basis stated; and
(b) the adjustments are appropriate for the purpose of presenting the Ñnancial information (as adjusted) on a basis consistent in all material respects with the accounting policies of the Company.
Yours faithfully,
Deloitte & Touche LLP
Deloitte & Touche LLP is the United Kingdom member Ñrm of Deloitte Touche Tohmatsu (""DTT''), a Swiss Verein whose member Ñrms are separate and independent legal entities. Neither DTT nor any of its member Ñrms has any liability for each other's acts or omissions. Services are provided by member Ñrms or their subsidiaries and not by DTT
61 PART IV Ì UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR 13.5.8(1) THE ENLARGED SHIRE GROUP 13.5.8(2) 13.5.9 The pro forma Ñnancial information set out below has been prepared to illustrate the eÅect on the consolidated net assets of Shire as if the Acquisition had occurred at 31 December 2006. The pro forma Ñnancial information has been prepared for illustrative purposes only and, because of its nature, the pro forma Ñnancial information addresses a hypothetical situation and, therefore, does not represent the Enlarged Shire Group's actual Ñnancial position or results. For the purpose of the preparation of the pro forma Ñnancial information, the Company has attributed the excess of the purchase price paid over the book value of New River's net assets entirely to goodwill. On apportionment of the purchase price, fair values ascribed to intangible assets, in-process research and development, property, plant and equipment, inventory and any other assets acquired or liabilities assumed, may result in material changes to the goodwill and the net asset position as recorded in this pro forma Ñnancial information for the Enlarged Shire Group.
62 PART IV Ì UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ENLARGED SHIRE GROUP
Pro forma statement of net assets of the Enlarged Shire Group
Adjustments New River Consideration Shire as at as at Net and 31 December 31 December proceeds of Draw Down transaction Acquisition 2006 2006 Placing of Facility costs Adjustments Enlarged (Note 1) (Note 2) (Note 3) (Note 4) (Note 5) (Note 6) Shire Group US$m US$m US$m US$m US$m US$m US$m ASSETS Current assets: Cash and cash equivalentsÏÏ 1,126.9 87.0 878.9 1,286.3 (2,742.8) Ì 636.3 Restricted cashÏÏÏÏÏÏÏÏÏÏÏÏ 29.8 Ì Ì Ì Ì Ì 29.8 Short term investments ÏÏÏÏÏ Ì 60.0 Ì Ì Ì Ì 60.0 Accounts receivable, netÏÏÏÏ 310.8 Ì Ì Ì Ì Ì 310.8 Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 131.1 Ì Ì Ì Ì Ì 131.1 Deferred tax asset ÏÏÏÏÏÏÏÏÏ 105.7 Ì Ì Ì Ì Ì 105.7 Prepaid expenses and other current assets ÏÏÏÏÏÏÏÏÏÏÏ 106.0 1.3 Ì 3.7 Ì Ì 111.0 Total current assets ÏÏÏÏÏÏÏÏ 1,810.3 148.3 878.9 1,290.0 (2,742.8) Ì 1,384.7 Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55.8 Ì Ì Ì Ì 55.8 Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏ 292.8 2.2 Ì Ì Ì Ì 295.0 Goodwill and Other intangible assets, netÏÏÏÏÏ 999.8 Ì Ì Ì Ì 2,614.5 3,614.3 Deferred tax asset ÏÏÏÏÏÏÏÏÏ 155.3 1.0 Ì Ì Ì Ì 156.3 Other non-current assets ÏÏÏ 12.4 Ì Ì 9.2 Ì Ì 21.6 Total long term assetsÏÏÏÏÏÏ 1,516.1 3.2 Ì 9.2 Ì 2,614.5 4,143.0 Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,326.4 151.5 878.9 1,299.2 (2,742.8) 2,614.5 5,527.7 LIABILITIES Current liabilities: Accounts payable and accrued expenses ÏÏÏÏÏÏÏ 566.1 19.5 Ì Ì Ì Ì 585.6 Liability to dissenting shareholders ÏÏÏÏÏÏÏÏÏÏÏÏ 452.3 Ì Ì Ì Ì Ì 452.3 Convertible notes ÏÏÏÏÏÏÏÏÏÏ Ì 137.8 Ì Ì Ì (137.8) Ì Deferred revenue ÏÏÏÏÏÏÏÏÏÏ Ì 6.2 Ì Ì Ì (6.2) Ì Deferred tax liability ÏÏÏÏÏÏÏÏ Ì 1.0 Ì Ì Ì Ì 1.0 Loan facility, currentÏÏÏÏÏÏÏÏ Ì Ì Ì 450.0 Ì Ì 450.0 Other current liabilitiesÏÏÏÏÏÏ 313.6 2.7 Ì Ì Ì Ì 316.3 Total current liabilities ÏÏÏÏÏÏ 1,332.0 167.2 Ì 450.0 Ì (144.0) 1,805.2 Accrued stock based compensation ÏÏÏÏÏÏÏÏÏÏÏ Ì 34.5 Ì Ì Ì (34.5) Ì Deferred revenue ÏÏÏÏÏÏÏÏÏÏ Ì 59.5 Ì Ì Ì (59.5) Ì Loan facility, non-currentÏÏÏÏ Ì Ì Ì 850.0 Ì Ì 850.0 Other non-current liabilitiesÏÏ 52.1 Ì Ì Ì Ì Ì 52.1 Total long term liabilities ÏÏÏÏ 52.1 94.0 Ì 850.0 Ì (94.0) 902.1 Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,384.1 261.2 Ì 1,300.0 Ì (238.0) 2,707.3 NET ASSETS / SHAREHOLDERS EQUITY/(DEFICIT) ÏÏÏÏÏÏ 1,942.3 (109.7) 878.9 (0.8) (2,742.8) 2,852.5 2,820.4
63 PART IV Ì UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ENLARGED SHIRE GROUP
Notes to the unaudited pro forma statement of net assets LR13.5.7(3)(c) (1) The consolidated net assets of Shire as at 31 December 2006 have been extracted without material adjustment from Shire's Ñling with the SEC on Form 10-K in respect of the year ended 31 December 2006. (2) The consolidated net assets of New River as at 31 December 2006 have been extracted without material adjustment from New River's Ñling with the SEC on Form 10-K in respect of the year ended 31 December 2006, as set out in Part III of this document. (3) An adjustment has been made to reÖect the proceeds of Shire's equity placing of $878.9 million, net of associated costs of $19.8 million. (4) A new debt facility of $2.3 billion has been arranged to provide part of the purchase consideration, of which $1.3 billion will be drawn down to part fund the gross cost of the acquisition. An adjustment has been made to defer the associated fees in respect of the new debt facility of $12.9 million (net of $0.8 million fees written oÅ in respect of Shire's previous facility), split between current ($3.7 million) and non-current ($9.2 million) assets. (5) The gross cost of the acquisition totals $2,742.8 million, representing the cost of the fully diluted equity interest, the net cash cost of settling the convertible debt and related contracts (as outlined in Note 4 to New River's Ñnancial information as set out in Part III of this document), together with related transaction costs. The gross cost as stated above is not adjusted for the cash and cash equivalents and short-term investments acquired with New River of $147.0 million as at 31 Decem- ber 2006, which reduce the net cost of the acquisition to Shire to $2.6 billion. The purchase price has been part funded through the net proceeds of the equity placing, ($878.9 million), net drawings under the new debt facility, ($1,286.3 million), with the remaining balance of the gross cost of the acquisition, ($577.6 million), being provided through the cash and cash equivalents of Shire. (6) The following adjustments have been made to reÖect the acquisition of New River: (i) the convertible notes at a principal amount of $137.8 million have been extinguished as a result of the change of control of New River; (ii) the liability of $34.5 million in respect of cash settled share appreciation rights, (""SARs''), has been eliminated from the balance sheet of New River as the SARs will be cash settled on completion of the acquisition (included in the purchase price shown in Note 5); (iii) current deferred revenue of $6.2 million and long-term deferred revenue of $59.5 million in relation to the collaboration agreement have been eliminated from New River's balance sheet as the Enlarged Shire Group will have no external performance obligations in respect of this deferred revenue subsequent to the acquisition; (iv) an adjustment has been made to reflect proforma goodwill and intangible assets of $2,614.5 mil- lion arising on the acquisition of New River. For the purposes of this proforma net asset statement Shire has attributed the excess of the purchase price paid, over the book value of New River's net assets as adjusted for (i)-(iii) above, entirely to goodwill (see Note 8 below). (7) No account has been taken of any trading or other transactions of Shire or New River since 31 December 2006. (8) The acquisition adjustments referred to in (6) above are not a complete and Ñnal apportionment of the purchase price. In particular, as required by FASB Interpretation No. 4 ""Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method Ì an Interpretation of FASB Statement No.2'' (FIN 4), any portion of the purchase price allocated to the
64 PART IV Ì UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ENLARGED SHIRE GROUP pro forma goodwill and intangible assets subsequently ascribed to in-process research and development, which the Company expects to be approximately $2 billion, will be immediately expensed, materially reducing the net assets of the Enlarged Shire Group. The Company expects the remaining balance of the pro forma goodwill and intangible assets to be primarily ascribed to intangible assets and related deferred tax liabilities in respect of the paediatric indication of VYVANSE (see Part 1, Item 6 of this Circular on page 9).
65 PART IV Ì UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ENLARGED SHIRE GROUP
REPORTING ACCOUNTANT'S OPINION RELATING TO PRO FORMA FINANCIAL INFORMATION
The Directors Morgan Stanley & Co. International Limited Shire plc 25 Cabot Square Hampshire International Business Park Canary Wharf Chineham London Basingstoke E14 4QA Hampshire RG24 8EP
26 March 2007 Dear Sirs, Shire plc (the ""Company'') We report on the pro forma Ñnancial information (the ""Pro forma Ñnancial information'') set out in Part IV of the investment circular dated 26 March 2007 (the ""Circular''), which has been prepared on the basis described in the notes, for illustrative purposes only, to provide information about how the transaction might have aÅected the Ñnancial information presented on the basis of the accounting policies adopted by the Company in preparing the Ñnancial statements for the period ended 31 December 2006. This report is required by Annex II item 7 of Commission Regulation (EC) No 809/2004 (the ""Prospectus Directive Regulation'') as applied by Listing Rule 13.5.31R and is given for the purpose of complying with that requirement and for no other purpose.
Responsibilities It is the responsibility of the directors of the Company (the ""Directors'') to prepare the Pro forma Ñnancial information in accordance with Annex I item 20.2 and Annex II items 1 to 6 of the Prospectus Directive Regulation. It is our responsibility to form an opinion, as required by Annex II item 7 of the Prospectus Directive Regulation as applied by Listing Rule 13.5.31R, as to the proper compilation of the Pro forma Ñnancial information and to report that opinion to you. Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to ordinary shareholders as a result of the inclusion of this report in the class 1 circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suÅered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R(6) consenting to its inclusion in the class 1 circular. In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any Ñnancial information used in the compilation of the Pro forma Ñnancial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
Basis of Opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying Ñnancial information, consisted primarily of comparing the unadjusted Ñnancial information with the source documents,
66 PART IV Ì UNAUDITED PRO FORMA FINANCIAL INFORMATION FOR THE ENLARGED SHIRE GROUP considering the evidence supporting the adjustments and discussing the Pro forma Ñnancial information with the Directors. We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma Ñnancial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.
Opinion In our opinion: (a) the Pro forma Ñnancial information has been properly compiled on the basis stated; and (b) such basis is consistent with the accounting policies of the Company.
Yours faithfully,
Deloitte & Touche LLP
Deloitte & Touche LLP is the United Kingdom member Ñrm of Deloitte Touche Tohmatsu (""DTT''), a Swiss Verein whose member Ñrms are separate and independent legal entities. Neither DTT nor any of its member Ñrms has any liability for each other's acts or omissions. Services are provided by member Ñrms or their subsidiaries and not by DTT.
67 PART V Ì DESCRIPTION OF PRINCIPAL TRANSACTION DOCUMENTS PRAnn1,22 TO EFFECT ACQUISITION
1. Merger Agreement The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, an indirect wholly owned subsidiary of Shire will make a cash tender oÅer to purchase all outstanding shares of common stock, par value $0.001 per share (the ""Shares''), of New River, at a purchase price of $64.00 per Share, net to the seller in cash. The Merger Agreement provides that following completion of the tender oÅer and the satisfaction or waiver of certain conditions in the Merger Agreement, the indirect wholly owned subsidiary of Shire will be merged with and into New River, with New River continuing as the surviving corporation as an indirect wholly owned subsidiary of Shire. At the eÅective time of the merger, any remaining outstanding Shares not tendered in the tender oÅer (other than (i) Shares owned by any wholly owned subsidiary of New River and any Shares owned by Shire or any wholly owned subsidiary of Shire, which shall be cancelled, or (ii) Shares owned by New River shareholders who properly demanded appraisal under the Virginia Stock Corporation Act of the Commonwealth of Virginia), will be converted into the right to receive $64.00 per Share or any greater per Share price paid in the tender oÅer in cash, without interest thereon. The Merger Agreement provides that all options to acquire Shares and all stock appreciation rights outstanding immediately prior to the eÅective time of the merger, whether or not fully vested and exercisable, will, at the eÅective time of the merger, be cancelled and each holder of an option or stock appreciation right will be entitled to receive a cash amount (subject to applicable withholding taxes) equal to the excess, if any, of the per Share amount paid in the tender oÅer over the per Share exercise price of such option or stock appreciation right, as applicable, multiplied by the number of Shares issuable upon exercise of such option or subject to such stock appreciation right, as applicable. The Merger Agreement contains customary representations and warranties of New River. The representa- tions and warranties will not survive consummation of the merger and cannot be the basis for claims under the Merger Agreement by the other party after termination of the Merger Agreement, other than claims for wilful breach. In addition, between the signing of the Merger Agreement and the consummation of the merger, New River has agreed to conduct its business in the ordinary course consistent with past practice and not to take certain speciÑed actions without the prior written consent of Shire. Shire's obligation to purchase Shares in the tender oÅer is subject to various conditions, including, but not limited to: (i) there being validly tendered and not withdrawn prior to the expiration of the tender oÅer a number of Shares, which, together with all other Shares then beneÑcially owned by Shire or any of its controlled aÇliates, represents at least a majority of the total number of Shares outstanding on a fully diluted basis; and (ii) approval of the Acquisition by the Shire Shareholders. The tender oÅer was also conditioned upon the expiration or termination of any applicable waiting period (and any extension thereof) under the HSR Act. On 16 March 2007, the waiting period under the HSR Act applicable to the Acquisition expired and, therefore, this condition has been satisÑed. Consummation of the merger is, among other things, conditional upon the closing of the tender oÅer and may be conditional upon the approval of the Acquisition by the holders of outstanding Shares. If Shire acquires at least 90 per cent of the outstanding Shares in the tender oÅer or otherwise, Shire may eÅect a ""short-form'' merger under the Virginia Stock Corporation Act of the Commonwealth of Virginia. This means that the merger could be consummated without a meeting of New River shareholders and without prior notice to, or any action by, any other New River shareholder. In the event that Shire does not acquire 90 per cent of the outstanding Shares, consummation of the merger will require the approval of the holders of not less than a majority of the outstanding Shares, including any Shares held by Shire. This would require a meeting of New River shareholders and, in connection therewith, a proxy or information statement would be required to be prepared, Ñled and cleared by the US Securities and Exchange Commission and distributed to all New River shareholders. As the closing of the tender oÅer is conditional upon there being validly tendered and not withdrawn in the tender oÅer a majority of the outstanding
68 PART V Ì DESCRIPTION OF PRINCIPAL TRANSACTION DOCUMENTS TO EFFECT ACQUISITION
Shares on a fully-diluted basis, Shire would own (assuming this condition is satisÑed and not waived) suÇcient Shares to enable it, without the vote of any other New River shareholder, to satisfy the shareholder approval requirement at the New River shareholder meeting. The Board is required to recommend the tender oÅer and the merger to Shire Shareholders and to convene an Extraordinary General Meeting of Shire Shareholders to approve the Acquisition. In connec- tion with such Extraordinary General Meeting, the Merger Agreement provides that Shire will (i) as promptly as practicable prepare and then, if required, Ñle with the UK Listing Authority a draft copy of, will use its reasonable best eÅorts to have approved, if required, by the UK Listing Authority and will thereafter promptly mail to its shareholders, this Circular, (ii) use its reasonable best eÅorts to secure approval of the Acquisition by the Shire Shareholders and (iii) otherwise comply with all legal requirements applicable to such meeting. The Board may change its recommendation if it determines in good faith, after consultation with external counsel to Shire, that it must take such action to comply with its Ñduciary duties under applicable law. If Shire makes such a recommendation change, Shire will not have any further obligations to recommend the Acquisition, to call the Extraordinary General Meeting of Shire Shareholders, to use its reasonable best eÅorts to secure approval of the Acquisition by the Shire Shareholders or to prepare this Circular. The Merger Agreement provides that the New River board of directors may not fail to make, withdraw or modify in a manner adverse to Shire its recommendation to approve the Acquisition or recommend, adopt or approve, or publicly propose to recommend, adopt or approve, a takeover proposal, or take any action or make any statement inconsistent with its recommendation in favour of the Acquisition unless, following the receipt of a superior proposal after the date of the Merger Agreement, the New River board of directors determines in good faith by a majority vote, after considering advice from outside legal counsel, that its failure to take such action would be reasonably likely to be inconsistent with its Ñduciary duties under applicable law and New River delivers three business days prior written notice advising Shire that it intends to take such action, and Shire does not make, within such three-business-day period, an oÅer that is at least as favourable to the New River shareholders, as determined by the New River board of directors in good faith (after considering the advice of a Ñnancial adviser of recognised reputation in the US) as such superior proposal. A ""takeover proposal'' means any inquiry, proposal or oÅer from any person (other than Shire and its aÇliates) relating to any (A) acquisition of assets of New River and its subsidiaries (including securities of subsidiaries of New River) equal to 20 per cent or more of New River's consolidated assets or to which 20 per cent or more of New River's revenues or earnings on a consolidated basis are attributable, (B) acquisition of 20 per cent or more of the outstanding shares of capital stock or any other voting securities of New River, (C) tender oÅer (including a self-tender oÅer) or exchange oÅer that if consummated would result in any person (other than Shire and its aÇliates) beneÑcially owning 20 per cent or more of the outstanding shares of capital stock or any other voting securities of New River or (D) merger, consolidation, share exchange, business combination, recapitalisation, liquidation, dissolu- tion or similar transaction involving New River or any of its subsidiaries whose assets, individually or in the aggregate, constitute more than 20 per cent of the consolidated assets of New River, in each case other than the transactions contemplated by the Merger Agreement. A ""superior proposal'' means any bona Ñde written proposal (on its most recently amended or modiÑed terms, if amended or modiÑed) made by any person (other than Shire and its aÇliates) to enter into a takeover proposal (with all of the percentages included in the deÑnition of ""takeover proposal'' increased to 75 per cent), and which is otherwise on terms and conditions which the New River board of directors determines by a majority vote in its good faith (after consultation with a Ñnancial adviser of reputation in the US and outside counsel) and in light of all relevant circumstances and all the terms and conditions of such proposal and the Merger Agreement, including any break-up fees, expense reimbursement provisions and conditions to consummation, to be more favourable to New River's shareholders than the
69 PART V Ì DESCRIPTION OF PRINCIPAL TRANSACTION DOCUMENTS TO EFFECT ACQUISITION tender oÅer, the merger and the other transactions contemplated by the Merger Agreement and for which Ñnancing, if a cash transaction (in whole or in part), is then committed or determined by the New River board of directors to be reasonably likely to be obtained.
New River is required to pay to Shire a break-up of $70 million if the Merger Agreement is terminated under any of the following circumstances:
‚ New River terminates the Merger Agreement upon substantially concurrent entry into a deÑnitive agreement implementing a superior proposal if the New River board of directors determines in good faith by a majority vote, after considering advice from outside legal counsel, that its failure to take such action would be reasonably likely to be inconsistent with its Ñduciary duties under applicable law and New River delivers three business days prior written notice advising Shire that it intends to take such action, and Shire does not make, within such three-business-day period, an oÅer that is at least as favourable to the New River shareholders as such superior proposal;
‚ Shire terminates the Merger Agreement because New River fails to make, withdraws or modiÑes in a manner adverse to Shire its recommendation in favour of the Acquisition (or fails to timely publicly conÑrm its recommendation after being requested by Shire to do so);
‚ Shire terminates the Merger Agreement as a result of New River's material breach of its obligations to, among other things, refrain from soliciting, initiating, or knowingly encouraging or facilitating any inquiries or the making of any proposal that is or is reasonably likely to lead to a takeover proposal; or
‚ Shire terminates the Merger Agreement due to the failure to complete the merger by 20 June 2007 or, in the event that certain conditions are not fulÑlled by that date, 20 August 2007 (the ""Walk Away Date''), but only if, both (A) prior to the Walk-Away Date, a takeover proposal has been publicly announced or otherwise communicated to the New River board of directors and not withdrawn, revoked or rejected prior to the date of termination of the Merger Agreement, and (B) New River, within nine months of such termination, enters into a deÑnitive agreement with respect to, or consummates a takeover proposal (provided that for purposes of this paragraph, each reference to ""20 per cent'' in the deÑnition of ""takeover proposal'' will be deemed a reference to ""50 per cent'').
Shire is required to pay to New River a termination fee of $70 million, if the agreement is terminated in any of the following circumstances:
‚ the Merger Agreement is terminated by either Shire or New River due to the merger not being approved in accordance with the requirements of the Listing Rules by the Shire Shareholders at the meeting held for that purpose; or
‚ New River terminates the Merger Agreement due to the failure of the Board to call and hold a meeting of Shire Shareholders to approve the merger in accordance with its obligations under the Agreement or because the Board fails to make or changes, in a manner adverse to New River, its recommenda- tion in favour of the Acquisition (or fails to timely publicly conÑrm its recommendation after being requested by Shire to do so).
In addition to the above, if at any time either New River or Shire is required to pay the termination fee contemplated above, the Merger Agreement provides that, no later than two business days after such termination, the paying party must reimburse the non-paying party for 100 per cent of its documented out-of-pocket fees and expenses (including reasonable fees and expenses of its counsel) up to $8 million actually incurred by it in connection with the Merger Agreement and the transactions contemplated by the Merger Agreement.
70 PART V Ì DESCRIPTION OF PRINCIPAL TRANSACTION DOCUMENTS TO EFFECT ACQUISITION
2. Tender and Support Agreement
Concurrently with entering into the Merger Agreement, Shire entered into the Tender and Support Agreement with Mr. Randal J. Kirk, the President, Chief Executive OÇcer and Chairman of New River, and certain entities controlled by him (collectively, the ""Supporting Shareholders'') who collectively beneÑ- cially own approximately 50.2 per cent of the currently outstanding Shares (and approximately 48.4 per cent of the Shares on a fully diluted basis).
Pursuant to the Tender and Support Agreement, each Supporting Shareholder agreed to validly tender (or cause to be tendered) in the tender oÅer all of such Supporting Shareholder's Shares pursuant to the terms of the tender oÅer as promptly as practicable (but no later than the close of business on the 17th business day) after commencement of the tender oÅer.
The Tender and Support Agreement further provides that each Supporting Shareholder will, at any meeting of the holders of Shares, vote (or cause to be voted) (i) in favour of the approval and adoption of the Merger Agreement, the merger and each of the other actions contemplated by the Merger Agreement and (ii) against (A) any action or agreement that would reasonably be expected to frustrate the purposes of, impede, hinder, interfere with, or prevent or delay or adversely aÅect the consummation of the transactions contemplated by the Merger Agreement, (B) any takeover proposal and any action in furtherance thereof, (C) any reorganisation, recapitalisation or winding-up of New River or any other extraordinary transaction involving New River or (D) any action, proposal, transaction or agreement that would reasonably be expected to result in a breach of any covenant, representation or warranty or any other obligation or agreement of New River under the Merger Agreement or of such Supporting Shareholder under the Tender and Support Agreement.
3. Facilities Agreement
In connection with the acquisition of New River, Shire entered into the Facilities Agreement with, inter alia, ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited and The Royal Bank of Scotland plc (the ""Arrangers'') on 20 February 2007. The Facilities Agreement comprises three credit facilities: (i) a committed multicurrency Ñve year term loan facility in an aggregate amount of $1,000 mil- lion (""Term Loan A''), (ii) a committed multicurrency 364 day term (with a further 364 day extension option) loan facility in an aggregate amount of $300 million (""Term Loan B'') and (iii) a committed Ñve year revolving loan facility in an aggregate amount of $1,000 million (the ""RCF'' and, together with Term Loan A and Term Loan B, the ""Facilities''). Shire has agreed to act as guarantor for any of its subsidiaries that borrow under the Facilities Agreement.
The RCF, which includes a $250 million swingline facility, may be used for general corporate purposes. Term Loan A and Term Loan B may be used only for Ñnancing the Acquisition (including related fees and transaction costs) and reÑnancing any existing indebtedness of New River or its subsidiaries.
The RCF and Term Loan A mature on 20 February 2012. Term Loan A is repayable in annual instalments on the anniversary of the Facilities Agreement in the following amounts: $150 million in 2008, $150 million in 2009, $200 million in 2010, $200 million in 2011 and the balance on maturity. Term Loan B matures on 19 February 2008. As noted above, at Shire's request, the maturity date of Term Loan B may be extended for a further 364 days.
The availability of loans under the Facilities is subject to customary conditions, including the absence of any defaults thereunder and the accuracy (in all material respects) of Shire's representations and warranties contained therein. In addition, the availability of loans for the purposes of Ñnancing the Acquisition is conditional upon, amongst other things, delivery to the Facility Agent of a copy of this Circular and evidence that Shire Shareholders have passed the EGM Resolution.
71 PART V Ì DESCRIPTION OF PRINCIPAL TRANSACTION DOCUMENTS TO EFFECT ACQUISITION
The Facilities include representations and warranties, covenants and events of default, including (i) requirements that Shire's ratio of Net Debt to EBITDA (as deÑned in the Facilities Agreement) does not exceed 3.50:1 for the 12 month period ending 31 December 2007; 3.25:1 for the 12 month period ending 30 June 2008; and 3.00:1 for each 12 month period ending 31 December and 30 June thereafter and (ii) that the ratio of EBITDA to Net Interest (as deÑned in the Facilities Agreement) must not be less than 4.0 to 1, for each 12 month period ending 31 December or 30 June, and additional limitations on the creation of liens, disposal of assets, incurrence of indebtedness, making of loans and giving of guarantees. Interest on loans under the Facilities will be payable on the last day of each interest period, which period may be one week or one, two, three or six months at the election of Shire (or as otherwise agreed with the Lenders (as deÑned in the Facilities Agreement)). The interest rate on each loan drawn under the RCF or Term Loan A for each interest period is the percentage rate per annum which is the aggregate of the applicable margin (initially set at 0.80 per cent per annum until delivery of the compliance certiÑcate for the year ending 31 December 2007 and thereafter ranging from 0.40 to 0.80 per cent per annum, depending on the ratio of Net Debt to EBITDA), LIBOR, and mandatory cost, if any (as calculated in accordance with Schedule 4 to the Facilities Agreement). The interest rate on each loan drawn under Term Loan B for each interest period is the percentage rate per annum which is the aggregate of the applicable margin (being from 0.50 per cent for the Ñrst six months from the date of the Facilities Agreement, 0.75 per cent for the second six months and 1.00 per cent per annum thereafter), LIBOR, and mandatory cost, if any (as calculated in accordance with Schedule 4 to the Facilities Agreement). Shire is also required to pay fees equal to 35 per cent per annum of the applicable margin on available commitments under the RCF for the availability period applicable to the RCF and 20 per cent per annum of the applicable margin on available commitments under Term Loan A and Term Loan B for the availability period applicable to Term Loan A and Term Loan B. Interest on overdue amounts under the Facilities will accrue at a rate which is one percentage point higher than the rates otherwise applicable to the loans under the Facilities. The Facilities Agreement restricts (subject to certain exceptions) Shire's ability to incur additional Ñnancial indebtedness, grant security over its assets or provide or guarantee loans. Further, any Lender may require mandatory prepayment of its participation if there is a change in control of Shire. In addition, in certain circumstances, the net proceeds of certain asset disposals by Shire must be applied towards mandatory prepayment of the Facilities, subject to certain exceptions. Upon a change of control of Shire or upon the occurrence of an event of default and the expiration of any applicable cure period, the total commitments under the Facilities may be cancelled and all or part of the loans, (together with accrued interest and all other amounts accrued or outstanding) may become immediately due and payable. Events of default under the Facilities Agreement include: (i) non-payment of any amounts due under the Facilities; (ii) failure to satisfy any of the Ñnancial covenants; (iii) material misrepresentation in any of the Finance Documents (as deÑned in the Facilities Agreement); (iv) failure to pay, or certain other defaults under other Ñnancial indebtedness; (v) certain insolvency events or proceedings; (vi) material adverse changes in the business, operations, assets or Ñnancial condition of the Shire Group; (vii) certain ERISA (as deÑned in the Facilities Agreement) breaches which would have a material adverse eÅect; (viii) if it becomes illegal for Shire or any of its subsidiaries that are parties to the Facilities Agreement to perform their obligations or (ix) if Shire or any subsidiary of Shire which is party to the Facilities Agreement repudiates the Facilities Agreement or any Finance Document. The Facilities Agreement is governed by English law.
72 PART VI Ì ADDITIONAL INFORMATION
1. Directors' Responsibility Statement LR13.4.1(4) The Directors of Shire, whose names appear in paragraph 3.1 below, accept responsibility for the information contained in this Circular. To the best of the knowledge and belief of the Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this Circular is in accordance with the facts and does not omit anything likely to aÅect the import of such information.
2. Registered OÇce PRAnn1,5.1.4 The Registered OÇce of Shire is Hampshire International Business Park, Chineham, Basingstoke, Hampshire RG24 8EP. The telephone number of the Registered OÇce is 01256 894000.
3. Directors (and service contracts) 3.1 Directors The names and principal functions of the Directors of Shire are as follows:
Name Position Dr. James Cavanaugh ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏChairman and Non Executive Director Matthew Emmens ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏChief Executive OÇcer Angus Russell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏChief Financial OÇcer Dr. Barry Price ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏSenior Non Executive Director The Hon. James Grant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏNon Executive Director Robin Buchanan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏNon Executive Director David Kappler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏNon Executive Director Patrick Langlois ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏNon Executive Director Kate Nealon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏNon Executive Director Dr. JeÅrey Leiden ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏNon Executive Director The names and principal functions of the Executive OÇcers of Shire are set out below. Matthew Emmens and Angus Russell are also Executive Directors of Shire. Save for Matthew Emmens and Angus Russell, the Executive OÇcers are not Directors.
Name Position Matthew Emmens ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏChief Executive OÇcer Angus Russell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏChief Financial OÇcer Mike Cola ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏPresident, Specialty Pharmaceuticals Dr. David Pendergast ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏPresident, Human Genetic Therapies Tatjana May ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏGeneral Counsel and Executive Vice President, Global Legal AÅairs Dr. Eliseo SalinasÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏChief ScientiÑc OÇcer and Executive Vice President, Global R&D John Lee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏExecutive Vice President, Global Supply Chain & Quality Joseph RusÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏExecutive Vice President, Alliance Management and New Market Development Anita Graham ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏExecutive Vice President, Global Human Resources Barbara DeptulaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏExecutive Vice President, Business Development Caroline WestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏSenior Vice President, Chief Compliance & Risk OÇcer
73 PART VI Ì ADDITIONAL INFORMATION
3.2 Directors' Service Contracts PRAnn1, 16.2
The amended and restated service contract between Shire Executive Services LLC (formerly Shire Executive Services Inc.) and Mr. Emmens is dated 12 March 2004 and was further amended on 21 November 2005 so as to provide for Shire being established as the new parent company of the Shire Group. Details of Mr. Emmens' service contract were published on 26 September 2005 in the Shire prospectus relating to Shire being established as the new parent company of the Shire Group (the ""Shire Prospectus''). Mr. Emmens' base salary for the year ending 31 December 2007 has been set by the Remuneration Committee at $1,158,167, an increase of Ñve per cent over the previous year's salary. Other than as described above or in the Shire Prospectus, the service contract of Mr. Emmens has not been amended or varied since 26 September 2005.
Mr. Russell entered into a service contract with SPG on 10 March 2004, which was novated to Shire on 21 November 2005 in connection with Shire being established as the new parent company of the Shire Group. Details of Mr. Russell's service contract were published on 26 September 2005 in the Shire Prospectus. Mr. Russell's base salary for the year ending 31 December 2007 has been set by the Remuneration Committee at 390,726, an increase of Ñve per cent over the previous year's salary. Other than as described above or in the Shire Prospectus, the service contract of Mr. Russell has not been amended or varied since 26 September 2005.
Each of the Non Executive Directors has a written letter of appointment with Shire, terminable by either party on three months' notice. Non Executive Directors are appointed for an initial term of two years and may be appointed to serve further terms at the discretion of the Board, unless the expiration of the term coincides with a particular Non Executive Director's turn to retire by rotation in which case re-election by shareholders is required. As Non Executive Directors who have served on the Board for nine or more years, Dr. James Cavanaugh and Dr. Barry Price have been appointed for one year terms and are subject to annual re-election by shareholders and may be appointed to serve further terms at the discretion of the Board.
Each Non Executive Director is paid a fee for acting as a Non Executive Director and additional fees are paid for being a member of the Audit, Remuneration and/or Nomination Committee, as well as for being Chairman of any of these committees. The Chairman is a Non Executive Director and is paid a separate fee. Fees are benchmarked against comparable companies in the sector and are determined by the Board. No Non Executive Director is provided with any beneÑts upon termination of his employment. The Non Executive Directors are not eligible to join Shire's pension scheme.
3.3 Directors' and other interests PRAnn1, 17.2
As at close of business on 22 March 2007 (being the latest practicable date prior to the publication of this Circular), the interests (all of which are beneÑcial) of the Directors and their immediate families in the share capital of Shire, which have been notiÑed to Shire by each Director pursuant to section 324 or 328 of the Act or which are required to be entered in the register maintained by Shire pursuant to section 325 of the Act or which are (so far as is known or could with reasonable diligence be ascertained by the relevant Director) interests of a person connected (within the meaning of section 346 of the Act)
74 PART VI Ì ADDITIONAL INFORMATION with a Director which would be required to be disclosed under the provisions of this paragraph if the connected person were a Director, were as follows:
Percentage of Number of Shire issued Name Ordinary Shares share capital Dr. James Cavanaugh ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 412,849 0.0749 Matthew EmmensÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18,938 0.0034 Angus Russell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,719 0.0018 Dr. Barry PriceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 31,350 0.0057 The Hon. James GrantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100,128 0.0182 Robin Buchanan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,500 0.0014 David Kappler ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,000 0.0018 Patrick LangloisÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nil N/A Kate Nealon ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,251 0.0004 Dr. JeÅrey Leiden ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Nil N/A In addition to their having an interest in 592,735 Shire Ordinary Shares as detailed above, certain of the Directors also have interests in Shire Ordinary Shares as a result of their participation in the Shire Employee Share Schemes. As at 22 March 2007 (being the latest practicable date prior to the publication of this Circular), these interests were as follows:
Number of Shire Ordinary Shares at 22 March Exercise Exercise Dates Director Scheme 2007 Price Earliest Latest Mr. Matthew Emmens ÏÏÏÏÏ 2000 Executive 945,010 3.6825 18.03.06 17.03.13 Scheme B 315,777 5.26 25.03.07 24.03.14 295,000 5.585 11.05.08 10.05.15 Stock Purchase Plan 713 7.47575 21.11.08 21.11.08 1 556,500 Mr. Angus Russell ÏÏÏÏÏÏÏÏ Executive Scheme A 4,181 7.175 13.12.02 12.12.09 2000 Executive 69,213 12.57 05.06.04 04.06.11 Scheme B 284,024 3.38 04.03.06 03.03.13 195,285 5.26 25.03.07 24.03.14 195,000 5.585 11.05.08 10.05.15 Sharesave 2,342 6.99 01.12.11 31.05.12 750,045 The Hon. James Grant ÏÏÏÏ BioChem 2,275 6.20 14.05.01 05.05.07 2,275 6.94 14.05.01 20.04.08 7,964 5.70 14.05.01 10.06.09 13,653 6.58 14.05.01 23.05.10 26,167
75 PART VI Ì ADDITIONAL INFORMATION
Details of awards under the Long Term Incentive Plan for Directors are as follows:
Shire Ordinary Shares at Earliest date in 22 March Value of award which an award Name of Director 2007 Date of award at grant date can be made $'000 Mr. Matthew Emmens ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 80,960 20.03.03 458 20.03.07 105,259 25.03.04 1,032 25.03.08 97,468 11.05.05 1,025 11.05.09 283,687 2,515 Mr. Angus Russell ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 44,667 20.03.03 252 20.03.07 65,095 25.03.04 638 25.03.08 63,217 11.05.05 664 11.05.09 172,979 1,554
As at 22 March 2007 (being the latest practicable date prior to publication of this Circular), details of the stock appreciation rights (""SARs'') of Directors are as follows:
Number of ADSs or Exercise Dates Ordinary Market Price at Director Scheme Type of Security Shares date of award Earliest Latest Mr. Matthew Emmens ÏÏ PSP part A ADSs 126,831 $49.36 17.08.09 17.08.11 PSP part B 92,671 $49.36 17.08.09 7.08.09 PSP part A ADSs 93,840 $64.10 27.02.10 27.02.12 PSP part B 70,380 $64.10 27.02.10 27.02.12 383,722 Mr. Angus Russell ÏÏÏÏÏ PSP part A Ordinary 128,542 8.65 17.08.09 17.08.11 Shares PSP part B 96,406 8.65 17.08.09 7.08.09 PSP part A Ordinary 117,495 10.99 27.02.10 27.02.12 Shares PSP part B 80,000 10.99 27.02.10 27.02.12 422,443
As Executive Directors, Mr. Emmens and Mr. Russell are among the potential beneÑciaries under the PRAnn1,18.1 Shire plc Employee BeneÑt Trust and are therefore regarded for the purposes of the Act as being interested in the shares held in the trust. As at 22 March 2007 (being the latest practicable date prior to publication of this Circular), the trustee of the Shire plc Employee BeneÑt Trust held 5,857,713 Shire Ordinary Shares and 534,926 ADSs.
76 PART VI Ì ADDITIONAL INFORMATION
4. Major interests in shares
As at 22 March 2007 (being the latest practicable date prior to the publication of this Circular) the total voting rights of Shire were 555,122,426 and the notiÑable interests in Shire Ordinary Shares so far as it is known to Shire, by reference to the notiÑcations made to Shire pursuant to the Disclosure and Transparency Rules, are as follows:
Voting rights in respect of Percentage of total voting rights Name of shareholder Shire Ordinary Shares of Shire as at 22 March 2007 Fidelity International Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,692,537 5.35 FMR Corp(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,231,254 2.92 Legal & General Group plc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17,158,878 3.09
(1) Prior to the implementation of the DTRs, the interests in shares of FMR Corp (""FMR'') and Fidelity International Limited (""Fidelity'') were aggregated for the purposes of shareholder reporting. According to the DTRs, the indirect holdings of FMR and Fidelity are now being reported separately.
As at 22 March 2007 (being the latest practicable date prior to publication of this Circular), the following person had notiÑed Shire that it is interested, directly or indirectly in three per cent or more of the issued ordinary share capital of Shire:
Number of Percentage of Name of shareholder Ordinary Shares issued share capital Franklin Resources Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,005,008 3.63 Save as disclosed above, Shire is not aware of any person who holds over three per cent or more of the voting rights attaching to Shire Ordinary Shares, held as shareholder or through a direct or indirect holding of Ñnancial instruments (within the meaning of DTR5), or a combination of such holdings.
5. Related Party transactions PRAnn1, 19 Except as set out below, Shire has entered into no material transactions with related parties for the Ñnancial year ended 31 December 2006 and in the current Ñnancial year to date: ‚ Shire incurred professional fees with Stikeman Elliot LLC, a law Ñrm which the Hon. James Grant, a Non Executive Director of Shire, is a partner, totalling $0.6 million for the year to 31 December 2006 ($0.5 million for the year ended 31 December 2005). ‚ In April 2004, Shire contributed cash of $3.7 million (CAN$5 million) and equipment and intellectual property to the start-up of a new Canadian-based pharmaceutical research and development company, ViroChem Pharma Inc. (""ViroChem''), in return for an equity interest and royalties on the sale of certain products subsequently launched by ViroChem. Dr. Bellini, a non-executive director of Shire BioChem, Inc. and, until 10 May 2003, a Non-Executive Director of Shire, had, at the time of the transaction, an indirect substantial interest in a company, which is a co-investor of ViroChem. In April 2006 and April 2005, Shire contributed cash of $8.0 million (CAN$9 million) and $4.1 million (CAN$5 million) respectively to ViroChem in return for an additional equity interest. Shire has undertaken to invest an additional $5.0 million (CAN$6 million) in ViroChem. ‚ In October 2005, Shire sub-leased its oÇce premises in Newport, Kentucky to Xanodyne Pharmaceuticals Inc.. Dr. James Cavanaugh, the non-executive Chairman of the Company, was the Chairman of the Board of Directors of Xanodyne Pharmaceuticals Inc. up to 9 February 2007 and remains a Board Director of Xanodyne Pharmaceuticals Inc.. As a result of the transaction Shire will receive $7.8 million (net of inducements) in lease income over the sub-lease period from Xanodyne Pharmaceuticals Inc.
77 PART VI Ì ADDITIONAL INFORMATION
6. New River management LR10.4.1(2)(j) The management of New River comprises R.J. Kirk, Chairman and Chief Executive, Krish Krishnan, Chief Operating OÇcer and Chief Financial OÇcer, Garen Z. Manvelian M.D., Chief Medical OÇcer, Suma M. Krishnan, Vice President, Product Development, John, K. Thottahil, Ph.D., Chief ScientiÑc OÇcer, Samir D. Roy Ph.D, Vice President, Formulation and Manufacturing and Clifton R. Herndon II, Vice President, Finance and Controller.
7. Litigation and other proceedings PRAnn1, 20.8 7.1 Shire Group Other than as set out below, no member of the Shire Group is or has been, engaged in any government, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which Shire is aware) during the twelve months prior to the date of this Circular which may have, or have had in the recent past, a signiÑcant eÅect on the Ñnancial position or proÑtability of the Shire Group:
7.1.1 ADDERALL XR (A) Barr Laboratories, Inc. Shire's extended release ""once daily'' version of ADDERALL, ADDERALL XR is covered by US Patent No. 6,322,819 (the """819 Patent'') and US Patent No. 6,605,300 (the """300 Patent''). In January 2003 Shire Laboratories, Inc. (since merged into its parent company Shire LLC) was notiÑed that Barr Laboratories Inc (""Barr'') had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR (""Barr's ANDA products'') prior to the expiration date of the Shire Group's "819 Patent, and alleging that the "819 Patent is not infringed by Barr's ANDA products. In August 2003 Shire was notiÑed that Barr also was seeking permission to market its ANDA products prior to the expiration date of the "300 Patent and alleging that the "300 Patent is invalid. Shire Laboratories Inc. Ñled a lawsuit against Barr for infringement of the "819 Patent in February 2003 and for infringement of the "300 Patent in September 2003. The schedules for the lawsuits against Barr with respect to the "819 and "300 Patents were consolidated in December 2003. On 19 October 2005 Shire brought another lawsuit against Barr in the Southern District of New York alleging infringement of US Patent No. 6,913,768 (the "768 Patent), which issued on 5 July 2005. On 14 August 2006, Shire and Barr announced that all pending litigation in connection with Barr's ANDA and its attempt to market generic versions of Shire's ADDERALL XR had been settled. As part of the settlement agreement, Barr entered into consent judgments and agreed to permanent injunctions conÑrming the validity and enforceability of Shire's "819, "300 and "768 Patents. Barr has also admitted that any generic product made under its ANDA would infringe the "768 patent. Under the terms of the settlement, Barr will not be permitted to market a generic version of ADDERALL XR in the United States until 1 April 2009, except in certain limited circumstances, such as the launch of another party's generic version of ADDERALL XR. No payments to Barr are involved in the settlement agreement. On 14 August 2006, Shire and Duramed, a subsidiary of Barr, entered into a product development and licence agreement related to Duramed's transvaginal ring technology that will be applied to at least Ñve women's health products, as well as a license to Duramed's currently marketed oral contraceptive, SEASONIQUE (levonorgestrel/ethinyl estradiol tablets 0.15 mg/0.03 mg and ethinyl estradiol tablets 0.01 mg) (the product development and license agreement). Under this agreement, Shire made an initial payment of $25 million to Duramed on 13 September 2006 for previously incurred product development expenses, and will reimburse Duramed for development expenses incurred going forward up to a maximum of $140 million over eight years, with the amount capped at $30 million per annum.
78 PART VI Ì ADDITIONAL INFORMATION
The settlement agreement and the product development and license agreement became eÅective upon the court signing the last of the consent judgments for the litigations on 6 September 2006. On 14 August 2006, Duramed also agreed to purchase Shire's ADDERALL (immediate-release mixed amphetamine salts) product for $63 million. The transaction closed on 29 September 2006. As required by law, Shire submitted to the US Federal Trade Commission (""FTC'') and the US Depart- ment of Justice (""DOJ'') all of the agreements with Barr and it subsidiaries that were entered into on 14 August 2006. On 3 October 2006, the FTC notiÑed Shire that it is reviewing the settlement agreement with Barr. While the Company has not received any requests for information regarding the settlement agreement, Shire intends to cooperate with the FTC should it receive any such requests. The FTC's review should not be considered to be an indication that Shire or any other company violated any law, and Shire believes that the settlement agreement is in compliance with all applicable laws.
(B) Impax Laboratories, Inc. In November 2003, Shire was notiÑed that Impax Laboratories, Inc. (""Impax'') had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic version of the 30mg strength of ADDERALL XR (Impax's ANDA product) prior to the expiration date of the "819 and "300 Patents. In December 2003, Shire Laboratories Ñled suit against Impax for infringement of the "819 and "300 Patents. In December 2004, Shire received an additional notiÑcation from Impax advising of the Ñling of an amendment to its ANDA for a generic version of the 5mg, 10mg, 15mg, 20mg and 25mg strengths of ADDERALL XR in addition to the 30mg strength, the subject of Impax's initial ANDA submission. In January 2005, Shire Laboratories Ñled suit against Impax for infringement of the "819 and "300 Patents. As part of the 19 October 2005 lawsuit against Barr, Shire also brought suit in the Southern District of New York against Impax for infringing the "768 Patent. Impax Ñled a declaratory judgment action in Delaware alleging that the "768 Patent was invalid and that its ANDA did not infringe the "768 Patent. On 19 January 2006, Shire and Impax announced that all pending litigation in connection with Impax's ANDA had been settled. As part of the settlement, Impax conÑrmed that its proposed generic products infringe Shire's "819, "300 and "768 Patents and that the three patents are valid and enforceable. Under the terms of the settlement agreement, Impax will be permitted to market generic versions of ADDERALL XR in the United States no later than 1 January 2010 and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shire's authorised generic. No payments to Impax are involved in the settlement agreement. The settlement agreement was eÅective immediately and was submitted to the FTC for its review, as required by US law.
(C) Colony Pharmaceuticals, Inc. In December 2004, Shire was notiÑed that Colony Pharmaceuticals, Inc. (""Colony'') had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Company's "819 and "300 Patents. On 20 March 2007, Shire Ñled a lawsuit in the US District Court for the District of Maryland against Colony, Actavis, Inc. and Actavis Group hf for infringement of Shire's "819, "300 and "768 patents. The lawsuit alleges that all of Colony's generic strengths infringe the three patents in suit.
(D) Teva Pharmaceuticals USA, Inc. In February 2005, Shire was notiÑed that Teva Pharmaceuticals, Inc. (""Teva Pharmaceuticals'') had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions
79 PART VI Ì ADDITIONAL INFORMATION of the 10mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Company's "819 and "300 Patents. In June 2005, Shire was notiÑed that Teva Pharmaceuticals had amended its ANDA to seek permission to market additional strengths of 5mg, 15mg and 20mg of its generic ADDERALL XR prior to the expiration of the "819 and "300 Patents. In January 2006, Shire received a third notice letter that Teva Pharmaceuticals had further amended its ANDA to seek permission to market the 25mg strength generic version of ADDERALL XR prior to the expiration of the "819 and "300 Patents. On 2 March 2006 Shire Ñled a lawsuit in the Eastern District of Pennsylvania against Teva Pharmaceuticals Industries Ltd. and Teva Pharmaceuticals USA, Inc. (together ""Teva'') alleging that all of Teva's ANDA products infringe both the "819 and the "300 Patents. The lawsuit triggered a stay of FDA approval of Teva's 25 mg strength product for 30 months from the date of the Company's receipt of Teva's third notice letter. There is no such stay with respect to Teva's 5mg, 10mg, 15mg, 20mg and 30 mg strengths versions of ADDERALL XR. No trial date has been set. (E) Andrx Pharmaceuticals, LLC In September 2006, Shire was notiÑed that Andrx Pharmaceuticals, LLC had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg and 30mg strengths of ADDERALL XR prior to the expiration date of the Shire Group's "819 and "300 patents. Shire Laboratories Inc. and Shire LLC., subsidiaries of Shire, Ñled lawsuits in the US District Court for the District of New Jersey and the Southern District of Florida against Andrx Pharmaceuticals, LLC and Andrx Corporation (collectively ""Andrx'') for infringement of Shire's "819 and "300 Patents. Watson Pharmaceuticals, Inc., the recent acquirer of Andrx, is also named in the lawsuit. The lawsuit in Florida has subsequently been dismissed without prejudice. The lawsuit in New Jersey alleges that all of Andrx's generic strengths infringe the patents in suit. Pursuant to US Hatch-Waxman legislation, there will be a 30-month stay with respect to Andrx's proposed generic products. (F) Sandoz Inc. In December 2006, Shire was notiÑed that Sandoz Inc. (""Sandoz'') had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions of the 5mg, 10mg, 15mg, 20mg, 25mg, 30mg strengths of ADDERALL XR prior to the expiration of the Company's "819 and "300 patents. On 26 January 2007, Shire Ñled suit in the US District Court for the District of Colorado for infringement of the "819 and "300 patents. The lawsuit triggers a stay of FDA approval of up to 30 months from the Company's receipt of Sandoz's notice to allow the court to resolve the suit. No trial date has been set. None of Colony, Andrx, Teva or Sandoz may launch their generic versions of ADDERALL XR before they receive Ñnal FDA approval of their respective ANDAs and upon the expiration of the Ñrst to Ñle's exclusivity rights. 7.1.2 CARBATROL (A) Nostrum Pharmaceuticals, Inc. In August 2003, Shire was notiÑed that Nostrum Pharmaceuticals, Inc. (""Nostrum'') had submitted an ANDA under the US Hatch-Waxman Act seeking permission to market its generic version of the 300mg strength of CARBATROL (Nostrum's ANDA product) prior to the expiration date of the Shire Group's US patents for CARBATROL, US Patent No. 5,912,013 (the "013 Patent) and US patent No. 5,326,570 (the "570 Patent). The notiÑcation alleges that the "013 and "570 Patents are not infringed by Nostrum's ANDA product. On 18 September 2003, Shire Ñled suit against Nostrum in the United States District Court for the District of New Jersey alleging infringement of these two patents by Nostrum's ANDA and ANDA product. On 23 January 2004, the Shire Group amended the complaint to drop the allegations with respect to the "013 Patent while maintaining the suit with respect to the "570 Patent. By way of counterclaims Nostrum is seeking a declaration that the "570 and "013 Patents are not infringed by
80 PART VI Ì ADDITIONAL INFORMATION
Nostrum's ANDA product. Nostrum's motion for summary judgment of non-infringement was denied by the court on 15 July 2005. The Court has granted a request by the parties to further stay discovery until 30 March 2007. No trial date has been set. Nostrum may not launch a generic version of CARBATROL before it receives Ñnal approval of its ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30 months from Shire's receipt of Nostrum's notice letter. The 30 month stay expired on 6 February 2006. Since the expiry of the stay, Nostrum could be in a position to market its 300mg extended-release carbamazepine product upon FDA Ñnal approval of its ANDA.
(B) Corepharma LLC On 30 March 2006 Shire was notiÑed that Corepharma LLC (""Corepharma'') had Ñled an ANDA under the US Hatch-Waxman Act seeking permission to market its generic version of carbamazepine extended release products in 100mg, 200mg and 300mg strengths prior to the expiration date of the "013 and the "570 Patents. On 17 May 2006, Shire Ñled suit against Corepharma in the United States District Court for the District of New Jersey alleging infringement of these two patents by Corepharma's ANDA and ANDA products. On 1 September 2006, Shire amended the complaint to drop the allegations with respect to the "013 Patent while maintaining the suit with respect to the "570 Patent. By way of counterclaims, Corepharma is alleging, amongst other things, noninfringement of the "570 and "013 Patents and federal and state antitrust violations. The parties have agreed to, and the court has accepted, a dismissal without prejudice of the antitrust counterclaims until a Ñnal judgment has been entered in the patent case. Further, the court has dismissed Corepharma's counterclaim of noninfringement of the "013 patent. No trial date has been set. Corepharma may not launch a generic version of CARBATROL before it receives Ñnal approval of its ANDA from the FDA. The lawsuit triggered a stay of FDA approval of up to 30 months from Shire's receipt of Corepharma's notice letter.
(C) Teva Pharmaceuticals USA, Inc. On 21 March 2007, Shire was notiÑed that Teva Pharmaceuticals USA, Inc. had Ñled an ANDA under the US Hatch-Waxman Act seeking permission to market its generic versions of the 100mg, 200mg and 300mg strengths of CARBATROL prior to the expiration of the "013 and "570 patents. Shire is currently reviewing this notice.
7.1.3 GA-GCB In January 2005, Genzyme Corporation (""Genzyme'') Ñled suit against Shire HGT in the District Court of Tel Aviv-JaÅa, Israel, claiming that Shire HGT's Phase 1/2 clinical trial in Israel evaluating GA-GCB for the treatment of Gaucher disease infringes one or more claims of Genzyme's Israeli Patent No. 100,715. In addition, Genzyme Ñled a motion for preliminary injunction, including a request for an ex parte hearing and relief on merits, to immediately seize and destroy all GA-GCB being used to treat patients and to prevent Shire HGT from submitting data generated from the clinical trial to regulatory agencies. In March 2005, the District Court refused to grant Genzyme's motion for a preliminary injunction. The lawsuit was dismissed in January 2006.
7.1.4 DYNEPO Since 1997, Shire HGT and its US licensee for DYNEPO, SanoÑ-Aventis, have been involved in ongoing patent litigation regarding Amgen's allegations that DYNEPO infringes claims of Ñve of Amgen's patents. In 2001, the United States District Court of Massachusetts concluded that DYNEPO infringed certain claims of the patents that Amgen had asserted. This decision was appealed to the United States Court of
81 PART VI Ì ADDITIONAL INFORMATION
Appeals for the Federal Circuit (the ""Federal Circuit'') which aÇrmed in part, reversed in part, and remanded the action to the United States District Court of Massachusetts for further proceedings. In 2004, the United States District Court of Massachusetts issued a decision on the remanded issues, Ñnding that certain claims related to four of the patents asserted by Amgen are infringed by Shire HGT and SanoÑ-Aventis. This decision was subsequently appealed to the Federal Circuit which aÇrmed in part, reversed in part, and once again remanded certain issues to the District Court. Recently, Amgen has Ñled a request for an extension of time to Ñle a petition with the Supreme Court. Under the most recent Federal Circuit decision, Shire HGT and SanoÑ-Aventis would be precluded from making, using and selling DYNEPO in the United States until the expiration of the relevant patents. Shire HGT is required to reimburse SanoÑ-Aventis, which controls the litigation and is paying the litigation expenses, for 50 per cent of the expenses incurred in connection with the litigation from and after 26 March 2004. This litigation has no impact on Shire's ability to make, use and sell DYNEPO outside of the United States.
7.1.5 Gene activation In 1996, Applied Research Systems Holding N.V. (""ARS''), a wholly-owned subsidiary of Serono S.A. (""Serono'') and Cell Genesys became involved in a patent interference involving Serono's US Patent No. 5,272,071 (the ""071 Patent''), which purportedly covers certain methods of gene activation. In June 2004, the Board of Patent Appeals and Interferences of the US Patent and Trademark OÇce (""PTO'') held that both Serono and Cell Genesys were entitled to certain claims in their respective patent and patent application, and Serono and Cell Genesys each appealed the decision to the US District Court of Massachusetts and the US District Court of the District of Columbia, respectively. Shire HGT was not a party to this interference. In August 2004, Serono served Shire HGT with an amended complaint in the appeal of the PTO decision that was Ñled in the US District Court of Massachusetts. The amended complaint alleges that Shire HGT infringes Serono's 071 Patent. In August 2005, the US District Court of Massachusetts severed and stayed the infringement action pending resolution of the interference claim at the District Court level. The District of Columbia action was subsequently transferred and consolidated with the District of Massachusetts action. Pre-trial proceedings concerning the Appeal between ARS and Cell Genesys are ongoing and ARS's infringement action against Shire HGT remains stayed pending resolution of those proceedings. In view of the stay, the Company has not yet answered ARS's complaint.
7.1.6 Appraisal rights In connection with Shire's merger with TKT, former holders of approximately 11.7 million shares of TKT common stock submitted written demands to the Delaware Court of Chancery for appraisal of these shares and, as a result, elected not to accept the $37 per share merger consideration. On 10 October 2005, at the request of one of the holders to tender 365,000 shares at the merger price of $37 per share, TKT Ñled a motion to dismiss the holder's demand. On 12 October 2005, the Delaware Court of Chancery granted this motion, and the holder tendered the shares at the merger consideration of $37 per share. Therefore, as at 31 December 2006, former holders of approximately 11.3 million shares of TKT common stock maintained written demands for appraisal of these shares and have elected not to accept the $37 merger consideration. In November 2005, the Delaware Court of Chancery approved a stipulated consolidation order whereby actions brought by all petitioners have been consolidated as one case. In April 2006, Shire Ñled a motion for partial summary judgment in respect of approximately 8 million shares, claiming that the petitioners were not entitled to assert appraisal rights in connection with such shares. To the extent that petitioners' demands were validly asserted in accordance with the applicable requirements of Delaware law and the former holders perfect their rights thereunder, such former holders
82 PART VI Ì ADDITIONAL INFORMATION will be entitled to receive the fair value of these shares as determined by the Delaware Court of Chancery. The determination of fair value will be made excluding any element of value arising from the transaction, such as cost savings or business synergies. The Delaware Court of Chancery may ascribe a valuation to the shares that is greater than, less than or equal to $37 per share and may award interest on the amount determined in the appraisal process. The total consideration for the acquisition of TKT, including amounts payable in respect of stock options and convertible securities, is approximately $1.6 billion at the merger price of $37 per share. This could change if Shire is required to pay a diÅerent amount of consideration in respect of the approximately 11.3 million shares for which holders have asserted appraisal rights. For every dollar increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million. Until such time as the appraisal process is complete, the Company is unable to determine the extent of its liability. Certain of the former TKT shareholders who have asserted appraisal rights Ñled a second suit in the Delaware Court of Chancery on 8 March 2007 alleging, among other claims, breaches of Ñduciary duty by TKT and certain members of its board in connection with the merger with Shire. Both Shire and the former TKT are named as defendants, as are four of the Ñve former directors of TKT who voted in favor of the merger. The new complaint also asserts a claim that the merger itself was not properly approved by a majority of the outstanding stock of TKT entitled to be voted, based on TKT's alleged inability to produce evidence documenting the vote. The complaint seeks rescissory damages with interest, attorneys fees and costs. Shire believes that this action is without merit and intends to vigorously defend itself. In particular, Shire believes that the petitioners' claim challenging the approval of the merger is completely unfounded as a legal and factual matter.
7.1.7 Class action shareholder suit In January and February 2003, various parties Ñled purported securities fraud class action lawsuits against TKT and Richard Selden, TKT's former Chief Executive OÇcer, in the United States District Court of Massachusetts. In April 2003, the Court appointed a Lead PlaintiÅ and Lead Counsel and consolidated the various matters under one matter: In re Transkaryotic Therapies, Inc., Securities Litigation, C.A. No. 03-10165-RWZ. In July 2003, the plaintiÅs Ñled a Consolidated and Amended Class Action Complaint (the ""Amended Complaint'') against TKT; Dr. Selden; Daniel GeÅken, TKT's former Chief Financial OÇcer; Walter Gilbert, Jonathan S. LeÅ, Rodman W. Moorhead III, and Wayne P. Yetter, then members of TKT's board of directors; William R. Miller and James E. Thomas, former members of TKT's board of directors; and SG Cowen Securities Corporation, Deutsche Bank Securities Inc., PaciÑc Growth Equities, Inc. and Leerink Swann & Company, underwriters of TKT's common stock in prior public oÅerings. The Amended Complaint alleges that the defendants made false and misleading statements and failed to disclose material information concerning the status and progress for obtaining United States marketing approval of REPLAGAL during the period between 4 January 2001 and 10 January 2003. The Amended Complaint asserts claims against Dr. Selden and TKT under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; and against Dr. Selden under Section 20(a) of the Exchange Act. The Amended Complaint also asserts claims based on TKT's public oÅerings of 29 June 2001, 18 December 2001 and 26 December 2001 against each of the defendants under Section 11 of the Securities Act of 1933 and against Dr. Selden under Section 15 of the Securities Act; and against SG Cowen Securities Corporation, Deutsche Bank Securities Inc., PaciÑc Growth Equities, Inc., and Leerink Swann & Company under Section 12(a)(2) of the Securities Act. The plaintiÅs seek equitable and monetary relief, an unspeciÑed amount of damages, with interest, and attorneys' fees and costs. In May 2004, the Court granted in part and denied in part TKT's motion to dismiss. In particular, the Court dismissed allegations against TKT to the extent they arose out of certain forward-looking statements
83 PART VI Ì ADDITIONAL INFORMATION protected by the ""safe harbor'' provisions of the Private Securities Litigation Reform Act of 1995 and dismissed claims based on the public oÅerings of 29 June 2001 and 18 December 2001. The Court allowed all other allegations to remain. In July 2004, the plaintiÅs voluntarily dismissed all claims based on the third public oÅering dated 26 December 2001. In November 2005, the court granted the plaintiÅs' motion for class certiÑcation. On 23 May 2005, the court entered judgment on all claims alleged against SG Cowen Securities Corporation, Deutsche Bank Securities Inc., PaciÑc Growth Equities, Inc., and Leerink Swann & Company. On 5 June 2006, the court entered judgment on all claims alleged against Messrs. Gilbert, LeÅ, Moorhead, Yetter, Miller, and Thomas. On 9 November 2006, Mr. GeÅken Ñled an Agreement for Judgment on all claims alleged against him.
7.2 New River No member of the New River Group is or has been, engaged in any government, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which Shire is aware) during the twelve months prior to the date of this Circular which may have, or have had in the recent past, a signiÑcant eÅect on the Ñnancial position or proÑtability of the New River Group.
8. SigniÑcant changes PRAnn1, 20.9 8.1 Shire Group Save for the equity placing referred to in paragraph 9.1 below, there has been no signiÑcant change in the Ñnancial or trading position of the Shire Group since 31 December 2006, being the date on which the most recent audited results have been prepared.
8.2 New River There has been no signiÑcant change in the Ñnancial or trading position of the New River Group since 31 December 2006, being the date on which the most recent audited results have been prepared.
9. Material contracts PRAnn1, 22 9.1 Shire Group No contracts have been entered into (other than contracts entered into in the ordinary course of business) by any member of the Shire Group, either (a) within the two years immediately preceding the date of this Circular which are or may be material; or (b) which contain any provision under which any member of the Shire Group has any obligations or entitlements which are or may be material as at the date of this Circular, save as disclosed below: ‚ The Merger Agreement, the Tender and Support Agreement and the Facilities Agreement, further details of which are set out in Part V of this Circular. ‚ On 20 February 2007, Shire entered into a placing agreement with Goldman Sachs, Morgan Stanley and Deutsche Bank (together the ""Banks''), pursuant to which the Banks agreed to bookbuild and underwrite the issue of new Shire Ordinary Shares, resulting in an equity placing of 42,883,721 new Shire Ordinary Shares at a price of 1,075 pence per Shire Ordinary Share. The total net proceeds of the placing were approximately $900 million (461 million). The new Shire Ordinary Shares issued pursuant to the placing agreement represented approximately 8.4 per cent of Shire's issued Ordinary Share capital. The placing agreement contained customary representations, warranties and indemnities. ‚ On 14 August 2006, Shire and Barr entered into a settlement agreement in relation to pending litigation concerning Barr's ANDAs for its generic versions of ADDERALL XR. As part of the
84 PART VI Ì ADDITIONAL INFORMATION
settlement agreement, Barr will not be permitted to market a generic version of ADDERALL XR in the United States until 1 April 2009, except for certain limited circumstances. Further details are set out in section 7.1. of Part VI of this Circular. ‚ On 19 January 2006, Shire and Impax entered into a settlement agreement in relation to pending litigation in connection with Impax's ANDA relating to a generic version of ADDERALL XR. Further details are set out in section 7.1. Part VI of this Circular. ‚ On 21 April 2005, SPG entered into a merger agreement with TKT pursuant to which, upon the terms and subject to the conditions set forth therein, a wholly-owned subsidiary of SPG merged with and into TKT, with TKT continuing as the surviving corporation. At the eÅective time of the merger, TKT became a wholly-owned subsidiary of SPG and each outstanding share of common stock of TKT, other than those shares as to which appraisal rights had been validly exercised, was converted into the right to receive $37.00 in cash, without interest. In addition, each outstanding option to purchase shares of TKT's common stock was cancelled and each option holder received, in respect of each cancelled option, a cash payment, without interest, equal to the excess of $37.00 over the applicable per share exercise price multiplied by the number of shares subject to the option, The acquisition of TKT was completed on 27 July 2005. ‚ On 9 September 2004, Shire completed the disposal of its vaccines business to ID Biomedical Corporation (""IDB''). The total consideration for the sale was $120 million comprising $30 million of cash received at completion, $30 million of cash held in escrow and due on the Ñrst anniversary of completion and $60 million received at completion in the form of 4,931,864 subscription receipts of IDB. If, prior to 10 January, 2005, IDB had raised up to $60 million from equity related issuances, then, pursuant to the terms of the sales agreement, it was required to redeem the subscription receipts from Shire for $60 million. Accordingly, following the completion of such a fund raising on 7 January 2005, IDB redeemed the subscription receipts from Shire for $60 million in cash. On the Ñrst anniversary of completion, Shire received the $30 million of cash held in escrow. As part of the transaction, Shire entered into an agreement to provide IDB with a loan facility of up to $100 million, which could be drawn down over the four years following completion. As at 31 December 2005, IDB had drawn down the entire $100 million loan. It was required that this facility be used by IDB to fund the development of injectable Öu and pipeline products within the vaccines business acquired from Shire. Drawings under the loan facility were segregated into two components: (i) drawings for injectable Öu development of $70.6 million repayable out of income generated by IDB on future non-Canadian injectable Öu products, subject to minimum annual repayments in respect of the Ñrst $30 million of the drawing, to be made between 2007 and 2017; and (ii) drawings for pipeline development of $29.4 million repayable out of income generated by IDB on future pipeline products and have no Ñxed repayment schedule. During 2006, IDB repaid $70.6 million, being the injectable Öu development tranche of the $100.0 million development loan facility provided to IDB. The repayment followed GSK's acquisition of IDB, after which IDB was provided with resources by GSK to fund the early repayment of the injectable Öu tranche. The $29.4 million pipeline development tranche of the loan facility is still outstanding.
9.2 New River No contracts have been entered into (other than contracts entered into in the ordinary course of business) by any member of the New River Group, either (a) within the two years immediately preceding the date of this Circular which are or may be material; or (b) which contain any provision under which any
85 PART VI Ì ADDITIONAL INFORMATION member of the New River Group has any obligations or entitlements which are or may be material as at the date of this Circular, save as disclosed below: ‚ On 31 January 2005, New River entered into an agreement with Shire to collaborate in developing, manufacturing, marketing and selling VYVANSE for the treatment of ADHD and other potential indications. In the rest of the world, Shire acquired the licence to develop and commercialise VYVANSE, in consideration of a low double-digit royalty. On 31 March 2005, New River and Shire split this agreement into two agreements by entering into a US Collaboration Agreement and a Rest of World Licence Agreement to replace the initial agreement. Under the terms of the US Collaboration Agreement, the parties agreed to collaborate on the development, manufacturing, marketing and sales of VYVANSE in the US. New River will be Ñnancially and operationally responsible for clinical and manufacturing development and Shire is required to book the product sales. New River had the option to supply up to 25 per cent of the sales eÅort under a co-promotion right which it exercised in July 2006. Pursuant to the US Collaboration Agreement, Shire is obligated to give VYVANSE marketing and promotional priority over its other oral ADHD stimulants should VYVANSE's label contain a claim that it has decreased potential for abuse or increased overdose protection. Shire paid an initial sum of $50 million on signing and a further $50 million was paid to New River following acceptance of the Ñling of a NDA by the FDA in January 2006. Shire is required to pay New River a $300 million milestone payment if VYVANSE is given a Schedule III, IV or V controlled substance classiÑcation or is unscheduled (""favourable scheduling'') by the Ñrst commercial sale of the product. The agreement also requires that, if VYVANSE is approved with a favourable scheduling, US operating proÑt is to be divided such that New River will receive 25 per cent of proÑts for the Ñrst two years following launch of the product, and the parties will share the proÑts equally thereafter. However, the FDA has proposed that VYVANSE be approved with Schedule II classiÑcation. If VYVANSE does receive a Ñnal Schedule II classiÑcation, no milestone payment will be payable by Shire to New River upon approval and the division of proÑts will be calculated under an alternative proÑt sharing scheme. New River's share of US product proÑts for the Ñrst two years will be at least 25 per cent, although it may increase to a value determined by a preset sales based formula. For following years, New River's share of US product proÑts will be at least 50 per cent, although it may increase to a value determined by a preset sales based formula thereafter. If VYVANSE is given a Schedule II controlled substance classiÑcation on approval and then gets favourable scheduling within one year of the Ñrst commercial sale, Shire will pay New River a $200 million milestone payment. If favourable scheduling occurs by the third anniversary of the Ñrst commercial sale, the milestone payment will be $100 million. Upon favourable scheduling being achieved under each of these scenarios, the proÑt sharing formula reverts to that applicable to favourable scheduling. In addition, New River will be entitled to a $100 million milestone payment from Shire at the end of the Ñrst calendar year in which cumulative worldwide net sales of all collaboration products during that calendar year exceed $1 billion. Pursuant to the Rest of World License Agreement, a $5 million milestone payment is payable following the Ñrst commercial sale in speciÑed European countries. Shire is entitled to terminate the agreement until 30 days following regulatory approval of VYVANSE. If Shire terminates the agreement before regulatory approval, no payment would be due to Shire. If Shire terminates after approval and VYVANSE has received a favourable scheduling assignment, no payment would be due to Shire. If the approved VYVANSE has received a Schedule II classiÑcation, Shire would be entitled to a $50 million termination payment, payable in cash, New River common stock, or an unsecured, 5-year promissory note, as will be agreed upon by Shire and New River.
86 PART VI Ì ADDITIONAL INFORMATION
If the Acquisition completes and Shire acquires New River, the US Collaboration Agreement and Rest of World Licence Agreement will cease to be of economic signiÑcance.
10. Working capital statement LR10.4.3(1) PRAnn3, 3.1 Shire is of the opinion that, taking into account bank and other borrowing facilities available to the LR13.4.3(1) Enlarged Shire Group, the Enlarged Shire Group has suÇcient working capital for its present require- ments, that is for the next 12 months from the date of this Circular.
11. Consents LR13.4.1(6) LR13.3.1(10) 11.1 Goldman Sachs International
Goldman Sachs International has given and has not withdrawn its written consent to the issue of this Circular with the inclusion of its name and references to it in the form and context in which they appear.
11.2 Morgan Stanley & Co. International Limited
Morgan Stanley & Co. International Limited has given and has not withdrawn its written consent to the issue of this Circular with the inclusion of its name and references to it in the form and context in which they appear.
11.3 Deloitte & Touche LLP
Deloitte & Touche LLP has given and has not withdrawn its written consent to the inclusion in Part IV of this Circular of its report on the pro forma Ñnancial information of the Enlarged Shire Group and in Part III B of this Circular of its report on the reconciliation of Ñnancial information of New River and the references to its name in the form and context in which they appear.
12. Documents on display PRAnn1, 24
Copies of the following documents may be inspected at the registered oÇce of Shire at Hampshire International Business Park, Chineham, Basingstoke, Hampshire RG24 8EP and at the oÇces of Slaughter and May, One Bunhill Row, London EC1Y 8YY, during normal business hours on any business day from the date of this document until the conclusion of the Extraordinary General Meeting:
(i) the Memorandum and Articles of Association of Shire;
(ii) the Merger Agreement, the Tender and Support Agreement and the Facilities Agreement;
(iii) the written consents referred to in paragraph 11 above;
(iv) the reports from Deloitte & Touche LLP set out in Part III B and Part IV of this document;
(v) the consolidated audited accounts of Shire Group for each of the Ñnancial years ended 31 December 2005 and 31 December 2004; and
(vi) a copy of this Circular.
Dated 26 March 2007
87 DEFINITIONS The following deÑnitions apply throughout this document unless the context requires otherwise: ""Acquisition'' the proposed acquisition of the entire issued share capital of New River by Shire on the terms set out in the Merger Agreement; ""Act'' as appropriate, the Companies Act 1985, as amended, or the Companies Act 2006; ""Articles of Association'' the articles of association of the Company; ""Board'' or the ""Directors'' the directors of Shire whose names are set out in Part VI of this Circular; ""Circular'' this document dated 26 March 2007; ""Company'' or ""Shire'' Shire plc, a company incorporated in England and Wales with com- pany number 05492592, whose registered oÇce is at Hampshire International Business Park, Chineham, Basingstoke, Hampshire RG24 8EP; ""Completion'' completion of the Acquisition; ""DEA'' the US Drug Enforcement Administration; ""Deutsche Bank'' Deutsche Bank AG, London Branch; ""Disclosure and the Disclosure and Transparency Rules of the FSA; Transparency Rules'' or ""DTR'' ""EBITDA'' earnings before interest, taxation, depreciation and amortisation; ""EGM'' or ""Extraordinary the extraordinary general meeting of Shire, to be held at 12 noon on General Meeting'' 16 April 2007, at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB, or any adjournment thereof, notice of which is set out at the end of this Circular; ""EGM Resolution'' the ordinary resolution set out in the notice convening the Extraordi- nary General Meeting on pages 93 to 94 of this Circular; ""EMEA'' the European Medicines Agency; ""Enlarged Shire Group'' the Shire Group as enlarged by the Acquisition; ""EU'' European Union; ""Facilities Agreement'' the $2.3 billion facilities agreement dated 20 February 2007 entered into between, inter alia, the Company as Original Borrower and Original Guarantor, ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited and The Royal Bank of Scotland plc as the Arrangers and Barclays Bank PLC as Facility Agent; ""FDA'' US Food and Drug Administration; ""Form of Proxy'' the form of proxy enclosed with this document for use by Shire Shareholders in connection with the EGM; ""FSA'' the UK Financial Services Authority; ""Goldman Sachs'' Goldman Sachs International;
88 DEFINITIONS
""Good Manufacturing US current good manufacturing practices, those requirements relat- Practices'' or ""GMP'' ing to manufacturing practices speciÑed in European Directive 2003/94/EC and the GMP Guide (Volume 4) and any other applica- ble law or regulation relating to good manufacturing practices in any applicable jurisdiction; ""HSR Act'' the US Hart-Scott-Rodino Act; ""Listing Rules'' the Listing Rules of the UK Listing Authority; ""Memorandum'' the memorandum of association of Shire; ""Merger Agreement'' the agreement of merger entered into among Shire, New River and Shuttle Corporation as of 20 February 2007, further details of which are set out in Part V of this Circular; ""Morgan Stanley'' Morgan Stanley & Co. International Limited; ""New River'' New River Pharmaceuticals Inc.; ""New River Group'' New River Pharmaceuticals Inc. and its subsidiary; ""OÇcial List'' the OÇcial List of the UK Listing Authority; ""Ordinary Shares'' or ""Shire ordinary shares of 5 (Ñve) pence each in the capital of Shire Ordinary Shares'' (excluding for the avoidance of doubt, the Shire Special Voting Shares);
""Shire'' Shire plc; ""Shire ADSs'' American depositary shares each representing three Shire Ordinary Shares; ""Shire BioChem'' Shire BioChem Inc., a wholly owned subsidiary of Shire; ""Shire Deferred Ordinary the deferred ordinary shares of 1.00 each in the capital of Shire of Shares'' which two are in issue as at the date of this Circular; ""Shire Employee Share The Shire plc Portfolio Share Plan (""PSP''), Shire Pharmaceuticals Schemes'' Group plc 2000 Executive Share Option Scheme (Parts A and B) (""2000 Executive Scheme''), the Shire Pharmaceuticals Executive Share Option Scheme (Parts A and B) (""Executive Scheme''), the Shire plc Sharesave Scheme (""Sharesave Scheme''), the Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (""Stock Purchase Plan'') and the BioChem Stock Option Plan (""BioChem Plan''); ""Shire Group'' Shire, its subsidiaries and its subsidiary undertakings; ""Shire HGT'' or ""TKT'' Shire Human Genetic Therapies, Inc. (formerly known as Transkary- otic Therapies, Inc.); ""Shire Shareholder'' a holder, for the time being, of Shire Shares; ""Shire Shares'' the Shire Ordinary Shares and the Shire Special Voting Shares; ""Shire Special Voting the special voting shares with a nominal amount of 0.00001 pence Shares'' each in the share capital of Shire, held by the Voting Trustee; ""SPG'' Shire Pharmaceuticals Group Limited;
89 DEFINITIONS
""Tender and Support the tender and support agreement entered into between Shire and Agreement'' R.J. Kirk and certain entities controlled by him on 20 February 2007, further details of which are set out in Part V of this Circular; ""UK'' the United Kingdom of Great Britain and Northern Ireland; ""UK Listing Authority'' the FSA acting in its capacity as the competent authority for the purposes of Part VI of the Financial Services and Markets Act 2000; ""US'', ""USA'' or ""United the United States of America, its territories and possessions, any States'' State of the United States, and the District of Columbia; ""US GAAP'' generally accepted accounting principles in the United States; and ""Voting Trustee'' the holder of the Shire Special Voting Shares. In this document, references to $ are to the currency of the United States.
90 Glossary of ScientiÑc Terms and Abbreviations
Product, compound or Description and use technical term
""ANDA'' Abbreviated New Drug Application. The application submitted to and reviewed by the FDA for a marketing authorisation for a generic drug product. Generic drug applicants must scientiÑcally demonstrate that their product is bioequivalent (i.e. has been demonstrated to be therapeutically equivalent) to an approved reference drug.
""IND application'' Investigational New Drug application. An IND application is submitted to the FDA to request permission to conduct studies in humans.
""Marketing authorisation'' A grant of a licence by a governmental regulatory authority giving permission to market a pharmaceutical product.
""NDA'' New Drug Application. The application for marketing authorisation submitted to and reviewed by the FDA showing the data on the quality, safety and eÇcacy of a chemical entity. Approval by the FDA allows a product to be marketed.
""New Chemical Entity'' a drug substance which has not previously been approved by the FDA for therapeutic use in the US.
""Orphan drug status'' A product with orphan drug status is granted market exclusivity for 7 years in the US and 10 years in the EU, in each case from the date of the approval of the marketing authorisation, during which time directly competitive similar products cannot normally be placed on the market. The purpose of orphan drug status is to stimulate the research, development and approval of products that treat rare diseases.
""Phase 1'' Clinical trials normally conducted in healthy human volunteers follow- ing pre-clinical trials.
""Phase 2'' Clinical trials to assess short term safety and preliminary eÇcacy in a limited number of patients with the relevant disease.
""Phase 3'' Clinical trials to undertake a comprehensive evaluation of safety and eÇcacy in patients with the relevant disease.
""sNDA'' Supplemental new drug application. The application submitted to and reviewed by the FDA to amend or vary an NDA.
91 List of Trademarks
Shire Trademarks
The following are trademarks, either owned or licensed by Shire or companies within the Shire Group, which are the subject of trademark registrations in certain territories.
ADDERALL XR» (mixed salts of a single-entity amphetamine product) ADDERALL» (mixed salts of a single-entity amphetamine product) AGRYLIN» (anagrelide hydrochloride) CARBATROL» (carbamazepine) DAYTRANATM (methylphenidate transdermal system) ELAPRASETM (idursulfase) FOSRENOL» (lanthanum carbonate) REMINYL» (galantamine hydrobromide) (UK and Republic of Ireland) REPLAGAL» (agalsidase alfa) VYVANSETM (lisdexamfetamine dimesylate) XAGRID» (anagrelide hydrochloride)
Third Party Trademarks
The following are trademarks of third parties.
3TC (trademark of GlaxoSmithKline (GSK)) CARRIERWAVE (trademark of New River) DYNEPO (trademark of SanoÑ-Aventis) PENTASA (trademark of Ferring BV) REMINYL (trademark of Johnson & Johnson, excluding UK and Republic of Ireland) SEASONIQUE (trademark of Barr Laboratories, Inc.)
92 SHIRE PLC (Incorporated and registered in England and Wales under the Companies Act 1985 with registered number 05492592)
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN that an EXTRAORDINARY GENERAL MEETING of Shire plc (the ""Company'') will be held at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB at 12 noon on 16 April 2007 for the purposes of considering and, if thought Ñt, passing the following resolution as an ordinary resolution:
ORDINARY RESOLUTION
That:
(A) in accordance with Article 101 of the Company's articles of association, notwithstanding the limit of $1.2 billion on the maximum aggregate amount of the monies borrowed by the group (within the meaning of Article 101), the directors be authorised to permit the maximum aggregate amount of monies borrowed by the group (within such meaning) to exceed, at any time, $1.2 billion provided that they shall not exceed $4 billion; and
(B) the Acquisition (as deÑned in the circular to shareholders of the Company dated 26 March 2007 (the ""Circular'')) upon the terms and conditions set out in the Merger Agreement (as deÑned in the Circular), with any amendments, modiÑcations, improvements, variations or revisions thereto which are not of a material nature, be and is hereby approved and the directors of the Company (or a duly authorised committee thereof) be and are hereby authorised to do all such things and execute all such agreements and make such arrangements as may seem to them necessary, expedient or appropriate to give eÅect to the Acquisition.
Dated 26 March 2007 By order of the Board
Tatjana May Company Secretary Registered OÇce: Hampshire International Business Park Chineham, Basingstoke Hampshire RG24 8EP United Kingdom
Notes:
1. A member of the Company entitled to attend and vote at the meeting may appoint one or more proxies to attend and, on a poll, vote instead of him/her. A proxy need not also be a member of the Company. The appointment of a proxy will not preclude a member of the Company from attending and voting in person at the meeting.
2. A form of proxy is enclosed for holders of ordinary shares in the Company. To be valid, the form of proxy (together with any power of attorney or other authority, if any, under which it is signed or a notarially certiÑed copy of such power or authority) must reach the Registrars, Lloyds TSB Registrars, at The Causeway, Worthing, West Sussex, BN99 8ZW, not later than 48 hours before the time appointed for the holding of the meeting or adjourned meeting. Separate instruction cards for holders of American Depositary Receipts to give instructions to the depositary, and for holders of exchangeable shares in Shire Acquisition Inc. to give instructions to the Voting Trustee, are being provided to such holders.
3. The Company, pursuant to Regulation 41 of the UncertiÑcated Securities Regulations 2001, speciÑes that only those shareholders registered or on the register of members of the Company at 12 noon on the day two days before the date of the meeting or any adjourned meeting shall be entitled to attend and vote at the relevant meeting in respect of the number of
93 shares registered in their name at the time. Changes to the entries on the register of members after such time will be disregarded in determining the right of any person to attend and/or vote at the meeting (or any adjournment thereof). 4. In the case of joint shareholders, the vote of the Ñrst named on the register of members of the Company who tenders a vote whether in person or by proxy, shall be accepted to the exclusion of the votes of other joint holders. 5. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the meeting and any adjournment(s) thereof by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members and those CREST members who have appointed a voting service provider, should refer to their CREST sponsor or voting service provider, who will be able to take the appropriate action of their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a ""CREST Proxy Instruction''), must be properly authenticated in accordance with CRESTco's speciÑcations and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the Company's agent, Lloyds TSB Registrars (ID 7RA01) not later than 48 hours before the time appointed for the meeting or time for any adjourned meeting. For this purpose, the time of any receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the Company's agent is able to retrieve the message by enquiry to CREST in the prescribed manner. After this time any change to proxies appointed through CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors or voting service providers should note that CRESTCo does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider takes) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST manual concerning practical limitations of the CREST systems and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the UncertiÑcated Securities Regulations 2001.
94
O U52041