hr hraetcl ru plc Group Pharmaceuticals Shire Shire Pharmaceuticals Group plc Annual review and summary financial statement 2001 Shire is proud of the part it plays in developing products which help people live their lives to the full. Shire, an international specialty pharmaceutical company, has a strategic focus on three therapeutic areas: central nervous system disorders, oncology and anti-infectives. It also has two platform technologies: advanced drug delivery and biologics.
Our global sales and marketing infrastructure has an established product portfolio. Shire has its own marketing subsidiaries in the US, Canada, the UK and the Republic of Ireland, France, Germany, Italy and Spain, with plans to add Japan by 2004. We cover other pharmaceutical markets indirectly through distributors. Our interests in the Pacific Rim are managed through our regional office in Singapore.
Shire has a risk-balanced R&D portfolio with clear focus on future product needs. Our global research and development expertise supported by in-licensing has, to date, successfully provided 20 marketed products, while the current pipeline of 24 projects includes 12 that are either in or post Phase II.
To enhance the potential for future growth, Shire follows two approaches, firstly, to start projects in-house through research and advanced drug delivery and secondly to in-license projects and products on reasonable commercial terms, and then to develop and launch them. This broad approach strengthens Shire’s strategy and takes account of ongoing changes that are taking place in the industry.
During the past seven years, we have completed six mergers and acquisitions and whereas we continue to evaluate M&A opportunities that offer a good strategic fit and add shareholder value, our priority is in-licensing more projects and products.
Contents 2 Shire: 2001 at a glance 30 Five-year review 44 Consolidated statements 73 Notes to the summary 4 Chairman’s statement 31 The remuneration report of comprehensive income/ financial statement 5 Chief Executive’s review 38 Corporate governance (losses) 74 Summary of significant Operating review: statements 44 Consolidated statements differences between 6 Central nervous system 40 Statement of directors’ of cash flows US GAAP followed by 10 Anti-infectives responsibilities 46 Notes to the financial the Group and UK GAAP 14 Oncology 40 Report of Independent statements 75 Shire head office and main 16 Additional Shire portfolio Public Auditors Summary financial statement: operating locations 18 Advanced drug delivery 41 Consolidated balance sheets 68 Auditors’ statement 76 Shareholder information 20 Biologics 42 Consolidated statements 69 Directors’ report 77 Glossary 22 Corporate responsibility of operations 70 Consolidated profit and 24 Shire and BioChem 43 Consolidated statements loss account 25 Financial review of changes in shareholders’ 71 Consolidated balance sheet 28 Board of Directors and equity 72 Consolidated cash flow Executive Committee statement
Shire Pharmaceuticals Group plc 1 Shire: 2001 at a glance
Financial highlights
After stock option compensation Before stock option compensation and one-time exceptional charges and one-time exceptional charges 2001* 2000† % 2001* 2000† % $m $m change $m $m change Revenues 877.6 671.1 +31 877.6 671.1 +31 Operating income* 95.5 151.4 –38 279.3 200.2 +39 Income before tax* 111.6 259.4 –58 295.4 204.2 +45 EPS (diluted)* – ordinary shares 7.7c 42.8c –82 43.9c 31.6c +39 – ADS 23.0c 128.4c –82 131.6c 94.9c +39
*2001 figures include the negative impact of a legal settlement of $7.7 million (3.4c per ADS) †2000 figures include the positive impact of a legal settlement of $8.0 million (3.7c per ADS) Average USD:GBP exchange rate – 2001: 1.44, 2000: 1.51
Business highlights
ADDERALL XR™ BioChem integration Ten-year government contract ADDERALL XR was launched in the US On 11 May 2001 Shire completed its In October 2001, Shire Biologics signed on 5 November 2001. ADDERALL XR is merger with BioChem Pharma Inc., a ten-year contract with the Government designed to provide an all day treatment a leading Canadian pharmaceutical of Canada to assure a state of readiness with one morning dose. This is considered company. Shire has grown both organically in case of an influenza pandemic to be an increasingly important benefit for and through mergers and acquisitions; it (worldwide epidemic) and to provide children with ADHD and their caregivers, has completed six mergers in seven years. influenza vaccine for all Canadian both at home and at school. On 8 April citizens in such an event. The value of the 2002, ADDERALL XR had captured 16.5%* agreement may exceed CAN$300 million. of the total ADHD US market share. More than 20 million prescriptions have been written for the ADDERALL brand to date.
Biologics FOZNOL™** Corporate responsibility Shire Biologics has a global mandate to Shire submitted its first filing for FOZNOL, Our approach to corporate social apply the most innovative science and which is likely to be renamed FOSRENOL, responsibility is intended to provide technologies to discover, develop, produce in Europe on 14 March 2001. It is a framework for managing risk and and market novel human vaccines and anticipated that US filing will occur maintaining the Company’s position as biologics. It is a significant player in what during the second quarter 2002. a good corporate citizen, as well as is being called the “golden age” of FOSRENOL is being developed for the creating a set of goals that will facilitate vaccines. treatment of hyperphosphataemia in continuous improvement throughout patients with chronic kidney failure. If the organisation. approved it will play an important role in building Shire’s international specialty marketing presence.
*Source: NDC health data **For the purposes of this document, FOSRENOL will be referred to as FOZNOL in the financial section.
2 Shire Pharmaceuticals Group plc Development pipeline
The table below lists our key products under development by therapeutic area indicating their most advanced development status for any market.
Indication Product Descriptor Preclinical Phase I Phase II Phase III Registration Marketed CNS Analgesia DIRAME™ Propiram fumarate Bipolar disorder SPD 417 Carbamazepine (CARBATROLTM) ADHD SPD 420 AMPAKINE TM (Cortex CX516) non-scheduled compound ADHD SPD 503 Non-scheduled compound Epilepsy SPD 421 DP-VPA (D-Pharm ) Parkinson’s disease SPD 473 BTS-7439 (DevCo) Parkinson’s disease SPD 474 Class of compounds for Parkinson’s disease
Parkinson’s disease SPD 451 Dopamine D1 agonist programme Epilepsy SPD 452 Novel formulation of an established anti-epileptic drug Epilepsy SPD 453 Novel formulation of an established anti-epileptic drug
Oncology Thrombocythaemia AGRYLIN™ Anagrelide, XAGRID™ (Europe) Leukaemia TROXATYL™ Troxacitabine Pancreatic cancer TROXATYL™ Troxacitabine Oncology SPD 427 Established oncology product
Anti-infectives Influenza SPD 707 Influenza vaccine (FLUVIRAL S/F TM) – traditional egg-derived vaccine for markets outside CanadaUS Canada Influenza SPD 701 Injectable and nasal influenza – cell culture Meningitis, septicaemia SPD 704 Neisseria meningitidis vaccine Opportunistic infections SPD 705 Pseudomonas aeruginosa vaccine HIV/AIDS SPD 754 Previously known as BCH-10618 HIV/AIDS SPD 756 Previously known as BCH-13520 Pneumonia, meningitis, SPD 703 Streptococcus pneumoniae otitis media vaccine
Other disease areas Hyperphosphataemia FOSRENOL™ Project lambda, lanthanum carbonate, (FOZNOL™) Ulcerative colitis PENTASA™ 500mg Mesalamine (mesalazine) Ulcerative colitis COLAZIDE™ Balsalazide
Shire Pharmaceuticals Group plc 3 Chairman’s statement
2001 was a landmark year for Shire. The completion of the and Mr Gérard Veilleux, joined Shire’s Board as non-executive merger with BioChem Pharma Inc. (BioChem) increased the directors. size and capability of the Shire Group and positioned it well for future development and growth. Shire concluded 2001 as People the third largest pharmaceutical company in the UK and one As the third largest pharmaceutical group in the UK, Shire of the fastest growing specialty companies in the world. employed 1,677 employees worldwide at 31 December 2001. The Group believes in the importance of hiring well-qualified, Mergers and acquisitions experienced staff with proven records of success. The Group’s Shire has grown both organically and through acquisitions, with future success depends upon its ability to attract and retain such six completed mergers and acquisitions within the past seven individuals. Shire will continue to apply and develop a strong years. On 11 May 2001, Shire announced that it had completed focus on staff development at all levels. the merger with BioChem, a Canadian pharmaceutical company. Future prospects 2001 results The launch of ADDERALL XR is progressing well. The recent 2001 concluded with strong financial results and the successful approval of a generic competitor emphasises the need for integration of BioChem. Group revenues and income before tax marketing and promotional expenditure to maintain a rapid rate (pre stock option compensation and exceptional charges) of conversion from ADDERALL and defend the overall ADHD increased by 31% and 45% respectively. Diluted earnings per franchise. In the medium and long term, management believes share were 43.9 cents per ordinary share or 131.6 cents per ADS. that ADDERALL XR is well positioned to establish itself as a leading once-daily ADHD treatment. Much of the impressive growth was driven by our strong product portfolio, which includes ADDERALL XR, ADDERALL™, FOZNOL is anticipated to gain its first European regulatory AGRYLIN™, PENTASA™, PROAMATINE™ and CARBATROL™. approval at the end of Q2 2002, and US regulatory approval Additional growth arose from the launch of REMINYL™* in the during 2003. US, and the continued roll-out of ZEFFIX™. FOZNOL will be the first product developed and marketed by Shire which will be sold in key countries worldwide. To ensure Operations a successful launch of FOZNOL we will incur pre and post As a result of the merger, Shire added two major development launch expenditure during the second half of 2002 and 2003. capabilities in lead optimisation and Biologics. In addition the merger added R&D “know-how” in anti-virals and strengthened These competitive and cost pressures may compromise the that in oncology. Group’s ability to grow in 2002. However, with the ongoing launch of four products, including ADDERALL XR, the prospects for Significant growth by all major marketed products contributed to FOZNOL product launch in the second half of 2002, the European Shire’s successful year. Total product sales increased by 39% launch of AGRYLIN during 2003 and the potential for project and to $724.0 million. ADDERALL XR, for the treatment of attention product acquisitions, management remains confident about the deficit and hyperactivity disorder (ADHD) received Food and Group’s prospects in the medium and long term. Drug Administration (FDA) approval in October 2001 and was launched in the US in November 2001, achieving an outstanding 16.5% market share of the ADHD market at 8 April 2002.** Shire’s marketing partner for REMINYL, Johnson & Johnson, launched this key product for the treatment of Alzheimer’s disease in the Dr James Cavanaugh Chairman US in May 2001. REMINYL was also launched in 14 other countries including the major European markets and Korea.
The Board On completion of the BioChem merger, three non-executive directors of Shire, Dr Zola Horovitz, Mr Joseph Smith and Mr John Spitznagel, resigned from the Board. Shire would like to take this opportunity to thank each of them for their contribution to the Group. On 11 May 2001, three BioChem directors, *REMINYL is a trademark of Johnson & Johnson Dr Francesco Bellini, the Honourable James Andrews Grant **Source: NDC health data
4 Shire Pharmaceuticals Group plc Chief Executive’s review
Shire is an international specialty pharmaceutical company, which products including ADDERALL XR in the US, ADEPT™ in seeks selectively to research, develop and market therapies in Europe and REMINYL in the UK*, demonstrated outstanding key areas of strategic focus. Our business model has five levels professionalism and performance. of focus: business, functional, geography, therapeutic areas and platform technologies. Geography Shire’s aim is to market its products using its own sales forces Business in eight major pharmaceutical markets of the world. In 2000 Shire has a particular interest in innovative therapies. The term we entered Spain and also set up a representative office in “specialty” refers to products prescribed by specialist doctors Singapore to manage our presence in the Pacific Rim. The only as opposed to those prescribed by primary care or general remaining market in which we do not yet operate is Japan; we practitioners. Shire targets specialist doctors who prescribe intend to build a presence there by 2004, either by launching within the following therapeutic areas: central nervous system our own products, or by acquisition. disorders, oncology and anti-infectives. Our increased geographic coverage has already increased our Shire’s strategy, as a specialty pharmaceutical group, is to target ability to attract potential licensors. The Company aims to a limited, but specific, audience and to maximise sales through capitalise on this in the future, as well as on the wider geographic a comparatively small sales force. The concept of marketing to rights it holds, for existing and future products. specialists allows us to clearly define our financial goals, which include high gross margin and operating targets, with the aim Therapeutic to reach both annual sales growth and investment in R&D above Following completion of the merger with BioChem, Shire’s the industry average. main areas of therapeutic focus are central nervous system disorders, oncology and anti-infectives. Shire also continues Functional to market two of its major products in the metabolic diseases Shire focuses on specific functional areas of the business that and gastroenterology specialist fields. The Group’s overriding are identified as being key drivers for success, such as research, strategy of targeting speciality pharmaceutical markets development and marketing. remains unchanged. To reduce financial and business risk, Shire aims to maintain Platform technologies a careful and objective discipline in its approach to R&D risk Shire supports its research and development strategy with its two management by balancing its portfolio of projects towards those platform technologies: Advanced Drug Delivery and Biologics. projects viewed as low to medium risk. As part of the process we consider a number of elements, which might include the class of compound, drug target, or mode of action. We also manage the risk for in-licensed projects by looking at the current stage of development of a particular project. Rolf Stahel Chief Executive Shire’s strategy also includes the identification of products that could be enhanced using the know-how of its oral drug delivery company, Shire Laboratories Inc., based in Maryland, USA. Examples of such projects are ADDERALL XR, for the treatment of ADHD, and CARBATROL, for the treatment of epilepsy. Shire seeks to obtain patent protection through drug delivery expertise wherever possible. Another very important source of growth is our search function. This has been a key growth driver, enabling the identification of new projects, products and acquisition opportunities. Our sales and marketing function is another essential factor in our success. The Group takes pride in its well-trained and highly- motivated sales forces that have, through the rapid advancement of our main marketed products and the recent launch of four *Co-marketed by Jansen-Cilag
Shire Pharmaceuticals Group plc 5 “Now she stands out for her achievements!”
Treatment of ADHD with medicines, as part of a total treatment regimen, such as Shire’s ADDERALL, ADDERALL XR and DEXTROSTAT™ can have significant benefits in the classroom. By improving concentration and reducing the disruptive impulsiveness and hyperactivity that is often a feature of the disorder the child is given the opportunity to fulfil their natural potential. Central nervous system Operating review
ADHD SPD 420, an AMPAKINE™** that was brought into the portfolio Shire has made a longstanding contribution to the effective in April 2000, under an option agreement with Cortex treatment of attention deficit hyperactivity disorder (ADHD). Pharmaceuticals, Inc., progressed into Phase II during Q3 2001. Historically thought to affect only children, there is now If successfully developed and registered, it is likely that SPD 420 increasing evidence that it can persist into adulthood. In will also treat a certain subset of patients and will complement children, the main symptoms tend to be degrees of inattention, our existing marketed products. impulsiveness and hyperactivity, leading to educational problems and a disruption of relationships with family, peers and teachers. Alzheimer’s disease It is estimated that between 3% and 7% of children in the US are Alzheimer’s disease (AD) affects 12 million people worldwide. affected and that 30% to 60% of these children continue to have A progressive disease, it initially causes gradual memory loss, problems as adults. confusion and disorientation. Over time it affects intellect, changes the personality and can often cause behavioural Shire currently has two main ADHD treatments in the US: problems. Eventually it leads to death. ADDERALL and ADDERALL XR. A third minor product, DEXTROSTAT, is also available. Shire conducted the first clinical trials of REMINYL in AD before going into partnership with Janssen Pharmaceutica NV, under a ADDERALL, a unique combination of four amphetamine salts development and licensing agreement. REMINYL was approved was, at the end of 2001, the most widely prescribed branded in Europe and made available to patients during 2000/2001. product for ADHD in the US. Since its launch, over 20 million In February 2001, it was approved by the US Food and Drug prescriptions have been written for the ADDERALL brand. On Administration and was launched there in May 2001. Shire 5 November 2001, we launched ADDERALL XR, a once-daily receives royalties on sales by Janssen worldwide, except in the patented version of ADDERALL. Once-daily formulations of UK and Ireland where the two companies have a co-promotion ADHD medicines, which avoid the need to take medication at agreement. school, are now accepted as the ideal. This has been borne out by the popularity of ADDERALL XR, which had already gained Epilepsy 16.5% of the US daily prescription market by 8 April 2002*. The development of products for the treatment of epilepsy has Approximately one-third of ADDERALL patients have now become increasingly important to us. Epilepsy affects about switched to ADDERALL XR. The remainder of ADDERALL XR 2.5 million people in the US, causing a variety of symptoms, from patients are either new to ADHD medications or represent the generalised seizures that most people associate with the switches from other therapies. condition, to absence seizures, which can make a person appear Future treatments for ADHD are likely to include non-scheduled to have lost concentration or not to be listening. Drug Enforcement Agency (DEA) medications. We are at the Shire currently markets CARBATROL, a twice daily formulation forefront of developing new medicines with mechanisms different of carbamazepine, for patients in the US, using the drug delivery from those currently available; two projects are already undergoing expertise of our subsidiary, Shire Laboratories, Inc. CARBATROL clinical evaluation. is more patient-friendly than other immediate-release formulations SPD 503 is in Phase II of clinical development. It is likely to be on the market which require dosing three or four times a day. In developed for adult and paediatric patients. While we won’t know December 2001, 35.5% of prescriptions written for extended- its clinical profile until studies have been conducted, we anticipate release carbamazepine were for CARBATROL. that it will assist in treating certain subsets of symptoms.
*Source: NDC health data **AMPAKINE is a trademark of Cortex
Shire has made a longstanding contribution to the effective treatment of ADHD.
We are at the forefront of developing new medicines for ADHD with mechanisms different from those currently available.
Shire Pharmaceuticals Group plc 7 Central nervous system Operating review
Following on the success of CARBATROL, we are currently Based on certain evidence for the use of carbamazepine as developing three projects for the treatment of epilepsy. The most a treatment for bipolar disorder, we are conducting a clinical advanced, SPD 421, a conjugate of the established anti-epileptic programme with CARBATROL (SPD 417), with a view to gaining drug valproic acid, together with a phospholipid, entered a proof marketing approval for this indication. of concept, Phase II clinical trial during January 2002. Despite its excellent efficacy profile, valproic acid has a variety of adverse Parkinson’s disease effects that limit its use. SPD 421 offers the potential for a unique Parkinson’s disease causes a progressive loss of movement, brain selective delivery, which should allow targeted therapeutic rigidity, postural abnormalities and tremor. As the number of efficacy while limiting systemic exposure and minimising adverse elderly people in the population increases it is likely that the side effects. Preclinical and Phase I results demonstrate that SPD numbers of people diagnosed with Parkinson’s disease will 421 may have a favourable safety and pharmacokinetics profile also rise. when compared with valproic acid. We have been conducting a dopamine D1 agonist project, Two further epilepsy projects, SPD 452 and SPD 453, were SPD 451, since December 2000, when it was in-licensed from introduced into the development portfolio during Q2 2001. CeNeS Pharmaceuticals plc. It is currently in the preclinical These novel formulations of established anti-epileptic drugs are stage of development. at the preclinical stage of development and replace the project During 2001, we extended our research into Parkinson’s disease SPD 418, which was discontinued in Q2 2001. with two further development projects. The exclusive worldwide rights to develop and market SPD 473, a mixed and potent Stroke dopamine, 5HT and noradrenaline reuptake inhibitor, were We progressed the development of SPD 502, a potential acquired during Q4 2001. Proof of concept (Phase IIa) studies treatment of stroke, to Phase I clinical trials. Since the are currently being conducted. development of treatments for stroke is high risk, we, together with the licensors NeuroSearch A/S, decided to put development On 24 December 2001, Shire entered into an evaluation and on hold while a third partner is sought to share the risk. option agreement for a class of compounds now described as SPD 474. If the evaluation is successful, Shire will have the right Analgesia to an exclusive worldwide licence. This project is at the preclinical DIRAME™ is an orally administered centrally acting analgesic, stage of development. for treating moderate to moderately severe pain. It is likely to Both SPD 473 and SPD 474 may have potential in other CNS have applications in several therapeutic categories, including disorders including ADHD, although Parkinson’s disease will be pain associated with cancer, advanced arthritis and post-surgery. the primary focus initially. Phase III trials in osteoarthritis were completed during 2001 while a further acute study in post-operative pain was initiated.
Bipolar disorder Patients with bipolar disorder experience alternating episodes of mania and depression. Typical symptoms of mania include rapid speech, increased energy and activity, reduced need for sleep, aggressiveness and, sometimes, hostility. Approximately 3.5 million people are affected by bipolar disorder in the US.
Based on certain evidence of the use of carbamazepine in bipolar disorder we are conducting a clinical programme with CARBATROL.
During 2001 we extended our research into Parkinson’s disease.
8 Shire Pharmaceuticals Group plc “Who says he’ll never be a racing driver!”
Compliance is a big issue for people with epilepsy. A breakthrough seizure caused by forgetting a dose can result in the loss of a driving licence. Shire’s CARBATROL makes it easier to remember by reducing the dose from three or four times a day down to twice a day, using specially formulated beads in a capsule which release the drug gradually over 12 hours. “A better quality of life”
Suitable combination therapies are now capable of reducing the HIV virus to below detectable levels and restoring immune function in many patients, enabling them to live longer and have a better quality of life. A common denominator in most of the treatments is Shire’s lamivudine. Anti-infectives Operating review
The anti-infective franchise, added to our portfolio as part isolates, including multiple and highly resistant strains of HIV. In of our merger with BioChem, provides us with considerable preclinical studies, viruses resistant to SPD 756 emerged slowly. expertise in this area. SPD 754, which entered Phase I in Q4 2001, also works as an NRTI but is an analogue of cytidine. Preclinical data indicates HIV/AIDS that SPD 754 is active against HIV strains which have developed The human immunodeficiency virus (HIV) is a retrovirus that has resistance to other nucleoside analogues, such as AZT* and 3TC, been isolated and recognised as the causative agent of acquired as well as against clinical isolates of HIV-1 that are highly immunodeficiency syndrome (AIDS). According to UNAIDS, resistant to a range of nucleoside analogues. As with SPD 756, in December 2001, there are more than 40 million adults and preclinical studies indicate that viral resistance to SPD 754 children worldwide living with the HIV infection. appears to develop very slowly. Lamivudine, originally discovered by Shire BioChem and licensed to Glaxo Wellcome (now GSK) in 1990, is the key to the success Hepatitis B of our marketed HIV/AIDS treatment franchise. Today, most The hepatitis B virus (HBV) is the causative agent of both acute people who are receiving antiretroviral treatment for HIV/AIDS and chronic forms of hepatitis B, a liver disease which is a major are on combination therapy, using three, four, or sometimes more cause of death. Over 2 billion people worldwide have been antiretroviral drugs. Suitable combination therapies are capable infected with HBV. Vaccines are currently available, but are not of reducing the HIV virus to below detectable levels and restoring effective in those people already infected with the virus. immune function in many patients, enabling them to live longer Lamivudine has also been shown to be effective in patients and to have a better quality of life. A common denominator in with chronic HBV and is available as ZEFFIX* and various other most of the treatments is lamivudine (sold in most markets as trademarks around the world. In an agreement similar to that EPIVIR*or 3TC*), now the most prescribed antiretroviral therapy for lamivudine in HIV/AID, we receive royalties on sales, except worldwide and available in more than 100 countries. in Canada where we have a commercialisation partnership GSK has developed new formulations of lamivudine: by with GSK. combining it in a single tablet with one other (COMBIVIR*), or two other HIV medications (TRIZIVIR*), the number of Influenza tablets that patients need to take each day is significantly Influenza strikes an estimated 70 to 150 million people and reduced. Both COMBIVIR and TRIZIVIR are now widely causes more than 125,000 deaths in North America and Europe available. We receive royalties on medications containing each year, according to the World Health Organization. The best lamivudine, except in Canada where we have a marketing and most cost effective protection is annual vaccination. partnership with GSK. We already market FLUVIRAL S/F™, a split virion vaccine, in Shire BioChem’s expertise in HIV/AIDS has led to the discovery Canada. In October 2001, a ten-year contract was signed with of two further antiretroviral compounds; SPD 756 (formerly BCH- the Government of Canada to provide influenza vaccine for all 13520) and SPD 754 (formerly BCH-10618). Canadian citizens should an influenza pandemic (worldwide epidemic) arise. Under the contract our subsidiary, Shire SPD 756, which entered Phase I in Q3 2001, is a guanosine Biologics, will also supply the Government with a substantial analogue that works as a potent nucleoside reverse transcriptase proportion of its annual influenza vaccine requirements over inhibitor (NRTI) to reduce the rate of replication of HIV. It has the ten-year period. been shown in vitro to retain efficacy against resistant clinical
*ZEFFIX, AZT, 3TC, EPIVIR, COMBIVIR and TRIZIVIR are registered trademarks of GSK
Lamivudine, originally discovered by Shire BioChem and licensed to Glaxo Wellcome (now GSK) in 1990, is the key to the success of our marketed HIV/AIDS treatment franchise.
Shire BioChem’s expertise in HIV/AIDS has led to the discovery of two further antiretroviral compounds; SPD 756 and SPD 754.
Shire Pharmaceuticals Group plc 11 Anti-infectives Operating review
Since we hold the worldwide rights for FLUVIRAL S/F, we are Existing polysaccharide vaccines against N. meningitidis protect planning a Phase III study as we are reviewing the possibility of against only four of the 12 serogroups and none protect against registering outside Canada. The development of FLUVIRAL S/F serogroup B, the most common strain in industrialised countries for markets outside Canada will be known as SPD 707. such as Canada, the US and the UK. SPD 704 appears to have the potential to protect against all known serogroups of the While classic egg-derived flu vaccines, such as our bacteria including type B. If these and other potential advantages FLUVIRAL S/F, are considered highly effective, public health are confirmed in clinical trials our recombinant protein vaccine officials see a need for an alternative manufacturing technology. against N. meningitidis will be a very significant medical advance. The time required to produce predetermined quantities of classical vaccines from embryonated chicken eggs results in a Streptococcus pneumoniae can cause a variety of infections planning and manufacturing process that takes several months. including meningitis, pneumonia and acute otitis media (ear infection). The US Center for Disease Control and Protection We have a further influenza vaccine project, SPD 701, that estimates that each year in the US S. pneumoniae causes at least uses new cell-culture-based technology which would enable 3,000 cases of meningitis, nearly half a million cases of severe the vaccine to be manufactured more quickly and in greater pneumonia and more than 40,000 deaths, as well as 7 to 10 million quantities. We are currently seeking a development partner cases of acute otitis media in children. before continuing development beyond Phase I. It is believed that our protein-based vaccine, SPD 703, should Antibacterial vaccines stimulate the immune system better than existing polysaccharide There is a great need for new antibacterial vaccines, particularly vaccines and has the potential to provide improved protection for given the increasing resistance of many bacteria to current children and older people alike. This project is at the preclinical antibiotics. As existing vaccines often provide ineffective phase of development. immunisation, we are developing a new generation of vaccines Pseudomonas aeruginosa is one of the leading causes of based on innovative recombinant protein technology. life-threatening nosocomial (hospital acquired) infections. In Our meningococcal vaccine candidate, SPD 704, currently compromised patients it has a 30% to 60% mortality rate. It also undergoing Phase I clinical trials, is designed to protect against causes chronic degenerative pulmonary disease in cystic fibrosis infection by Neisseria meningitidis which, during the 1990s, patients. Antibiotic resistance is high and increasing. emerged as one of the two most common bacterial causes of Shire is collaborating with Cytovax Biotechnologies Inc. in the meningitis. Two of the most common outcomes of infection by development of a vaccine, SPD 705, against P. aeruginosa. N. meningitidis are meningococcal meningitis and septicaemia. Cytovax’s proprietary “Anti-Adhesion Platform Technology” could prevent infection by blocking the adhesion of pathogens onto human mucosal cells. Initiation of a Phase I study began in February 2002.
There is a great need for new antibacterial vaccines...
...we are developing a new generation of vaccines based on innovative recombinant protein technology.
12 Shire Pharmaceuticals Group plc “Just a little scratch”
This may be how the nurse introduces it, but the benefits of vaccination can prevent a lot of suffering and even death. We are in the early stages of developing new vaccinations to help prevent serious bacterial infections such as meningitis, septicaemia, pneumonia and acute ear infections. “It’s not a case of winning it’s the taking part”
A condition affecting blood platelets known as thrombocythaemia can result in a higher risk of heart attack, stroke and haemorrhaging. Shire’s AGRYLIN may reduce these risks, allowing people to continue to enjoy their lives. The product is currently marketed in North America and various other markets and we are working to gain approval in the EU and Japan so more people can benefit from this treatment. Oncology Operating review
The merger with BioChem strengthened our oncology portfolio: Oncology product it provided us with potential treatments for leukaemias and solid SPD 427 is a novel formulation of an existing oncology product tumours and gave us additional expertise in these areas. that is undergoing Phase II clinical trials. For commercial reasons we have not yet provided any further information on this project. Thrombocythaemia Thrombocythaemia is a chronic disorder associated with Leukaemias increased or abnormal production of blood platelets. Since Leukaemias are a form of cancer in which white blood cells platelets are involved in blood clotting, their abnormal production reproduce in a disorganised and uncontrolled way, progressively can result in the inappropriate formation of blood clots or in displacing the normal constituents of blood and causing effects bleeding, with consequent increased risk of gastrointestinal such as anaemia, severe bleeding and infection. Cancer is the bleeding, heart attack and stroke. leading cause of death in children between the ages of three and 13, about half of these are due to leukaemia. Patients in North America can already benefit from treatment with AGRYLIN (anagrelide), our product for thrombocythaemia, We discovered TROXATYL, a dioxolane nucleoside analogue. where it is the only medicine approved for this condition. It has Studies to date have shown that TROXATYL is a complete also been registered and is available through distributors in DNA chain terminator and DNA polymerase inhibitor. As such, Switzerland (available as XAGRID™), Israel, South Africa, it appears to incorporate itself into the growing DNA chain of Australia and South Korea. Anagrelide continues to be developed cancer cells, interfering with their ability to replicate further. for other countries. The submission for the European Medicine Evidence also suggests that, unlike other cytidine analogues Evaluation Agency (EMEA) to gain marketing approval for the currently used in cancer therapy, TROXATYL is not degraded by European Union, Iceland and Norway, was made on 27 March cytidine deaminase, an enzyme used by cancerous cells to resist 2002, whilst the Phase I clinical programme in Japan has been other cancer treatments. This project is currently at Phase II. completed. The trademark in Europe is likely to be XAGRID. Solid tumours Prostate cancer Pancreatic cancer comprises 2% of new cancer cases, both The agreement relating to the development of SPD 424,a worldwide and in the US, and represents the fourth most treatment for prostate cancer, was realigned at the end of common cause of cancer deaths, accounting for 5% of cancer December 2001. Responsibility for conclusion of the Phase III deaths in men and 6% of cancer deaths in women. development, filing of regulatory approval, and production of the We are investigating TROXATYL for pancreatic cancer; a Phase I implant has been returned to the licensor, Hydro Med Sciences trial is currently being initiated. in the US. We retain an option to market and distribute the product outside the US. We will be entitled to royalties on sales in the US and in markets where we do not exercise the option.
Mechanism of action of Troxatyl
TROXATYL...appears to incorporate itself into the growing DNA chain of cancer cells, interfering with their ability to replicate further.
DNA chain terminator
Shire Pharmaceuticals Group plc 15 Additional Shire portfolio Operating review
Hyperphosphataemia We have two products for the treatment of UC. The first, There are thought to be approximately 650,000 patients PENTASA (mesalamine), is available through Shire in the US, worldwide with end-stage kidney disease. Almost all of these where it addresses a market of up to 1 million patients. A new experience elevated blood phosphate levels, described as higher-strength 500mg product is also in development. A higher hyperphosphataemia which, if untreated, can combine with dose formulation than the currently available PENTASA 250mg other biochemical disturbances and result in bone disorders would aid the compliance of patients who often need to take described as renal osteodystrophy. Recent clinical data suggest large doses of this medication. that hyperphosphataemia and hypercalcaemia may also be COLAZIDE™ (balsalazide), our second treatment, is currently associated with the development of cardiovascular disease, marketed by Shire in the UK and by distributors in other which accounts for nearly 50% of all deaths in dialysis patients. European markets. We intend to market COLAZIDE in France Conventional dialysis and a phosphate restricted diet are and Germany, although further data is likely to be necessary generally unable to reduce phosphate levels sufficiently without before we can submit a Marketing Authorisation Application the addition of phosphate binding drugs. to gain the necessary approvals. We have developed FOZNOL (lanthanum carbonate), likely to Diabetic gastroparesis be renamed FOSRENOL, which binds to the phosphate in the We decided to let the development option expire for stomach and prevents it from passing easily through the stomach EMITASOL™, an intranasal formulation of metoclopramide for lining into the blood stream. As a consequence, phosphate diabetic gastroparesis. The decision was made as part of the absorption from the diet is decreased. portfolio review following the merger with BioChem. The potential In March 2001, we submitted the first marketing application to a market for this product did not warrant our continued support. Reference Member State in Europe, the initial step in the process that leads to the Mutual Recognition Procedure. The US New Drug Postural hypotension Application (NDA) is being compiled and is likely to be submitted Postural hypotension, which causes dizziness, weakness and to the Food and Drug Administration (FDA) during Q2 2002. unconsciousness, arises from a marked reduction in blood pressure when the affected person stands up. Our product, Ulcerative colitis PROAMATINE (midodrine hydrochloride), is the only medication Ulcerative colitis (UC) is a chronic, relapsing disease in which approved by the FDA for the treatment of this condition. part or all of the large intestine becomes inflamed and often We market the same product in Canada under the trademark ulcerated. This usually causes severe diarrhoea and abdominal AMATINE™. pain, but a significant proportion of patients can also develop complications such as malnutrition, strictures, perforations and an Osteoporosis increased risk of cancer of the colon. Complications such as Osteoporosis, a major cause of illness and death in the elderly, these are responsible for most of the severe illness and fatalities results in an increased risk of fracture, particularly of the hip, which arise from UC. The peak incidence is in young adults spine and wrist. between 15 and 25 years, and causes significant disruption We market the CALCICHEW™ range as adjuncts in the treatment to their education and social lives. of osteoporosis in the UK and the Republic of Ireland and through distributors, in various export markets.
Conventional dialysis and a phosphate restricted diet are generally unable to reduce phosphate levels sufficiently without the addition of phosphate binding drugs.
We have developed FOSRENOL, which binds to the phosphate in the stomach and prevents it from passing easily through the stomach lining into the blood stream.
16 Shire Pharmaceuticals Group plc “Looking to the future”
FOZNOL, likely to be renamed FOSRENOL, aims to benefit the long-term harm caused by raised blood phosphate levels. People with end-stage kidney disease are at significant risk of problems caused in part by the phosphate imbalance, such as bones becoming weak and painful and the development of cardiovascular disease. “Once a day!”
Taking medicine for ADHD at school can be embarrassing for a child. It also puts a burden on the school and opens the possibility of the medicine getting into the wrong hands. Shire Laboratories, Inc. (SLI) developed ADDERALL XR, a once a day formulation version of ADDERALL, to solve this problem. Children in America can now get all the benefits of ADDERALL by taking just one capsule a day before they go to school. Advanced drug delivery Operating review
Our subsidiary, Shire Laboratories, Inc. (SLI), is an advanced SLI has a broad range of oral drug delivery systems that have drug delivery company. Its multidisciplinary teams of highly been proven in numerous clinical studies, patented for a range experienced scientists are dedicated to solving drug delivery of applications and commercialised for several pharmaceutical challenges for Shire and the industry in general. products. Microtrol™ consists of beadlets that can be coated to provide customised release profiles such as extended delivery SLI has a range of proven and patented technologies for (Microtrol XR™), pulsed delivery (Microtrol PR™) or delayed bioavailability enhancement and oral controlled release. delivery (Microtrol DR™); Solutrol™ is a proprietary matrix tablet, Using ProScreen™ SLI identifies the barriers to oral delivery. which can provide extended release of highly soluble and pH The ProScreen platform includes technologies such as advanced dependent compounds; in contrast poorly soluble and soluble cell-based assays to evaluate transcellular and paracellular compounds can benefit from the application of EnSoTrol™ transport, protease degradation of the drug, cellular sensitivity osmotic tablet technology; Emutrol™, an emulsified delivery and a variety of other parameters. system can be used to enhance solubility and permeability of drugs; Rapitrol™ is designed for rapid drug absorption and Once the rate limiting barriers to absorption are identified can be formulated either as an oral tablet (Rapitrol RO™) or OptiScreen™ is used to create many enhanced formulations, a transmucosal tablet (Rapitrol RT™). to optimise them and to select the one that maximises bioavailability. This is accomplished by using SLI’s extensive Marketing of SLI’s expertise and proprietary delivery library of enhancers, advanced cell-based screening and in vivo technologies continues to be well received and has resulted in screening. By using OptiScreen, SLI can achieve acceptable partnerships with emerging and multinational pharmaceutical formulations before conducting costly human trials, save companies, taking the number of ongoing third-party molecules which otherwise could have been abandoned because development projects at the end of 2001 to eight. of their poor bioavailability or drug delivery challenges and SLI also provides considerable added value to the Group. Its improve delivery of existing commercial products. first success story was the development of CARBATROL, the The in vitro/in vivo predictability of ProScreen and OptiScreen has twice-daily formulation of carbamazepine, based on Microtrol been established by developing enhanced formulations of technology and now marketed in the US by Shire. More recently, a model drug and testing them in cell lines and in vivo models. in October 2001, ADDERALL XR, another Microtrol-based Further confirmation has been gained by comparing formulation, was approved by the FDA and launched in the US. pharmacokinetic and cell line transport data for numerous Eight internal and eight external products in development also development stage compounds and commercial products. use SLI expertise and delivery technologies. These products, usually modified or extended release formulations of established Once components for the enhanced formulation have been drugs, provide lower risk projects that balance the higher risk identified through the ProScreen and OptiScreen systems, of new chemical entities (NCEs) that we are also developing. SLI can select the most appropriate dosage for delivery of This balance of risk is an important part of Shire’s strategy. the molecule from its portfolio of advanced drug delivery There are a total of eight advanced drug delivery projects in technologies or, if required, design a new and customised the Shire R&D portfolio. dosage form.
SLI’s multidisciplinary teams of highly EnSoTrol is a patented osmotic drug experienced scientists are dedicated delivery system designed to solubilise to solving drug delivery challenges for drugs and provide extended drug Shire and our partners. release properties.
SLI also provides considerable added value to the Group… the development of wicking CARBATROL… and… ADDERALL XR… agent and… partnerships with emerging and multinational pharmaceutical companies. core
coating gastrointestinal fluids
Shire Pharmaceuticals Group plc 19 Biologics Operating review
Biologics represents a new product platform for Shire Innovative bacterial-vaccines portfolio Headquartered in Canada, Shire Biologics has a global mandate Looking ahead, Shire Biologics is pressing forward with the to apply the most innovative science and technologies to discover, development of its own portfolio of bacterial vaccines, based on develop, produce and market novel human vaccines and innovative recombinant-protein technology that could eventually biologics. It represents an entirely new product platform for the render existing vaccines obsolete. Shire’s unique expertise Group, one which positions it as a significant player in what is in this area resides in the development of a process that entails being called the “golden age” of vaccines. The vaccines market identifying universal surface-protein antigens. is experiencing dramatic growth, driven by health authorities’ This programme includes advanced vaccines to provide protection awareness of the urgent need to develop new vaccines that will against a variety of potentially deadly “bugs”, including all 12 offer cost-effective protection against infectious diseases – many strains of Neisseria meningitidis and Streptococcus pneumoniae. of which have become resistant to existing antibiotics. Both those vaccines are in development at Shire Biologics’ leading-edge development centre in Northborough, Countering the threat of an influenza pandemic Massachusetts, while another four candidates that share the Another threat that concerns health authorities around the globe same technology platform are in research. is the likelihood of an influenza pandemic, similar to the 1957/58 “Asian flu” and 1968/69 “Hong Kong flu” outbreaks. Since experts Strategic priorities say it is only a question of when – not if – we can expect another Shire Biologics’ other strategic priorities for 2002 include: pandemic, authorities must be prepared. development of FLUVIRAL S/F™ for markets outside Canada, In October 2001, Shire Biologics signed a ten-year contract with in order to capitalise on the increased capacity of the the Government of Canada to provide flu vaccine for all Canadian Sainte-Foy facility; citizens in the event of a pandemic. Under the contract, Shire will also supply a substantial proportion of Canadian health seeking regulatory approval for the manufacture at Sainte-Foy authorities’ normal, annual influenza-vaccine requirements. of Shire’s PACIS BCG™ immunotherapy, used for the To meet these commitments, Shire Biologics is substantially treatment of superficial bladder cancer; and expanding capacity for production of its split virion influenza aggressively looking to expand the Shire Biologics pipeline vaccine, FLUVIRAL S/F, at the unit’s state-of-the-art, vaccine- through in-licensing and acquisitions. manufacturing facility in Sainte-Foy, Quebec. Influenza represents just one area of Shire Biologics’ focus and expertise. In January 2002, it added an important new bacterial- vaccine product to its Canadian pipeline with approval by Health Canada for the commercialisation of NEISVAC-C™. This new vaccine, for which we hold exclusive Canadian distribution rights, has been shown to be highly effective against serogroup C Neisseria meningitidis. There has been a resurgence of meningococcal C meningitis disease, with almost 200 confirmed cases, predominantly in adolescents and young adults, reported in Canada over an 18-month period during 2000/01.
Influenza vaccine is produced from embryonated hens’ eggs. Increased capacity at Shire Biologics’ Laval, Quebec, vaccine facility will enable it to process 70,000 to 200,000 eggs per day.
Increased capacity will enable Shire Biologics to seek new export markets for its FLUVIRAL S/F influenza vaccine.
Shire Biologics has a global mandate to apply the most innovative science and technologies to discover, develop, produce and market novel human vaccines and biologics. “Prevention is better than cure”
Shire is developing new bacterial vaccines based on recombinant protein technology with the potential to protect against a variety of serious infections. The importance of such vaccines increases as more bacteria resistant to current antibiotic therapies emerge. Corporate responsibility
Above: Work sessions for employees at all levels Above: Through automated dosing, this system Above: As part of the atmospheric emission and from all the major business units were held assures respect for environmental standards treatment systems at Shire BioChem in Laval, air to identify and define our corporate values. Here required to safeguard the waste water recovery evacuated by overhead fans is treated to meet the is a group of Shire BioChem and Shire Biologics systems in Shire BioChem’s facilities in Laval. The current environmental standards of the government employees during a session held in Laval, Canada. system neutralises the pH level or level of acidity before being released into the atmosphere. in the water from the laboratories, to ensure that it is not corrosive before being released into the sewer system.
Shire believes that it has a responsibility to society as well as to As a responsible corporate citizen, Shire is committed to its shareholders. As the third largest pharmaceutical company in supporting the continued growth and prosperity of the society the UK, and one of the fastest growing in the world, it is fully within which it evolves. To that end, Shire and its employees aware that it must play its own part in ensuring the sustainability devote considerable time, energy and financial resources to of the environment and that it should behave fairly, respecting the endeavours that contribute to the cultural and social rights of individuals in the countries in which it operates. As a enrichment of the communities in which we are present. responsible corporate citizen, Shire is committed to supporting the At a corporate level, we have taken part in UK-based activities continued growth and prosperity of the society within which it sponsored by Business in the Community. Chief Executive evolves. To that end, Shire and its employees devote considerable Rolf Stahel took part in HRH The Prince of Wales’s “Seeing is time, energy and financial resources to endeavours that contribute Believing” programme in 2001 and visited Feltham prison to to the cultural and social enrichment of the communities in which witness rehabilitation schemes for UK inmates. The meeting we are present. also identified the possibility that untreated ADHD may be one Our approach to corporate social responsibility is intended to of the causes of many of the social problems that eventually provide a framework for managing risk and maintaining the lead to crime and imprisonment. Company’s position as a good corporate citizen, as well as Rolf Stahel has also given his support to the Business in the creating a set of goals that will facilitate continuous improvement Community Partners in Leadership scheme which involves throughout the organisation. a two-way mentoring with a local school headteacher. In our 2000 report we stated that we had developed our In 2001, we announced that, in conjunction with our partner approach to environmental issues and planned to expand into GlaxoSmithKline, we would forgo royalties of 3TC – the other areas. During 2001 we developed our first corporate social world’s most prescribed treatment for HIV/AIDS – in South responsibility policy. This not only covers environmental issues, Africa through an appointed non-governmental-organisation but also ethical, human rights, health and safety, and employee manufacturer and distributor. This action is in response to the issues, community relations and compliance. The policy will be need for increased access to AIDS treatment in the country communicated to all employees and published on our website. which has the world’s largest number of untreated sufferers. In parallel, we undertook a number of specific activities during 3TC was discovered by BioChem, now merged with Shire, the year: and is commercialised worldwide by GSK except in Canada, where the product is marketed by Shire and GSK. Following on from the environmental study of our key operational facilities during 2000, a review of the Looking ahead, we will focus on converting our corporate environmental status of locations now forming part of the social responsibility policy into clear actions with associated Group, after the acquisition of BioChem Pharma Inc., was objectives and targets. During 2002 we plan to involve undertaken by specialist consultants. The report showed department heads and line managers in developing these that these facilities are satisfactory and, in many cases, targets. In future years we aim to continue to report on this are already operating well above the industry required important and significant area. standard. A values project is underway. Shire has identified four important values – innovation, integrity, dynamism and caring – which it believes are fundamental to the way its organisation acts and how its employees behave on a daily basis. Led by the Human Resources function, a project to ensure commitment and involvement throughout the organisation is progressing towards the launch of this set of values.
22 Shire Pharmaceuticals Group plc Above: Shire Head Office made a donation to Above: Shire US employees participated in October the UK Alzheimer’s Society instead of sending 2001 in the Breast Cancer Walk organised by the Company Christmas cards in 2001. Greater Cincinnati/Northern Kentucky chapter of the American Cancer Society, a major fundraising event for cancer research in which 9,000 people took part.
Community support initiatives are encouraged at our local operations:
> A donation to the UK Alzheimer’s > In Canada, Shire BioChem financed: Society. This has enabled more Canadian Cancer Society support worker hours and forged a strong partnership with this Museum of Fine Arts of Montreal influential group. The Cardinal Villeneuve Foundation for physically handicapped children > Funding the provision of five nurses specialising in osteoporosis in Learning Disability Association Above: A grant in the amount of $40,000 was conjunction with the UK National of Quebec provided by Shire to the Trigeminal Neuralgia Osteoporosis Society as well as Association (TNA) to help support patient education Canadian Chemistry and Physics supporting primary care and clinical research. Trigeminal neuralgia is Olympiads a painful disorder of the fifth cranial nerve. From organisations which help the elderly left to right: Roger Levy, Esq, Chairman, Claire to cope with normal life after Montreal Children’s Hospital Patterson, President and CEO of TNA, and fractures or illness. Foundation Colette Monier, CARBATROL Product Manager.
> Shire US sponsorship of and > Shire employees are encouraged donations to: to support local causes. In 2001, activities included: The Muhammad Ali Parkinson Fight Night in aid of Parkinson’s disease The adoption of a family in need research by Shire Laboratories, Inc. Staff took part in fundraising events and Avon Breast Cancer walk donated gifts American Cancer Society’s Making Employer and employee Strides against Breast Cancer walk fundraising for: The National Attention Deficit Muscular dystrophy in Canada Disorder Association (ADDA) Dinner Jeans for Genes campaign Annual meeting reception for Children and Adults with Attention American Red Cross Deficit Disorder (CHADD) (post 11 September) The Epilepsy Foundation of America Worcester Food Bank Above: For the past seven years, Shire BioChem The Cleveland Clinic Foundation Lance Armstrong Cancer Fund and its employees have been enthusiastic (supporting people with epilepsy) supporters of the annual AIDS walk in Montreal. St Vincent de Paul Society The money raised in this event is utilised to improve John Hopkins University the quality of life of men, women and children living The Paul Bevin Hospice with HIV and AIDS and to promote education and In the US, Shire Biologics supported: > Cancer research prevention programmes. The Northborough Police department Centraide/United Way campaign in (to support community activities) Montreal and Quebec City, Canada Starhawks Youth Hockey (employee fundraising campaign matched with a corporate donation – to help the less Scholarships at two local high schools fortunate members of our community) (to support science education) Shire Pharmaceuticals Group plc 23 Shire Pharmaceuticals Group: a specialty pharma powerhouse
The merger of Shire and BioChem in May 2001 brought together Its success was remarkable. Shire has a substantial amount of two highly successful companies which have complementary marketed products and a well-balanced portfolio of projects strengths, activities and competencies. Together, we have become under development or at the regulatory stage of approval. The one of the world’s leading global specialty pharmaceutical Company has sales and marketing capabilities in seven major companies. world markets (US, Canada, UK/Republic of Ireland, France, Germany, Italy and Spain) and plans to add Japan by 2004. Shire and BioChem: a historical overview Other markets are covered through appointed distributors. The acquisitions of Imperial Pharmaceutical Services in 1995, Created in the same year, they have followed Pharmavene Inc. and Richwood Pharmaceutical Company Inc., an different roads to success. oral drug delivery company, in 1997, helped achieve this success. In 1986, the three original founders of Shire Pharmaceuticals From Richwood Pharmaceutical came one outstanding product, developed the concept of the Company in a small cottage living ADDERALL, for the treatment of ADHD, which is now room. Later, they established themselves in an office called Shire successfully marketed by Shire’s US sales force. Pharmavene, House (hence the Company name), to create what was originally now known as Shire Laboratories, Inc, took on ADDERALL XR to be a bone disease company. Across the ocean, three (a once a day product) development projects. Today, Shire entrepreneurial colleagues started the creation of what was to Laboratories, Inc. plays a very important role in the future become BioChem Pharma, a biopharmaceutical company based success of Shire. in Laval, near Montreal, Canada. In 1999, whilst in the process of merging with the specialty After 14 years of tremendous growth on both sides, the two pharmaceutical company Roberts Pharmaceutical Corporation, companies joined forces to create the third largest UK Shire acquired the German, French and Italian sales and pharmaceutical company and one of the world’s leading marketing subsidiaries of Fuisz Technologies Ltd. specialty pharmaceutical companies. In 2000, Shire extended its operations to the Pacific Rim Why did it make sense to merge? Here’s a brief historical countries with the opening of an office in Singapore, and further overview. broadened its reach in Europe by opening a Spanish subsidiary. BioChem became a public listed company in 1986 on the While Shire was extending its product portfolio and market Montreal Stock Exchange, whilst Shire began trading as a public reach, BioChem was expanding its therapeutic pipeline of company in 1996 on the London Stock Exchange, followed by product candidates and intensifying its efforts in the vaccines a listing on Nasdaq in New York, USA, in 1998. area. In 1997, it inaugurated a state-of-the-art vaccine manufacturing facility in Sainte-Foy, near Quebec City. In 1989, BioChem announced the discovery of the drug lamivudine, later to be marketed under the trade name 3TC 1998 saw lamivudine approved for the treatment of hepatitis B, or EPIVIR. The drug was licensed to Glaxo Wellcome (now while BioChem again increased efforts in the field of innovative GlaxoSmithKline) in 1990 and came on the market in 1995. It is vaccines. The company opened a vaccine development centre now available in more than 100 countries and has become the in Northborough, Massachusetts, near Boston. cornerstone of HIV/AIDS treatment around the world. In 1992, lamivudine went into clinical trials for a new indication, A leading specialty pharmaceutical company hepatitis B, the ninth most deadly disease in the world. The merger between Shire and BioChem added to the individual company strengths, providing bolt-on expertise and additional In the meantime, Shire pursued another strategy. It set out to sources for future growth. in-license specialty pharmaceutical products at the pre-clinical or later stages of clinical development and, at the same time, to Founded in the same year, with very different growth strategies, develop or acquire specialised sales forces that could effectively Shire and BioChem Pharma have become successful leaders market these products direct to specialist doctors in the world’s in different ways. It was these differences that made them great major markets. merger candidates, a remarkable fit in terms of science, marketing infrastructure and financial resources.
24 Shire Pharmaceuticals Group plc Financial review
The following review should be read in conjunction with the Sales of PENTASA, for the treatment of ulcerative colitis, were up Group’s consolidated financial statements and related notes 39% at $75.5 million (2000: $54.2 million), due in part to price appearing elsewhere in this report. increases and also the renegotiation of contracts with Managed Care. Underlying prescriptions grew by 9% for the year 2001. Business combinations and divestitures Sales of PROAMATINE, for the treatment of postural hypotension, In May 2001 the Group completed its merger with BioChem. The were $38.0 million, 60% higher than 2000 sales of $23.7 million, transaction, which was accounted for as a pooling of interests due in part to price increases and also the renegotiation of under US GAAP, was achieved through a tax-free exchange of contracts with Managed Care. Underlying prescriptions grew shares. The Company issued 179.4 million ordinary shares and by 18% during the year. 17.3 million exchangeable shares to effect the merger. Merger related costs, which totalled $177.0 million, are discussed below. CARBATROL, for the treatment of epilepsy, recorded sales of The results for all periods discussed have been restated to $36.8 million in 2001, an increase of 44% over prior year sales of combine the results of BioChem. $25.6 million. CARBATROL achieved 35.5% of the US extended release carbamazepine prescription market in December 2001 Results of operations compared with 30.9% in December 2000. Pre stock option compensation and exceptional charges, the Group recorded income before tax of $295.4 million (2000: Licensing and development $204.2 million) and diluted earnings per ordinary share pre stock As expected, following the launch by Janssen (Johnson & option compensation and exceptional charges of 43.9 cents or Johnson) of REMINYL, the Group’s Alzheimer’s drug, 131.6 cents per ADS, up 39% (2000: 31.6 cents or 94.9 cents reimbursement of associated research and development costs per ADS). by Janssen has now come to an end. Consequently, licensing and development revenues decreased by 61% to $5.5 million Total revenues (2000: $14.1 million). For the year ended 31 December 2001, total revenues increased by 31% to $877.6 million. Product sales in the US continue to Royalties represent a significant percentage of worldwide product sales, Royalty revenue increased 7% to $145.2 million in 2001 increasing to 85% in 2001 from 79% in 2000. Royalty income is compared to $135.5 million in 2000. The Group receives royalties also an important contributor to the Group’s revenue growth. from GlaxoSmithKline (GSK) on the worldwide sales of 3TC and ZEFFIX, with the exception of Canada, where a commercialisation Product sales partnership with GSK has been established. Royalty income in For the year ended 31 December 2001, total product sales 2001 also includes royalties on sales of REMINYL, received from increased by 39% to $724.0 million, compared to $520.2 million Johnson & Johnson. in the prior year. Cost of revenues and operating expenses Of the Group’s total product sales, 48% related to ADDERALL XR For the year ended 31 December 2001, cost of revenues and ADDERALL, the Group’s products marketed in the US for the represented 16% of product sales (2000: 19%). The higher treatment of ADHD. In the period from launch date to 31 December margin products, ADDERALL XR, ADDERALL, and AGRYLIN, 2001 ADDERALL XR achieved sales of $32.6 million including represented a higher proportion of total sales in 2001 (60%) $11.0 million of launch stock. On a combined basis, these compared to the prior year (52% of total sales). Improved pricing products increased their share of the total US ADHD prescriptions in respect of the ADHD franchise has also benefited the gross written from 33.0% in December 2000 to 34.4% in December 2001. margin on product sales. Sales of AGRYLIN, the only US product licensed for the treatment Research and development expenditure increased to of essential thrombocythaemia, grew by 48% to $85.5 million $171.0 million in 2001 from $155.1 million in 2000, representing (2000: $57.7 million) and accounted for 24.4% of the total US an increase of 10%. Included in research and development AGRYLIN, Hydrea and generic hydroxyurea prescription market expenditure in 2001 is a warrant compensation charge of in December 2001 (2000: 18.8%). $4.5 million (2000: $nil) relating to the agreement with Technology
Shire Pharmaceuticals Group plc 25 Financial review
Partnerships Canada (TPC). Excluding the effect of this warrant items was 25% (2000: 23%). The Group has recorded net compensation charge, research and development expenditure deferred tax assets of $32.3 million (2000: $33.5 million). It is increased by 7% and as a proportion of total revenues considered more likely than not that the deferred tax assets will represented 19% (2000: 23%). be realised. Selling, general and administrative expenses increased from Liquidity and capital resources $236.3 million to $311.1 million, an increase of 32%. Excluding The Group has financed its operations since inception through the effects of stock option compensation charges of $2.3 million private and public offerings of equity securities, the issuance of (2000: $21.9 million), selling, general and administrative costs loan notes and convertible loan notes, collaborative licensing and increased by 44% to $308.8 million (2000: $214.4 million). As a development fees, product sales and investment income. The percentage of product sales, selling, general and administrative Group’s funding requirements depend on a number of factors. expenses (excluding stock option compensation charges) were These include the Group’s product development programmes, 43% (2000: 41%). The increase is in part due to the high level of business and product acquisitions, the level of resources promotional spend associated with the ADDERALL XR launch. required for the expansion of marketing capabilities, increased A significant component of selling, general and administrative investment in accounts receivable and inventory which may arise expenses is depreciation and amortisation charges, which as sales levels increase, competitive and technological increased from $38.0 million in 2000 to $45.8 million in 2001. developments, the timing and cost of obtaining required This increase is partly attributable to the purchase of new regulatory approvals for new products, and the continuing products in Europe during 2001. revenues generated from sales of its key products. Cash, cash equivalents and marketable securities and other Merger related costs current assets at 31 December 2001 amounted to $842.0 million As a result of the merger with BioChem, pre tax charges in the (2000: $463.7 million). After deduction of borrowings this gives second quarter of 2001 totalling $177.0 million were recorded a net cash position of $435.1 million (2000: $249.8 million). in respect of asset impairments and restructuring charges ($85.4 million), merger transaction expenses ($83.5 million), Debt and loss on disposal of assets ($8.1 million). On 15 August 2001 Shire Finance Limited (the issuer), a wholly Asset impairments and restructuring charges of $85.4 million owned subsidiary, placed an offering of $350.0 million principal include an impairment charge of $20.9 million to adjust intangible amount of Guaranteed Convertible Notes due 2011 with asset values, primarily trademark and patent costs but also an international institutional investors at an issue price of 100%. In element of product rights, to their estimated fair value. These connection with the issue, the initial purchasers exercised in full charges are consistent with the Group’s accounting policy to the option to subscribe or procure subscribers for an additional review periodically the carrying value of intangible assets and $50.0 million principal amount of notes. The total principal evaluate whether there has been any impairment in the carrying amount of the issue was therefore $400.0 million. These Notes value of those intangibles as compared with estimated are guaranteed by the Company and are convertible into undiscounted future cash flows relating to those intangibles. redeemable preference shares of the issuer which, upon Other asset impairment charges included the write down of long- issuance, will be immediately exchanged for either (i) ordinary term unquoted investments ($24.9 million) and a write down of shares or (ii) American Depository Shares (ADSs) of the $30.8 million relating to a debenture held by BioChem, which Company, or at the issuer’s option, cash. The effective initial was received on divestiture of its diagnostics subsidiary. These exchange price was $20.154 per ordinary share and $60.4625 charges are consistent with Group policy to provide for non- per ADS. This exchange price represented a premium of 25% temporary impairments in investments by reference to the fair over the closing price of ADSs of the Company on 14 August value of the investment using established financial methodologies 2001. Investors have the right, subject to certain conditions, to and an assessment of qualitative factors. A further $8.8 million require the issuer to redeem the Notes at par on 21 August 2004, has been recorded in respect of employee related costs. The 2006 or 2008. Subject to certain conditions, the Notes will be $8.1 million loss on disposition of assets resulted from the sale callable after 21 August 2004. of a duplicate manufacturing facility in Toronto, Canada. On November 19, 1999, the Group entered into an agreement with CSFB to replace an existing credit agreement with a Interest income and expense $250.0 million credit facility consisting of a $125.0 million five- In the year ended 31 December 2001, the Group received year revolving credit facility and a $125.0 million five-year term interest income of $19.7 million compared with $19.2 million in loan facility. In connection with the credit facility, the Group 2000. Interest expense decreased from $16.4 million in 2000 to was subject to certain affirmative and negative covenants and $8.3 million in 2001, reflecting an improvement in the Group’s maintenance tests that required it to maintain a net minimum debt profile. An $80.0 million promissory note and the worth, a specified leverage ratio and a specific coverage ratio. $125.0 million CSFB term loan were repaid in full in January The loan was repaid in full during the year ended 31 December and May 2001 respectively. In August the Group issued a 2001, the $125 million five-year revolving credit facility was $400.0 million convertible loan note. The related annual interest terminated, and associated deferred financing costs of expense accrues at a comparatively lower fixed rate of 2%. $2.6 million were written off and have been disclosed as Further details are discussed below. an extraordinary item within the consolidated statement of operations. All obligations under the facility, which was jointly Income taxes and severally guaranteed by the Group and secured by all For the year ended 31 December 2001 income taxes increased material property owned by the Group and the capital stock by $25.2 million to $72.9 million. The Group’s effective tax rate in of the subsidiaries, have been released. 2001 before stock option compensation charges and exceptional
26 Shire Pharmaceuticals Group plc Concentration of credit risk the euro. There was a three-year transition to the euro, and at the Financial instruments that potentially expose the Group to end of 2001 the currency came into circulation whilst national concentrations of credit risk consist primarily of short-term cash currencies will be withdrawn by July 2002. investments and trade accounts receivable. As revenues are The UK did not participate in the EMU at the commencement of mainly derived from agreements with major pharmaceutical the third stage on 1 January 1999 and it is uncertain whether or companies and relationships with pharmaceutical wholesale on what terms the UK would be permitted to join at a later date. distributors and retail pharmacy chains, and such clients typically There can be no prediction as to whether the UK will participate have significant cash resources, any credit risk associated with in the EMU or as to the rate at which the pound sterling would be these transactions is considered minimal. The Group operates converted into the euro. Furthermore, there can be no prediction credit evaluation procedures. Excess cash is invested in short- as to the likely impact on the US dollar/sterling exchange rate of term money market instruments, including bank and building a decision by the UK to participate in the EMU. society term deposits and commercial paper from a variety of companies with strong credit ratings. These investments typically It is anticipated that the pricing of goods and services will be bear minimal risk. more transparent through the use of a single currency within the participating member states. Competition is likely to increase Market risk with the greater price transparency and removal of exchange rate Shire’s principal treasury operations are managed by the Group’s risk. In the longer term more general price convergence is likely, treasury function based in the UK in accordance with the assuming the EMU leads to greater harmonisation of healthcare Group’s treasury policies and procedures which are approved policies across the participating member states. by Shire’s Board. As a matter of policy, Shire does not undertake The Group has sales and marketing operations in the Republic speculative transactions that would increase its currency or of Ireland, France, Germany, Spain and Italy and therefore there interest rate exposure. The Group is subject to market risk may be some impact on its business and competitive position as exposure in the following areas: a result of the increased price transparency. Management have Interest rate and market risk reviewed financial and operating systems of the Group and are The Group has cash and cash equivalents on which interest is satisfied that the introduction of the euro has not caused any earned at variable rates. Since 31 December 2000 the loan out- disruption to the business, and that Shire has systems in place to standing to CSFB and amounts due to GSK under a promissory receive and make payments in euros. Management will continue note have been repaid in full. Thus, as at 31 December 2001 to monitor the UK’s stance in relation to participation in the euro exposure to variable interest rate market risk on debts and assess the impact of any significant changes in policy. outstanding compared to the position at 31 December 2000 is much reduced. The Convertible Loan Notes bear interest of 2% per annum, paid semi-annually. The interest rate is fixed over the period of the debt reducing any risk associated with movements in interest rates. The interest rate risk that has been mitigated by obtaining a fixed rate debt is equivalent to a $4.0 million saving Angus Russell per 1% rise in interest rates per annum. Conversely a fall in Group Finance Director interest rates by 1% will effectively cost the Group $4.0 million. Foreign exchange market risk A number of subsidiary operations are located outside the UK. As such, the consolidated financial results are subject to fluctuations in exchange rates, particularly between the US dollar and Canadian dollar against the pound sterling. The financial statements of foreign entities are translated using the accounting policies described in note 1 to the consolidated financial statements. The exposure to foreign exchange market risk is managed by the Group’s treasury function, using forecasts provided by the operating units. There have been no significant changes to our exposure to foreign exchange risks during the year ended 31 December 2001.
Inflation Although at reduced levels in recent years, inflation continues to apply upward pressure on the cost of goods and services used by the Group. However, management believes that the net effect of inflation on the Group’s operations has been minimal during the past two years.
Euro conversion On 1 January 1999, the European Economic and Monetary Union (EMU) introduced the euro as the official currency of the 11 participating member countries. On that date, the currency exchange rates of the participating countries were fixed against
Shire Pharmaceuticals Group plc 27 Board of Directors and Executive Committee
Company directors Non-executive directors and Executive Jeff Devlin (49) Committee Director Corporate Affairs Rolf Stahel (57) Joined Shire in January 2000 as Director of Chief Executive Dr James Cavanaugh (65) Corporate Affairs. Prior to joining Shire he was a Chairman and non-executive Director Joined the Group in March 1994 as Chief Executive partner at Ernst & Young and also a member of its from Wellcome plc where he worked for 27 years in Joined the Board on 24 March 1997 and was Global Executive Steering Group for Life Sciences. Switzerland, Italy, Thailand, Singapore and the UK. appointed as non-executive Chairman with effect He was previously with Arthur D Little, Management As Regional Director based in Singapore Mr Stahel from 11 May 1999. Dr Cavanaugh is the President Consultancy, where he was a European director in was responsible for 18 Pacific Rim countries. From of HealthCare Ventures LLC. Formerly he was its Healthcare and Pharmaceuticals practice. April 1990 until February 1994, he served as President of SmithKline & French Laboratories, the Director of Group Marketing reporting to the Chief US pharmaceutical division of SmithKline Beecham Executive. A Business Studies graduate of KSL Corporation. Prior to that, he was President of The Honourable James Andrews Grant (64) Lucerne, Switzerland, he attended the 97th SmithKline Beecham Corporation’s clinical Non-executive Director Advanced Managers Program at Harvard Business laboratory business and, before that, President Joined the Board on 11 May 2001 as a non- School. On 15 March 2001 Mr Stahel received the of Allergan International. Prior to his industry executive director. He was formerly a director of Chief Executive Officer of the Year Award 2001 experience, Dr Cavanaugh served as Deputy BioChem since 1986, and is a partner with the law from the global pharmaceutical industry. Assistant to the President of the US for Health firm of Stikeman Elliot in Montreal. Mr Grant sits on Affairs on the White House Staff in Washington, the boards of two other Canadian corporations in Angus Russell (45) DC. He is a non-executive director of MedImmune addition to other foundations and councils that are Group Finance Director Inc., Diversa Corporation, 3-Dimensional not-for-profit organisations. He attended McGill Pharmaceuticals Inc. and Versicor Inc. Prior to joining Shire, Mr Russell worked for ICI, University receiving a BA in Arts in 1958 and a BCL Zeneca and AstraZeneca for a total of 19 years. in Law in 1961. His last position was Vice President – Corporate Dr Francesco Bellini (54) Finance at AstraZeneca PLC, where he was Non-executive Director responsible for financial input into M&A activities, Tatjana May (37) management of tax, legal and finance structure, Joined the Board of Shire on 11 May 2001 as General Counsel and Company Secretary investor relations activities and the management a non-executive director. Dr Bellini is Chairman of Joined Shire from AstraZeneca PLC (formerly of various financial risks. Prior to this, he held a Picchio International Inc. and is also on the board Zeneca Group) where she occupied the position number of positions within Zenaca Group PLC from of several companies and organisations such as of Assistant General Counsel in Corporate 1993 until 1999, including Group Treasurer, and Molson Inc. and Industrial-Alliance Life Insurance Headquarters. Ms May has substantial experience before that in ICI from 1980 until 1992. Mr Russell Co. Formerly, he was Chairman and CEO of and knowledge of undertaking large M&A is a chartered accountant, having qualified BioChem Pharma which he co-founded in 1986. transactions as well as the negotiation and with Coopers & Lybrand, and is a fellow of the implementation of a large number of commercial Association of Corporate Treasurers. agreements. Prior to joining AstraZeneca she Dr Bernard Canavan (66) worked at Slaughter and May. Non-executive Director (Chairman Audit Committee) Dr Wilson Totten (46) Joined the Board as a non-executive director on Jack Khattar (40) Group R&D Director 11 March 1999. Dr Canavan is a medical doctor. President and Chief Executive, SLI Joined Shire in January 1998 as Group R&D American Home Products employed him for over Joined Shire as President and CEO of Shire Director. Dr Totten is a medical doctor and has wide 25 years until he retired in January 1994. He was Laboratories Inc. in May 1999. Mr Khattar came experience in the pharmaceutical industry covering President of that corporation from 1990 to 1994, to Shire from CIMA, a drug delivery company, all phases of drug development. He has substantial and prior to that was Chairman and Chief Executive where he last served as an executive officer and experience in the field of central nervous system Officer of American Home Products Pharmaceutical the Chairman of the Operating Management disorders. His last position was Vice President of Division, Wyeth-Ayerst Laboratories. Dr Canavan is Committee with a functional role as Vice President Clinical Research & Development with Astra a director of Genaera Corporation. Dr Canavan of Business Development. Charnwood where he served from 1995 to 1997, is Chairman of the Audit Committee. having previously worked for Fisons Pharmaceuticals from 1989 to 1995, and prior to that with 3M Health William Nuerge (50) Care and Eli Lilly. He is a non-executive director President and Chief Executive, Shire US of Keryx Biopharmaceuticals Inc. Joined Shire US in 1994 as Chief Operating Officer. Mr Nuerge has over 25 years’ experience within the industry and has held several senior pharmaceutical positions. Mr Nuerge holds a Bachelor of Science degree from Purdue University and an MBA from Indiana Wesleyan University. 28 Shire Pharmaceuticals Group plc The Board, from left: Angus Russell*, Dr Francesco Bellini, Ronald Nordmann, Dr James Cavanaugh, Rolf Stahel*, Gérard Veilleux, Dr Wilson Totten*, Dr Barry Price, Dr Bernard Canavan, The Hon James A Grant.
*Also members of the Executive Committee.
Ronald Nordmann (60) Richard de Souza (49) Mark Webster (40) Non-executive Director Director International Commercial Director Has served as a non-executive director of Roberts Joined Shire in September 2000 as Director Is responsible for Search (Global Business since May 1999 and of Shire since December International. Prior to this he worked as President, Development) and Global Strategic Marketing. 1999, and has been a financial analyst in Pharmaceuticals Europe and Asia in Warner He has worked in the pharmaceutical industry for healthcare equities since 1971. From September Lambert/Parke-Davis. He was previously with 18 years in a number of general management and 1994 to January 2000 he was an analyst and SmithKline Beecham for 22 years, where he was senior sales and marketing roles in the UK, Canada partner at Deerfield Management. He has held Chairman, Pharmaceuticals Europe. and the US. Mr Webster worked for Abbott senior positions with PaineWebber, Oppenheimer & Laboratories for the last 13 years and immediately Co., F Eberstadt & Co., and Warner-Chilcott before joining Shire held the position of Vice- Laboratories, a division of Warner-Lambert. Gérard Veilleux (59) President and General Manager Anti-Virals, Abbott Mr Nordmann received his undergraduate degree Non-executive Director Laboratories USA. He has launched numerous new from The Johns Hopkins University and an MBA products, and negotiated and implemented a Joined the board of Shire on 11 May 2001 as a from Fairleigh Dickinson University. Mr Nordmann number of commercial and R&D alliances across non-executive director. He was formerly a director is also a director of Guilford Pharmaceuticals Inc., a wide range of therapeutic areas. He has a of BioChem since 1999. He is President of Power Boron, LePore & Associates Inc. and Pharmaceutical BSc(Hons) in Chemistry from Durham University. Communications Inc. and Vice President of Power Resources Inc. Corporation, a diversified management and holding company. Mr Veilleux is a director of several public and private companies as well as a member of the Dr Barry Price (58) Board of Governors of McGill University. He has Senior non-executive Director (Chairman a Masters degree in Public Administration from Remuneration Committee) Carleton University and a Bachelor of Commerce Joined the Board on 24 January 1996 having spent from Laval University. 28 years with Glaxo holding a succession of key executive positions with Glaxo Group Research. He The Executive Committee, is Chairman of Antisoma plc and also Biowisdom from left: Ltd. He is also on the board of directors of Mark Webster, Jeff Devlin, Pharmagene plc. Dr Price is Chairman of the Jack Khattar, Richard de Souza, Remuneration Committee. William Nuerge, Tatjana May.
29 Five-year review
Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 2001 2000 1999 1998 1997 $000 $000 $000 $000 $000 Income statement data: Revenues 877,569 671,110 537,253 435,905 298,656 Operating expenses (779,498) (519,752) (573,907) (358,275) (334,317) Operating income/(loss) 98,071 151,358 (36,654) 77,630 (35,661) Interest and other, net 16,152 108,033 23,064 14,092 10,704 Income/(loss) before income taxes and extraordinary items 114,223 259,391 (13,590) 91,722 (24,957) Income taxes (72,860) (47,664) (21,663) (7,665) (3,080) Income/(loss) from continuing operations and before extraordinary items 41,363 211,727 (35,253) 84,057 (28,037) Extraordinary items (2,604) – ––– Loss from discontinued operations, net of tax – – (12,179) (2,017) (366) Net income/(loss) 38,759 211,727 (47,432) 82,040 (28,403) Income/(loss) from continuing operations per share – basic 8.4c 43.8c (7.3)c 17.5c (6.5)c Income/(loss) from continuing operations per share – diluted 8.2c 42.8c (7.3)c 17.0c (6.5)c Net income/(loss) per share – basic 7.9c 43.8c (9.8)c 17.1c (6.6)c Net income/(loss) per share – diluted 7.7c 42.8c (9.8)c 16.6c (6.6)c Weighted average number of shares outstanding – basic 492,594,226 482,890,070 484,358,876 480,827,784 431,276,428 Weighted average number of shares outstanding – diluted 504,875,587 494,691,805 484,358,876 494,149,715 431,276,428 Balance sheet data: Current assets 1,140,555 695,853 520,023 445,972 495,360 Non-current assets 770,176 852,642 831,768 764,181 626,413 Current liabilities 231,616 227,850 233,818 99,770 141,196 Non-current liabilities 416,126 146,259 238,087 137,151 59,834 Minority interests – – – – 9,011 Shareholders’ equity 1,262,989 1,174,386 879,886 973,232 911,732
30 Shire Pharmaceuticals Group plc The remuneration report
The Company has applied the Principles of Good Governance relating to the directors’ remuneration and has complied with the provisions of the Code of Best Practice as set out below and as disclosed in the Corporate governance statements.
The Committee The Remuneration Committee (“the Committee”) comprises four non-executive directors: Dr James Cavanaugh, Dr Bernard Canavan, Mr Gérard Veilleux, and is chaired by Dr Barry Price. The Chief Executive attends meetings of the Committee at its invitation.
Remuneration policy The Committee’s policy on the remuneration of executive directors is directed at the retention and motivation of executive directors by ensuring that their remuneration is competitive with companies within the sector of specialty pharmaceutical companies, taking into account the interests of shareholders. The Committee meets regularly and acts within agreed terms of reference. In developing remuneration policy and fixing remuneration, consideration is given to salary data of directors of comparable companies of a similar size in the industry generally and, more specifically, in the specialty pharmaceuticals sector. The Chief Executive also advises the Committee on other executive remuneration and on individual performance. External agencies are also used to advise on levels of remuneration as appropriate. No director is involved in determining his own remuneration. The Committee regularly reviews the procedures and criteria for determining remuneration policy.
Annual bonuses The annual bonuses payable to executive directors are established on the basis of objectives for the Group and personal objectives. They include measurable and quantitative criteria related to financial performance. For the year ended 31 December 2001 these included revenue and earnings targets. The maximum annual bonus for each executive director for the year ended 31 December 2001 was 55% of salary in respect of Mr Rolf Stahel and 50% in respect of Mr Angus Russell and Dr Wilson Totten.
Share options Details of the share option schemes are set out below and in note 26 to the consolidated financial statements. Except as mentioned below, none of the executive directors who served during the year were granted additional options under any of the Company’s share option schemes in the year ended 31 December 2001. Share options under the Sharesave Scheme (see note 26 on pages 65 to 67) are offered at a discount as permitted by paragraph 13.31 of the Listing Rules. Share options are not otherwise offered at a discount. The following share options were granted to executive directors during the year:
Number of Exercise price Executive director Share option scheme Date of grant ordinary shares £ Mr Rolf Stahel 2000 Executive Scheme B 05.06.01 126,492 12.57 Sharesave Scheme 01.12.01 1,151 8.41 Dr Wilson Totten 2000 Executive Scheme B 05.06.01 73,986 12.57 Mr Angus Russell 2000 Executive Scheme B 05.06.01 69,213 12.57
Share options are granted to executive directors and senior executives as an incentive. The grant of options is wholly discretionary. In granting share options, the Committee takes into account the advice and recommendations of the Chief Executive and individual salary levels and positions within the Group. On 4 March 2002 the executive directors were granted share options under the 2000 Executive Scheme at a price of £5.065 per share. Mr Rolf Stahel, Mr Angus Russell and Dr Wilson Totten were granted 209,211, 114,474 and 122,368 options respectively.
Retirement benefits The Company contributes 10% of salary to the personal pension plans of the executive directors.
Fees for non-executive directors The Board determines the remuneration of each of the non-executive directors. Except as detailed on page 35, non-executive directors do not participate in any of the Company share schemes or other employee benefit schemes. Certain non-executive directors hold share options relating to their service with companies that have been acquired or merged with Shire whose policy was to grant share options. No options have been granted to non-executive directors in their capacity as non-executive directors of Shire.
Shire Pharmaceuticals Group plc 31 The remuneration report
Long Term Incentive Plan i) Structure The Long Term Incentive Plan (“the Plan”) was adopted at the Company’s Annual General Meeting on 30 June 1998. Under the Plan, the Company may at any time, with the approval of the Committee, grant, or request that trustees grant an award to any full-time employee of any member of the Group. ii) Eligibility An award may be made to any full-time employee (including a director who is also such an employee) of a member of the Group on the terms set out in the Plan and upon such other terms as the Board (or a committee appointed by the Board) may specify, provided that no award may be granted to an employee who is within two years of his or her contractual retirement age. Directors were granted an award under the Plan (as a “conditional allocation”, as defined in the Plan) in respect of the total number of ordinary shares in the Company, upon the terms set out in the Plan, as follows:
Value of Total Earliest date award at number of on which an Date of grant date ordinary award can award £000 shares be made Mr Rolf Stahel 05.06.01 246 21,081 06.06.05 Dr Wilson Totten 05.06.01 144 12,330 06.06.05 Mr Angus Russell 05.06.01 134 11,535 06.06.05
Service contracts No director has a notice period of more than 12 months. Non-executive directors have been appointed for a fixed two-year term which will not continue automatically. This applies in the current year to Dr James Cavanaugh, Dr Barry Price and Mr Ronald Nordmann who have all offered themselves for re-election.
Related party transactions a) Mr Spitznagel, a former director of the Company who resigned during the year, entered into a consultancy agreement with the Company in December 1999, which provided that; i) if he had good reason, as defined in his service agreement with Roberts Pharmaceutical Corporation (Roberts), to terminate his employment with Roberts under his service agreement, the Company would cause Roberts to provide him with the payments and benefits he would be entitled to upon a “good reason” termination; ii) Mr Spitznagel would provide consulting services to the Company for at least 42 months following the acquisition of Roberts, unless Mr Spitznagel terminated the consultancy agreement prior to the end of the 42nd month upon 30 days’ notice; and iii) the Company would pay Mr Spitznagel at a rate of $400,000 per annum for his consulting services, $150,000 per annum as an office holder, $250,000 per annum to comply with certain restrictive covenants contained therein and $150,000 per annum for tax, financial and estate planning advice, life insurance and health insurance. b) Prior to the acquisition of BioChem, Dr Bellini entered into an agreement with BioChem whereby BioChem granted to Dr Bellini an option to purchase from BioChem its interest in a company that owned land and buildings located on Province Island, Quebec for the fair market value of CAN$225,000. Dr Bellini exercised his option and the transaction was completed in accordance with the terms of the option agreement on 29 November 2001. c) The Group incurred professional fees with a Canadian law firm in which The Hon James Andrews Grant is a partner, totalling $59,000 for the year ended 31 December 2001. d) BioChem Immunosystems Inc. (Immunosystems), formerly a wholly owned subsidiary of BioChem Pharma Inc. (BioChem) was sold in February 2000 to a third party. Dr Bellini, the former Chief Executive officer of BioChem, continued as a director of Immunosystems. In December 2001, Shire acquired a 19.9% equity interest in Immunosystems in consideration for the release of a debt owing to Shire from Immunosystems. This debt existed prior to the BioChem acquisition. As part of the same transaction, Shire was released from a pre-existing BioChem guarantee over other Immunosystems’ liabilities.
32 Shire Pharmaceuticals Group plc Directors’ emoluments Total Gains on Total Gains on remuneration exercise remuneration exercise Compensation Year to of share Year to of share for loss of 31 December options 31 December options Salary office Bonus Fees Benefits Pension 2001 2001 2000 2000 Executive directors $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Mr Rolf Stahel 693 – 323 – 27 69 1,112 120 971 – Mr Angus Russell 377 – 162 – 26 37 602 – 471 – Dr Wilson Totten 414 – 158 – 30 42 644 – 472 – 1,484 – 643 – 83 148 2,358 120 1,914 –
Non-executive directors Dr James Cavanaugh – – – 60 – – 60 – 54 – Dr Barry Price – – – 45 – – 45 – 30 – Dr Francesco Bellini 65 3,966 – 253 53 – 4,337 30,869 –– Dr Bernard Canavan – – – 86 – – 86 – 30 – The Hon James Andrews Grant – – – 27 – – 27 595 –– Dr Zola Horovitz – – – 10 – – 10 – 31 486 Mr Ronald Nordmann – – – 42 – – 42 – 31 621 Mr Joseph Smith – – – 10 – – 10 – 31 – Mr John Spitznagel – – – 10 – – 10 – 31 15,583 Mr Gérard Veilleux – – – 30 – – 30 104 –– 65 3,966 – 573 53 – 4,657 31,568 238 16,690 Total 1,549 3,966 643 573 136 148 7,015 31,688 2,152 16,690
Details of exercise of share options are set out in the notes below and on pages 34 and 35. Non-executive directors’ remuneration is to/from the date of resignation/appointment.
Directors’ shareholdings* Directors who held office at the end of the year had interests in the share capital of the Company as follows: Number of ordinary shares of 5 pence each 31 December 31 December** Notes 2001 2000 Dr James Cavanaugh (i) 8,806,368 8,806,368 Mr Rolf Stahel (ii) 23,684 13,827 Mr Angus Russell – – Dr Wilson Totten (iii) – – Dr Barry Price 31,350 31,350 Dr Francesco Bellini (iv) 6,486,708 – Dr Bernard Canavan (v) 28,032 3,000 The Hon James Andrews Grant (vi) 4,551 – Mr Ronald Nordmann 46,968 46,968 Mr Gérard Veilleux (vii) – –
* All interests are beneficial unless otherwise stated. ** Or date of appointment if later. Notes i) Dr Cavanaugh is the President of HealthCare Ventures LLC, which is the management company for a number of limited partnerships which have interests in 8,690,090 ordinary shares. Dr Cavanaugh is also the beneficial owner of 116,278 ordinary shares. ii) On 4 September 2001 Mr Stahel exercised an option under the Shire Pharmaceuticals Sharesave Scheme to acquire 9,857 shares at the option price of £1.75 per share. On 4 March 2002 Mr Stahel purchased 19,000 ordinary shares at a price of £5.195 per share. As a result of this transaction Mr Stahel has an interest in 42,684 ordinary shares. iii) On 6 March 2002 Dr Totten purchased 6,061 ordinary shares at a price of £4.90 per share. iv) Dr Bellini on 14 September 2001 part exercised an option granted to him under the BioChem Stock Option Plan and acquired 1,500,000 shares at the option price of £2.23 per share. These shares were immediately sold at £9.93 per share. On 3 December 2001 Dr Bellini exercised a further 1,000,000 shares granted under the BioChem Stock Option Plan at the option price of £2.23 per share and these shares were sold on the same day at a price of £8.32 per share. The balance of this option being 913,550 shares was exercised on 4 December 2001 of which 613,550 shares were immediately sold at a price of £8.4183 per share. On 31 December 2001 Dr Bellini donated 300,000 shares from his beneficial holding in the Company to the Royal Institution for the Advancement of Learning at McGill University, Montreal, Canada. On 1 March 2002 Dr Bellini purchased 100,000 ordinary shares at a price of £5.29 per share. As a result of this transaction Dr Bellini has an interest in 6,586,708 ordinary shares. v) On 11 May 2001 Dr Canavan acquired 25,032 ordinary shares in the Company by virtue of his shareholding in BioChem Pharma, Inc. pursuant to the terms of the merger with BioChem Pharma, Inc. vi) On 14 September 2001 The Hon James Andrews Grant exercised an option granted to him under the BioChem Stock Option Plan for 47,334 shares at the option price of £1.63 per share. All these shares were sold on the same day at a price of £10.36 per share. vii) On 13 November 2001 Mr Veilleux exercised options for 1,137 shares, 7,964 shares and 13,891 shares with option prices of £6.58, £6.58 and £6.60 per share respectively, these shares having been granted under the BioChem Stock Option Plan. All these shares were immediately sold at a price of £9.72 per share.
Shire Pharmaceuticals Group plc 33 The remuneration report
Directors’ share options Directors and employees have been granted options over ordinary shares under the Shire Pharmaceuticals Group plc 2000 Executive Share Option Scheme (Parts A and B) (“2000 Executive Scheme”), the Shire Holdings Limited Share Option Scheme (“SHL Scheme”), the Pharmavene 1991 Stock Option Plan (“SLI Plan”), the Shire Pharmaceuticals Executive Share Option Scheme (Parts A and B) (“Executive Scheme”), the Shire Pharmaceuticals Sharesave Scheme (“Sharesave Scheme”), the Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (“Stock Purchase Plan”), the Richwood 1993 and 1995 Stock Option Plans (“SRI Plan”), the Roberts Stock Option Plan (“Roberts Plan”) and the BioChem Stock Option Plan (“BioChem Plan”).
Number of ordinary shares Exercise dates
At 1 January At 2001/on 31 December Exercise Director Scheme Notes appointment Granted Exercised Lapsed 2001 price Earliest Latest Mr Rolf Stahel SHL (i) 89,840–––89,840 £1.00 24.11.96 23.11.02 89,840–––89,840 £1.00 24.11.97 23.11.02 89,840–––89,840 £1.00 24.11.98 23.11.02 90,160–––90,160 £1.00 24.01.97 23.01.03 90,160–––90,160 £1.00 24.01.98 23.01.03 90,160–––90,160 £1.00 24.01.99 23.01.03
Executive Scheme A (ii) 13,761–––13,761 £2.18 15.02.99 14.02.06
Executive Scheme B (ii) 329,095–––329,095 £1.75 15.02.99 14.02.03 81,918–––81,918 £3.385 09.02.01 08.02.05 54,189–––54,189 £10.275 01.03.03 28.02.07
2000 Executive Scheme B (vii) 34,241–––34,241 £12.80 03.08.03 02.08.10 126,492 – – 126,492 £12.57 05.06.04 04.06.11
Sharesave (iii) 9,857 – (9,857) – – £1.75 01.04.01 30.09.01 1,151 – – 1,151 £8.41 01.12.04 31.05.05 1,063,061 127,643 (9,857) – 1,180,847 Dr Wilson Totten Executive Scheme A (ii) 8,862–––8,862 £3.385 09.02.01 08.02.08
Executive Scheme B (ii) 141,138–––141,138 £3.385 09.02.01 08.02.05 25,000–––25,000 £4.705 12.05.02 11.05.06 16,995–––16,995 £10.275 01.03.03 28.02.07
2000 Executive Scheme B (vii) 63,242–––63,242 £12.80 03.08.03 02.08.10
73,986 – – 73,986 £12.57 05.06.04 04.06.11 Sharesave (iii) 1,139–––1,139 £8.56 01.06.03 30.11.03 256,376 73,986 – – 330,362 Mr Angus Russell Executive Scheme A (ii) 4,181–––4,181 £7.175 13.12.02 12.12.09 Executive Scheme B (ii) 45,819–––45,819 £7.175 13.12.02 12.12.06 6,422–––6,422 £10.275 01.03.03 28.02.07 2000 Executive Scheme B (vii) 69,213 – – 69,213 £12.57 05.06.04 04.06.11
Sharesave (iii) 1,971–––1,971 £8.56 01.06.05 30.11.05 58,393 69,213 – – 127,606
34 Shire Pharmaceuticals Group plc Directors’ share options continued Number of ordinary shares Exercise dates At 1 January At 2001/on 31 December Exercise Director Scheme Notes appointment Granted Exercised Lapsed 2001 price Earliest Latest Dr Francesco Bellini BioChem (viii) 3,413,550 – (3,413,550) – – £2.23 14.05.01 16.12.01 3,413,550 – – – 3,413,550 £7.12 14.05.01 28.01.07 6,827,100 – (3,413,550) – 3,413,550 The Hon James Andrews Grant BioChem (viii) 47,334 – (47,334) – – £1.63 14.05.01 17.09.01 31,859 – – – 31,859 £2.08 14.05.01 18.06.02 31,859 – – – 31,859 £1.25 14.05.01 16.06.03 31,859 – – – 31,859 £1.24 14.05.01 26.06.04 31,859 – – – 31,859 £2.50 14.05.01 06.06.05 31,859 – – – 31,859 £6.26 14.05.01 04.06.06 2,275 – – – 2,275 £6.20 14.05.01 05.05.07 2,275 – – – 2,275 £6.94 14.05.01 20.04.08 7,964 – – – 7,964 £5.70 14.05.01 10.06.09 12,516 – – – 12,516 £6.58 14.05.01 22.05.10 1,137 – – – 1,137 £6.58 14.05.01 23.05.10 232,796 – (47,334) – 185,462 Mr Gérard Veilleux BioChem (viii) 23,894 – (13,891) – 10,003 £6.60 14.05.01 18.07.09 7,964 – (7,964) – – £6.58 14.05.01 22.05.10 1,137 – (1,137) – – £6.58 14.05.01 23.05.10 32,995 – (22,992) – 10,003
The middle market price of the Company’s ordinary shares was £8.60 as at 31 December 2001. The high and low mid-market prices during the year to 31 December 2001 were £13.39 and £8.15 respectively. Except as disclosed above, no director who served during the year under review has been granted or has exercised any options during the period between 1 January 2002 and 12 April 2002. Inclusive of those options granted to executive directors disclosed above, employees and former employees of the Group have been granted options over the following ordinary shares:
Options outstanding by scheme at 31 December 2001 Exercise dates Number of ordinary Exercise Total by Scheme Notes shares price Earliest Latest scheme SHL (i) 285,140 £1.00 24.11.98 23.11.02 271,420 £1.00 24.01.99 23.01.03 556,560 Executive Scheme A (ii) 23,761 £2.180 15.02.99 14.02.06 12,000 £1.900 30.09.99 29.09.06 7,620 £2.690 26.08.00 25.08.07 86,429 £3.385 09.02.01 08.02.08 8,275 £3.625 13.08.01 12.08.08 25,194 £4.170 11.12.01 10.12.08 17,765 £4.735 15.03.02 14.03.09 10,618 £5.650 26.07.02 25.07.09 5,623 £5.335 23.08.02 22.08.09 4,181 £7.175 13.12.02 12.12.09 113,869 £10.275 01.03.03 28.02.10 21,426 £10.275 27.04.03 26.04.10 12,007 £10.275 06.06.03 05.06.10 9,612 £12.480 03.08.03 02.08.10 7,239 £12.430 19.09.03 18.09.10 1,500 £12.690 27.11.03 26.11.10 367,119
Shire Pharmaceuticals Group plc 35 The remuneration report
Options outstanding by scheme at 31 December 2001 continued Exercise dates Number of ordinary Exercise Total by Scheme Notes shares price Earliest Latest scheme Executive Scheme B (ii) 329,095 £1.750 15.02.99 14.02.03 10,000 £1.900 30.09.99 29.09.03 127,000 £2.185 25.03.00 24.03.04 320,475 £2.690 26.08.00 25.08.04 581,429 £3.385 09.02.01 08.02.05 496,725 £3.625 13.08.01 12.08.05 17,806 £4.170 11.12.01 10.12.05 37,500 £4.260 12.01.02 11.01.06 2,000 £4.200 10.03.02 09.03.06 873,235 £4.735 15.03.02 14.03.06 182,500 £4.705 12.05.02 11.05.06 19,382 £5.650 26.07.02 25.07.06 14,377 £5.335 23.08.02 22.08.06 45,819 £7.175 13.12.02 12.12.06 1,136,460 £10.275 01.03.03 28.02.07 35,000 £10.275 25.04.03 24.04.07 195,905 £10.275 27.04.03 26.04.07 64,662 £10.275 06.06.03 05.06.07 95,888 £12.480 03.08.03 02.08.07 34,261 £12.430 19.09.03 18.09.07 8,000 £12.690 27.11.03 26.11.07 4,627,519 2000 Executive Scheme A (vii) 2,417 £12.410 19.09.03 18.09.10 172,619 £12.570 05.06.04 04.06.11 25,674 £9.940 08.11.04 07.11.11 200,710 2000 Executive Scheme B (vii) 320,248 £12.800 03.08.03 02.08.10 157,583 £12.410 19.09.03 18.09.10 4,000 £13.200 27.11.03 26.11.10 2,605,999 £12.570 05.06.04 04.06.11 368,749 £9.940 08.11.04 07.11.11 3,456,579 Roberts (vi) 1,564 $3.277 – 02.12.03 75,338 $3.280 – 02.12.03 31,280 $3.380 – 12.01.04 56,299 $3.680 – 15.12.02 938 $4.240 – 21.01.03 309,901 $5.240 – 31.08.04 11,730 $5.600 – 09.06.04 62,560 $6.000 – 20.01.05 187,680 $6.020 – 26.05.05 1,564 $6.754 – 10.12.04 43,920 $6.760 – 10.12.04 8,140 $7.000 – 23.03.05 790,914 SRI (v) 148,899 $1.2345 – 12.03.02 209,316 $1.64 – 12.03.02 358,215 SLI (iv) 2,265 $1.2955 – 10.04.04 6,806 $1.2955 – 21.05.05 167 $1.2969 – 22.01.06 9,972 $1.2955 – 05.03.06 872 $1.2955 – 07.08.06 2,508 $1.7270 – 06.11.06 20,319 $1.7274 – 10.12.06 42,909
36 Shire Pharmaceuticals Group plc Options outstanding by scheme at 31 December 2001 continued Exercise dates Number of ordinary Exercise Total by Scheme Notes shares price Earliest Latest scheme Sharesave (iii) 17,473 £1.54 01.12.01 31.05.02 14,739 £2.20 01.11.02 30.04.03 37,634 £8.56 01.06.03 30.11.03 26,289 £8.56 01.06.05 30.11.05 37,845 £8.41 01.12.04 31.05.05 44,043 £8.41 01.12.06 31.05.07 178,023 BioChem (viii) 31,859 £2.08 – 18.06.02 31,859 £1.25 – 16.06.03 31,859 £1.24 – 26.06.04 9,104 £1.39 – 29.09.04 67,816 £1.79 – 17.01.05 31,859 £2.50 – 06.06.05 73,729 £6.00 – 01.02.06 157,023 £6.26 – 04.06.06 3,186 £5.56 – 15.06.06 81,014 £7.11 – 15.06.06 18,204 £5.01 – 12.09.06 3,478,858 £7.12 – 28.01.07 22,757 £7.75 – 28.02.07 2,275 £6.20 – 05.05.07 77,374 £7.20 – 01.09.07 89,651 £6.11 – 19.01.08 383,743 £6.94 – 20.04.08 203,658 £8.08 – 27.01.09 25,032 £7.40 – 28.02.09 4,097 £6.30 – 12.05.09 7,964 £5.70 – 10.06.09 10,003 £6.60 – 18.07.09 383,918 £9.05 – 25.01.10 13,653 £6.58 – 23.05.10 1,775 £7.48 – 25.07.10 5,242,270 Stock Purchase Plan (ix) 120,819 £9.10 01.06.02 01.06.02 6,551 £9.74 01.08.02 01.08.02 301,656 £8.06 01.02.04 01.02.04 429,026 16,249,844
Notes i) These options have been granted over shares in Shire Holdings Limited, a previous holding company of the Group. Exercise of these options results in the optionholder receiving ordinary shares in the Company. ii) Options granted under the Executive Scheme are subject to performance criteria and cannot be exercised in full, unless the Company’s share price increases at a compound rate of at least 20.5% per annum over a minimum three-year measurement period. If the Company’s share price increases at a compound rate of 14.5% per annum over a minimum three-year measurement period, 60% of the options may be exercised. If these conditions are not met after the initial three years, they are thereafter tested quarterly by reference to share price growth over the extended period. If the share price does not meet these conditions at any time, none of the options will become exercisable. iii) Options granted under the Sharesave Scheme are granted with an exercise price equal to 80% of the mid-market price on the day before invitations are issued to employees. Following changes in the Inland Revenue rules governing such schemes, employees may now enter into three or five-year savings contracts. iv) These options have been granted over shares in SLI, formerly Pharmavene Inc., a company acquired by the Group on 23 March 1997. Exercise of these options results in the optionholder receiving ordinary shares in the Company. As a result of the acquisition of SLI, and in accordance with the terms of the original share option plan, all options granted under that plan became immediately capable of exercise. v) These options have been granted over shares in SRI, formerly Richwood Pharmaceutical Company, Inc., a company acquired by the Group on 22 August 1997. Exercise of these options results in the optionholder receiving ordinary shares in the Company. As a result of the acquisition of SRI, and in accordance with the terms of the original share option plan, all options granted under that plan became immediately capable of exercise. vi) These options have been granted over shares in Roberts Pharmaceutical Corporation, a company acquired by the Group on 23 December 1999. Exercise of these options results in the optionholder receiving ordinary shares in the Company. As a result of the acquisition of Roberts, and in accordance with the terms of the original Roberts share option plan, all options granted under that plan became immediately capable of performance. vii) Options granted under the 2000 Executive Scheme are subject to criteria and cannot be exercised in full, unless the Company’s share price increases at a compound rate of at least 20.5% per annum over a minimum three-year period. If the Company’s share price increases at a compound rate of at least 14.5% per annum over a minimum three-year measurement period, 60% of the options will be exercisable. If these conditions are not met after the initial three-year measurement period, they will thereafter be tested quarterly by reference to compound annual share price growth over an extended period. If the share price does not meet these conditions at any time, none of these options will become exercisable. At the Annual General Meeting of the Company held on 5 June 2001, a resolution was passed to permit the grant of options under the 2000 Executive Scheme to be made subject to performance criteria determined prior to the date of grant. Subsequent to the passing of this resolution options have been granted based on a performance criteria being satisfied before grant namely that the Company’s share price had increased by an annualised compound rate of 20.5% over a minimum three-year period. viii) Following the merger with BioChem Pharma Inc. on 11 May 2001, the BioChem Stock Option Plan was amended such that options over BioChem’s common stock became options over ordinary shares of the Company. All BioChem options, which were not already exercisable, vested and became exercisable as a result of the merger. It is intended that no further options will be granted under the BioChem Stock Option Plan. ix) Under the Stock Purchase Plan options are granted with an exercise price equal to 85% of the fair market value of a share on the enrolment date (the first day of the offering period) or the exercise date (the last day of the offering period), whichever is lower. The offering period is for 27 months.
Shire Pharmaceuticals Group plc 37 Corporate governance statements
The Company is committed to high standards of corporate governance The Combined Code on Corporate Governance appended to the Listing Rules of the Financial Services Authority requires companies listed on the London Stock Exchange to make a disclosure statement on its application of the principles of and compliance with the provisions of good governance set out in the Combined Code. Throughout the period under review the Company has been committed to high standards of corporate governance, has always sought to comply fully with the provisions of the Combined Code and has, in the directors’ opinion, done so.
The Board The Board meets at least four times a year and comprises three executive and seven non-executive directors and the meetings are well attended. The Board seeks to provide effective leadership and control required for a listed company and in so doing has formally reserved specific matters to itself for determination. Specific powers and authorities are also delegated to an Executive Committee and to various other Board committees set out below. Four of the non-executive directors (Dr Barry Price, Dr Bernard Canavan, Mr Ronald Nordmann and Mr Gérard Veilleux) are viewed as independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. Whilst the Company views Dr James Cavanaugh, Dr Francesco Bellini and the Hon James Andrews Grant as independent non- executive directors, the Company does accept that on a strict interpretation of the Combined Code the interests that Dr Cavanaugh has as President of HealthCare Ventures LLC and the position The Hon James Andrews Grant has as a partner of Stikeman Elliot, a law firm retained by BioChem Pharma Inc. prior to the merger, prevents the strict application of independence. The same is also relevant to Dr Francesco Bellini by virtue of the executive directorship that Dr Bellini held with BioChem Pharma Inc. All directors have access to the advice and guidance of the Company Secretary and are encouraged to seek independent advice at the Company’s expense, where they feel it is appropriate. No such independent advice has as yet been sought. The Board is confident that all its members have the knowledge, aptitude and experience to perform the functions required of a director of a listed company. Biographical details of the Board are shown on pages 28 to 29.
Chairman and Chief Executive The offices of Chairman and Chief Executive are held separately. The non-executive Chairman, Dr James Cavanaugh, is responsible for the conduct of the Board and ensures that Board discussions are conducted in such a way that all views are taken into account, so that no individual director or small group of directors dominates proceedings. The Chief Executive, Mr Rolf Stahel, is responsible for running the business and chairs the Executive Committee.
Senior and non-executive director Dr Barry Price is the nominated senior independent non-executive director.
Supply of information The executive directors and the Company Secretary are responsible for ensuring that detailed information is provided to the Board at least one week before any scheduled meeting of the Board. Before decisions are made, consideration is given to the adequacy of information available to the Board and, if necessary, decisions are deferred if further information is required.
Re-appointment Non-executive directors are appointed for a maximum period of two years. Re-appointment of non-executive directors following the expiry of such two-year period is subject to Board approval.
Committees of the Board The standing Board committees are the Audit Committee, the Remuneration Committee, the Nomination Committee and the Executive Committee. Each committee has its own written terms of reference that have been approved by the Board. Details of each committee are as follows: i) The Audit Committee is chaired by Dr Bernard Canavan and usually meets on four occasions in the year. Other members of the Committee are Dr James Cavanaugh, Dr Barry Price and Mr Ronald Nordmann. Under its terms of reference the Committee is required, among other things, to review the scope and extent of the internal operational audit programme, to monitor the relationship with external auditors, to review the Company’s statutory accounts and other financial statements and information, to monitor compliance with statutory and listing requirements for any exchange on which the Company’s shares are quoted, to review the business risks faced by the Company and to initiate special projects or investigation as it sees fit. ii) The Remuneration Committee, under the chairmanship of Dr Barry Price, usually meets three times a year. Dr James Cavanaugh, Dr Bernard Canavan and Mr Gérard Veilleux are the other members of this Committee. The remuneration of non-executive directors is determined by the Chief Executive together with the executive directors. The remuneration report appears on pages 31 to 37 and provides further information on this committee. iii) The Nomination Committee has been delegated with responsibility for nominations to the Board. This Committee meets as required and is chaired by Dr James Cavanaugh. Mr Rolf Stahel and Mr Ronald Nordman also serve on this Committee. The Committee provides a formal and transparent procedure for the appointment of new directors to the Board. iv) The Executive Committee has had the day-to-day management of the Company delegated to it by the Board and operates within clear and formal parameters. Mr Rolf Stahel is the Chairman of the Committee, which consists of nine senior executives including the three executive directors. The Executive Committee reports to, and seeks guidance from, the Board on a regular basis.
38 Shire Pharmaceuticals Group plc Directors’ remuneration The Company’s remuneration policy appears on page 31. The policy details the level of remuneration for directors and the basis upon which executive remuneration is fixed.
Relations with shareholders The Company is committed to maintaining good relations with shareholders through the provision of regular interim and annual reports and other trading statements. The Company also arranges individual and group meetings with its institutional shareholders in order to discuss relevant communications to ensure that the investing community receives a balanced and complete view of the Company’s performance and issues faced by the business. The Company holds its Annual General Meeting in London and all shareholders are given the opportunity to ask questions of the Board. The Company’s website at www.shire.com provides Company information and is regularly updated.
Balanced and understandable assessment of positions and prospects The Company strives to give full, timely and realistic assessments of matters that impact on its business and financial position and to present scientific and other price-sensitive data in a balanced way. The Company voluntarily adopted quarterly financial reporting, which is not obligatory in the UK, and before it was required under SEC rules.
Financial reporting The Board has ultimate responsibility for the preparation of accounts and for the monitoring of systems of internal financial control. The Board strives to present a balanced and understandable assessment of the Company’s position and its prospects and endeavours to present scientific and other price-sensitive information in a balanced way. The Company publishes quarterly financial reports so that its shareholders can monitor the Company’s financial position regularly. On behalf of the Board, the Audit Committee examines the effectiveness of systems of internal financial control on a regular basis. This includes considering independent access to the Auditors throughout the year in addition to presentations from the Auditors on a quarterly basis. Any significant findings or identified risks are closely examined and are reported to the Board with recommendations for action.
Internal control In applying the principle that the Board should maintain a sound system of internal control to safeguard shareholders’ investment and the Company’s assets, the directors recognise that they have overall responsibility for the Company’s system of internal control and for reviewing its effectiveness. The directors believe that the Company has applied this principle during the year under review. However, there are limitations in any system of internal control and accordingly even the most effective system can provide only reasonable and not absolute assurance. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Company has an ongoing process for identifying, evaluating and managing the significant risks that it faces. This process has been in operation throughout the period under review. In particular, the Executive Committee, the Audit Committee and the Board have reviewed the schedule of risks faced by the Company. This includes analysis of the impact of the operation of key risks and the action being taken to avoid or reduce each risk. In particular, the schedule of risks allocates responsibility for management of each key risk to senior executives. These reviews, together with regular reports on financial performance, represent the main elements in establishing the effectiveness of the system of internal control. In addition, the Company has a system of control procedures and compliance with these procedures is monitored through a system of internal review. Any significant issues arising are reported to the Board for review. During the year, the Audit Committee has considered how it can obtain assurance that risks continue to be managed effectively following the increase in the extent of operations worldwide. In November, proposals were agreed by the Audit Committee for the establishment of an outsourced risk assurance and internal audit function. This service will not be provided by the Auditors, Arthur Andersen, and will commence in 2002.
Audit Committee and auditors The Board has, through the Audit Committee, established formal and transparent arrangements for financial reporting, internal control and external auditing. All employees can raise any concerns in these areas with the Chairman of the Audit Committee in the strictest confidence. The Audit Committee’s terms of reference have been extended to cover the Group’s risk management activities as a whole and not just the financial aspects of internal control. The Audit Committee reviews the scope and results of the audit and non-audit services, the cost effectiveness and the independence and objectivity of the auditors.
Shire in the community The Company recognises that business activities have an influence on the community and accepts that it has a duty to carry these out in a responsible manner. The continual ongoing development and implementation of the Company’s environmental policy reflects the key activities of the Company at each of its office sites, production sites and suppliers’ sites. This has enabled the Company to measure its performance now and in the future. The Company’s commitment to the community has already led to the Company’s inclusion in the FTSE4Good index.
Shire Pharmaceuticals Group plc 39 Statement of directors’ responsibilities
Accounts and adoption of going concern basis Company law requires the directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss of the Group for that period. After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence in the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. In preparing the accounts, the directors are required to select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts.
Other matters The directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and Group and which enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and Group and for preventing and detecting fraud and other irregularities. The directors, having prepared the accounts, are required to provide to the auditors such information and explanation as the auditors think necessary for the performance of their duty.
Report of Independent Public Auditors To the shareholders of Shire Pharmaceuticals Group plc
We have audited the accompanying consolidated balance sheets of Shire Pharmaceuticals Group plc and its subsidiaries as of 31 December 2001 and 2000, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the years ended 31 December 2001, 2000 and 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements for the years ended 31 December 2000 and 1999 of BioChem Pharma Inc., a company acquired in 2001 in a transaction accounted for as a pooling of interests. Such statements are included in the consolidated financial statements of Shire Pharmaceuticals Group plc and reflect total assets of 35% and 34%, and total revenues of 23% and 25% respectively, of the related consolidated totals for the years ended 31 December 2000 and 1999, after restatement to reflect certain adjustments as set forth in note 3. The financial statements prior to those adjustments were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for BioChem Pharma Inc., for the years ended 31 December 2000 and 1999, is based solely upon the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Shire Pharmaceuticals Group plc and subsidiaries as of 31 December 2001 and 2000, and the results of their operations and their cash flows for the years ended 31 December 2001, 2000 and 1999 in conformity with accounting principles generally accepted in the United States.
Arthur Andersen Reading, England
27 February 2002
40 Shire Pharmaceuticals Group plc Consolidated balance sheets
31 December 31 December 2001 2000 $000 $000 Assets Current assets: Cash and cash equivalents 118,040 93,266 Marketable securities and other current asset investments 723,911 370,425 Accounts receivable, net 193,913 144,175 Inventories, net 46,690 49,612 Deferred tax asset 19,430 26,990 Prepaid expenses and other current assets 38,571 11,385 Total current assets 1,140,555 695,853 Investments 68,743 74,314 Property, plant and equipment, net 113,347 131,224 Intangible assets, net 549,044 578,436 Net assets of business transferred under contractual arrangements – 35,850 Deferred tax asset 12,874 6,543 Other non current assets 26,168 26,275 Total assets 1,910,731 1,548,495
Liabilities and shareholders’ equity Current liabilities: Current instalments of long-term debt 4,325 81,811 Accounts payable and accrued expenses 167,152 113,446 Unearned income 17,409 – Other current liabilities 42,730 32,593 Total current liabilities 231,616 227,850 Long-term debt, excluding current instalments 402,481 132,063 Other non-current liabilities 13,645 14,196 Total liabilities 647,742 374,109
Shareholders’ equity: Common stock, 5 pence par value; 800,000,000 shares authorised; and 481,817,487 (2000: 488,015,304) shares issued and outstanding respectively 39,861 40,292 Exchangeable shares: 5,978,902 (2000: nil) shares issued and outstanding respectively 277,386 – Additional paid-in capital 1,014,796 1,209,448 Accumulated other comprehensive losses (93,009) (60,550) Accumulated surplus/(deficit) 23,955 (14,804) Total shareholders’ equity 1,262,989 1,174,386 Total liabilities and shareholders’ equity 1,910,731 1,548,495
The balance sheet as at 31 December 2000 has been restated to include BioChem Pharma Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB Opinion No. 16, “Accounting for Business Combinations”. The accompanying notes are an integral part of these consolidated financial statements.
Shire Pharmaceuticals Group plc 41 Consolidated statements of operations
Year to Year to Year to 31 December 31 December 31 December 2001 2000 1999 $000 $000 $000 Revenues: Product sales 723,964 520,231 400,959 Licensing and development 5,498 14,147 14,585 Royalties 145,155 135,470 119,714 Other revenues 2,952 1,262 1,995 Total revenues 877,569 671,110 537,253
Costs and expenses: Cost of revenues 118,285 101,371 103,047 Research and development 171,029 155,145 141,112 Selling, general and administrative (inclusive of stock option compensation charge of $2,278, $21,914 and $11,933 for 2001, 2000 and 1999 respectively) 311,103 236,289 194,513 Other charges: In-process research and development – 26,947 – Asset impairments and restructuring charge 85,447 – 97,132 Merger transaction expenses 83,470 – 32,279 Loss on disposition of assets 10,164 – 5,824 Total operating expenses 779,498 519,752 573,907 Operating income/(loss) 98,071 151,358 (36,654) Interest income 19,667 19,232 15,957 Interest expense (8,315) (16,413) (11,644) Other income, net 4,800 105,214 18,751 Total other income, net 16,152 108,033 23,064 Income/(loss) before income taxes and extraordinary items 114,223 259,391 (13,590) Income taxes (72,860) (47,664) (21,663) Net income/(loss) from continuing operations and before extraordinary items 41,363 211,727 (35,253) Extraordinary item (2,604) –– Discontinued operations (net of tax) – – (12,179) Net income/(loss) 38,759 211,727 (47,432) Net income/(loss) per share: Basic: Continuing operations 8.4c 43.8c (7.3)c Extraordinary items (0.5)c –– Discontinued operations – – (2.5)c Net income 7.9c 43.8c (9.8)c Diluted: Continuing operations 8.2c 42.8c (7.3)c Extraordinary items (0.5)c –– Discontinued operations – – (2.5)c Net income 7.7c 42.8c (9.8)c Weighted average number of shares: Basic 492,594,226 482,890,070 484,358,876 Diluted 504,875,587 494,691,805 484,358,876
The results for the years ended 31 December 2000 and 1999 have been restated to include the results of BioChem Pharma Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB Opinion No. 16, “Accounting for Business Combinations”. The accompanying notes are an integral part of these consolidated financial statements.
42 Shire Pharmaceuticals Group plc Consolidated statements of changes in shareholders’ equity
Common Exchangeable Accumulated Common stock Exchangeable shares Additional other Total stock Number shares Number paid-in Accumulated comprehensive shareholders’ Amount of shares Amount of shares capital deficit losses equity $000 000 $000 000 $000 $000 $000 $000 As at 31 December 1998 32,324 388,542 – – 1,096,341 (39,717) (33,311) 1,055,637 Net loss –––––(47,432)–(47,432) Foreign currency translation ––––––1,048 1,048 Issuance of common stock for acquisitions 8,123 100,767 – – (8,123) – – – Issuance of common stock by pooled entity ––––8,615 – – 8,615 Options exercised 266 3,297 – – 5,983 – – 6,249 Repurchase of common stock (1,472) (18,206) – – (19,146) (139,382) – (160,000) Stock option compensation ––––11,933 – – 11,933 Tax benefit associated with exercise of stock options ––––1,964 – – 1,964 Unrealised holding gain on available- for-sale investments ––––––1,872 1,872 As at 31 December 1999 39,241 474,400 – – 1,097,567 (226,531) (30,391) 879,886 Net income –––––211,727 – 211,727 Reclassification adjustment for realised loss included in net earnings ––––––1,356 1,356 Foreign currency translation ––––––(31,467)(31,467) Issuance of common stock 137 1,843 – – 11,720 – – 11,857 Issue costs ––––(3,385) – – (3,385) Options exercised 914 11,772 – – 50,850 – – 51,764 Stock option compensation ––––21,914 – – 21,914 Tax benefit associated with exercise of stock options ––––30,782 – – 30,782 Unrealised holding loss on non-current investments ––––––(48)(48) As at 31 December 2000 40,292 488,015 – – 1,209,448 (14,804) (60,550) 1,174,386 Net income –––––38,759 – 38,759 Foreign currency translation ––––––(32,507)(32,507) Issue of shares for acquisitions (3,662) (51,876) 802,256 17,292 (798,594) – – – Issuance of common stock for conversion of loan note 22 295 – – 1,522 – – 1,544 Issue costs ––––(18)––(18) Exchange of exchangeable shares 2,414 33,940 (524,870) (11,313) 522,456––– Options exercised 795 11,443 – – 69,397 – – 70,192 Stock option compensation and warrants ––––6,780 – – 6,780 Tax benefit associated with exercise of stock options ––––3,805 – – 3,805 Unrealised holding loss on non-current investments ––––––4848 As at 31 December 2001 39,861 481,817 277,386 5,979 1,014,796 23,955 (93,009) 1,262,989
Each exchangeable share is exchangeable into three ordinary shares. The results for the years ended 31 December 2000 and 1999 have been restated to include the results of BioChem Pharma, Inc. the merger with whom was accounted for as a pooling of interests in accordance with APB Opinion No. 16, “Accounting for Business Combinations”. The accompanying notes are an integral part of these consolidated financial statements.
Shire Pharmaceuticals Group plc 43 Consolidated statements of comprehensive income/(losses)
Year ended Year ended Year ended 31 December 31 December 31 December 2001 2000 1999 $000 $000 $000 Net income/(loss) 38,759 211,727 (47,432) Foreign currency translation adjustments (32,507) (31,467) 1,048 Reclassification adjustments for realised loss included in net earnings – 1,356 – Unrealised holding gain/(loss) on marketable securities and non-current investments 48 (48) 1,872 Comprehensive income/(loss) 6,300 181,568 (44,512)
There are no material tax effects related to the items included above. The results for the years ended 31 December 2000 and 1999 have been restated to include the results of BioChem Pharma Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB Opinion No. 16 “Accounting for Business Combinations”. The accompanying notes are an integral part of these consolidated financial statements.
Consolidated statements of cash flows
Year ended Year ended Year ended 31 December 31 December 31 December 2001 2000 1999 $000 $000 $000 Cash flows from operating activities: Net income/(loss) 38,759 211,727 (47,432) Loss from discontinued operations – – 12,179 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Acquired in-process research and development – 26,947 – Depreciation and amortisation 45,809 37,987 34,172 Stock option compensation 6,780 21,914 11,933 Tax benefit of stock option compensation, credited directly to equity 3,805 30,782 1,967 Decrease in deferred tax asset 1,229 3,782 535 Non-cash exchange gains and losses (979) (1,676) (664) Gain on sale of long-term investments – (98,627) (16,142) Loss/(gain) on sale of property, plant and equipment 8,112 – (828) Loss on sale of intangible assets 2,014 1,514 5,825 Write-down of long-term investments 61,596 – 7,546 Write-down of intangible assets 25,393 –– Share of loss in equity method investees – 3,809 3,670 Other elements – 1,102 1,563 Changes in assets and liabilities, net of acquisitions: (Increase)/decrease in accounts receivable (52,033) (52,570) 1,898 Decrease/(increase) in inventory 2,922 (7,916) (7,165) (Increase)/decrease in prepayments and other current assets (26,109) 1,215 (2,491) Decrease in other assets 823 –– Increase in accounts and notes payable and other liabilities 61,504 37,727 49,868 Increase in unearned income 17,409 –– Reserve for restructuring charges 1,788 (83,608) 83,608 Net cash provided by operating activities 198,822 134,109 140,042
44 Shire Pharmaceuticals Group plc Consolidated statements of cash flows
Year ended Year ended Year ended 31 December 31 December 31 December 2001 2000 1999 $000 $000 $000 Cash flows from investing activities: (Investment in)/redemption of marketable securities and other current asset investments (367,206) (186,019) 43,903 Purchase of subsidiary undertakings – – (32,000) Expenses of acquisition – (1,461) – Additional investment in existing subsidiary – (32,302) – Net cash acquired with subsidiary undertakings – – 1,979 Purchase of long-term investments (22,336) (16,995) (10,960) Purchase of intangible assets (35,986) (38,379) (57,848) Purchase of property, plant and equipment (13,604) (44,243) (26,459) Purchase of other assets – (6,658) (5,077) Proceeds from sale of long-term investments – 123,327 21,407 Proceeds from sale of property, plant and equipment 7,081 12,007 2,118 Proceeds from sale of intangible fixed assets 4,556 – 6,575 Collection on notes receivable – 766 7,195 Other – (1,427) (1,400) Net cash used in investing activities (427,495) (191,384) (50,567) Cash flows from financing activities: Proceeds from issue of long-term debt 400,000 –– Payment of debt issuance costs (9,000) –– Payments on long-term debt, capital leases and notes (207,762) (8,514) (15,449) Proceeds from issue of common stock, net 1,526 14,589 11,342 Repurchase of common stock – – (81,544) Proceeds from exercise of options 70,192 45,647 3,523 Net cash provided by/(used in) financing activities 254,956 51,722 (82,128) Effect of foreign exchange rate changes on cash and cash equivalents (1,509) (1,975) 934 Cash flows used in discontinued operations – (1,708) (6,945) Net increase/(decrease) in cash and cash equivalents 24,774 (9,236) 1,336 Cash and cash equivalents at beginning of period 93,266 102,502 101,166 Cash and cash equivalents at end of period 118,040 93,266 102,502
Supplemental cash flow information: Interest paid 11,122 12,264 11,927 Income taxes paid 65,773 14,095 18,074
Non-cash activities: Notes issued for product acquisitions – – 11,800 Common stock issued for product acquisitions – 3,085 – Common stock issued on conversion of zero-coupon note 1,544 8,772 – Debt assumed on acquisition of subsidiaries – – 3,300
The results for the years ended 31 December 2000 and 1999 have been restated to include the results of BioChem Pharma, Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB Opinion No. 16, “Accounting for Business Combinations”. The accompanying notes are an integral part of these consolidated financial statements.
Shire Pharmaceuticals Group plc 45 Notes to the financial statements
1 Summary of significant accounting policies a) Description of operations and principles of consolidation Shire Pharmaceuticals Group plc (the Company) is an international specialty pharmaceutical company with a strategic focus on three therapeutic areas: central nervous system disorders, oncology and anti-infectives. The Company’s strategy is further supported by two technology platforms, drug delivery and biologics. The Company has sales and marketing subsidiaries with a portfolio of products targeting the US, Canada, UK, Republic of Ireland, France, Germany, Italy and Spain. Shire also covers other significant pharmaceutical markets indirectly through distributors. The business is operated and managed within three individual operating segments: US, International and global research and development. Within these segments, revenues are derived primarily from three sources: sales of products by the Company’s own sales and marketing operations, royalties and licensing and development fees. The Company is referred to as “specialty” because its principal products tend to be prescribed by specialists as opposed to primary care physicians. The Company’s main approach is to start projects in-house through research and advanced drug delivery, or to in-license projects and then to develop and launch them using its sales and marketing capability in eight of the key world markets. The Company seeks to protect the intellectual property upon which it relies through a range of patents and patent applications (both its own and those of its licensors). The Company’s principal products include: in the US, ADDERALL XR and ADDERALL for the treatment of ADHD; AGRYLIN for the treatment of elevated blood platelets; PENTASA for the treatment of ulcerative colitis; CARBATROL for the treatment of epilepsy; and PROAMATINE for the treatment of postural hypotension. In addition, the Company receives royalties on sales of REMINYL for the treatment of Alzheimer’s disease, marketed by Johnson & Johnson, and on EPIVIR, COMBIVIR and TRIZIVIR for the treatment of HIV/AIDS and EPIVIR-HBV™ for the treatment of hepatitis B, each marketed by GSK; in the UK, the CALCICHEW range, used primarily as adjuncts in the treatment of osteoporosis, and REMINYL, which was launched in September 2000 and is co-promoted by Janssen-Cilag; in Canada, 3TC for the treatment of HIV/AIDS, COMBIVIR and HEPTOVIR™ (marketed in partnership with GSK); AMATINE; SECOND LOOK™, a breast cancer diagnostics product for which the Company also received a US FDA approval in January 2002; and FLUVIRAL S/F, a vaccine for the prevention of influenza; and in the rest of the world, the Company receives royalties on the sales of ZEFFIX for the treatment of hepatitis B, marketed by GSK, and will receive royalties on sales of REMINYL from Janssen Pharmaceutica. In addition, the Company has a number of products in late stage development including DIRAME for the treatment of analgesia, FOZNOL for the treatment of high blood phosphate levels associated with kidney failure and TROXATYL for the treatment of leukaemia and pancreatic cancer. The Company submitted the first regulatory submission for FOZNOL under the European Mutual Recognition procedure on 13 March 2001. The accompanying consolidated financial statements include the accounts of Shire Pharmaceuticals Group plc and all its subsidiary undertakings after elimination of intercompany accounts and transactions. b) Use of estimates in financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are primarily made in relation to provisions for product returns, litigation and sales deductions. c) Revenue recognition The Company recognises revenue when: there is persuasive evidence of an arrangement; delivery of products has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company’s principal revenue streams and their respective accounting treatments are discussed below: i) Product sales Revenue for the sales of products is recognised as net revenue upon shipment to customers. Provisions for certain rebates, product returns and discounts to customers are provided for as reductions to net revenue in the same period as the related sales are recorded. Approximately $17.0 million of ADDERALL XR product launch shipments made in Q4 2001 will not be recognised as product revenue until 2002, in accordance with Staff Accounting Bulletin 101, as these sales had not been realised and earned at 31 December 2001. ii) Licensing and development fees Licensing and development fees represent revenues derived from licence agreements and from collaborative research and development arrangements.
46 Shire Pharmaceuticals Group plc 1 Summary of significant accounting policies continued Initial licence fees are not considered to be separable from the associated research and development activities, even where such fees are non-refundable and not creditable against research and development services to be rendered. Initial licence fees are thus deferred and recognised over the period of the licence term or the period of the associated research and development agreement. In circumstances where initial licence fees are not for a defined period, revenues are deferred and recognised over the period to the expiration of the relevant patent to which the licence relates. During the term of certain research and development agreements, the Company receives non-refundable milestones as certain technical targets are achieved. Revenues are recognised on achievement of milestones. The Company also receives non-refundable clinical milestones when certain targets are achieved during the clinical phases of development, such as the submission of clinical data to a regulatory authority. These clinical milestones are recognised when received. If milestone payments are creditable against future royalty payments, the milestones are deferred and released over the period in which the royalties are anticipated to be paid. iii) Royalty income Royalty income relating to licenced technology is recognised when receivable. Where applicable, all revenues are stated net of value added tax and similar taxes, trade discounts and intercompany transactions. No revenue is recognised for consideration, the value or receipt of which is dependent on future events, future performance or refund obligations. d) Research and development Research and development expenditures include funded and unfunded expenditures and are charged to operations in the period in which the expense is incurred. Milestones payable in respect of research and development work are charged to the income statement on achievement of those milestones. e) Leased assets The costs of operating leases are charged to operations on a straight-line basis over the lease term, even if rental payments are not made on such a basis. Assets acquired under capital leases are included in the balance sheet as tangible fixed assets and are depreciated over the shorter of the period of the lease or their useful lives. The capital elements of future lease payments are recorded as liabilities, while the interest elements are charged to the income statement over the period of the leases to produce a level yield on the balance of the capital lease obligation. f) Pensions The Group contributes to personal defined contribution pension plans of employees. Contributions are charged to the income statement as they become payable. These contributions are detailed in note 24. Details of the supplemental Executive Retirement Plan operated by the Group are given in note 24. g) Finance costs of debt Finance costs of debt are recorded as a deferred asset and then amortised to the income statement over the term of the debt using the level yield method. Deferred financing costs relating to debt extinguishments are written off to the income statement in that period. h) Income taxes The Company provides for income taxes in accordance with SFAS No.109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are provided for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts. The deferred tax assets and liabilities are measured using the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Income tax expense is computed as the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realised. i) Advertising expense The Company expenses the cost of advertising as incurred. Advertising costs amounted to $21.8 million, $6.6 million and $6.7 million for the years ended 31 December 2001, 2000 and 1999 respectively. j) Foreign currency Monetary assets and liabilities in foreign currencies are translated into US dollars at the rate of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into US dollars at the rate of exchange ruling at the date of the transaction. Transaction gains and losses are recognised in arriving at operating income. The functional currency of each of the Company’s subsidiaries is the local currency. The results of overseas operations, whose functional currencies are not US dollars, are translated at the average rates of exchange during the period and their balance sheets at the rates ruling at the balance sheet date. The cumulative effect of exchange rate movements is included in a separate component of other comprehensive income.
Shire Pharmaceuticals Group plc 47 Notes to the financial statements
1 Summary of significant accounting policies continued The consolidated financial statements are prepared from records maintained in the country in which the subsidiary is located and are translated into US dollars according to the above policy. Foreign currency exchange transaction gains and losses on an after-tax basis included in consolidated net income in the years ended 31 December 2001, 2000, and 1999, pursuant to SFAS No. 52, “Foreign Currency Translation”, amounted to a $0.5 million loss, $2.1 million gain and $1.3 million gain, respectively. k) Employee stock plans The Company accounts for stock options in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. l) Cash and cash equivalents Cash and cash equivalents include cash in banks and bank short-term investments with original maturities of less than 90 days. m) Marketable securities and other current asset investments Marketable securities classified as available for sale consist primarily of debt instruments with maturities of more than three months. They are marked to market at each balance sheet date, with gains and losses recorded in a separate component of other comprehensive income. Other than temporary impairments in value are recorded through the income statement. n) Inventories Inventories, consisting primarily of finished goods, are stated at the lower of cost or net realisable value. Cost incurred in bringing each product to its present location and condition is based on purchase costs calculated on a first-in, first-out basis, including transport. Net realisable value is based on estimated normal selling price less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow moving or defective items where appropriate. o) Investments The Company accounts for its investments in 20% to 50% owned companies using the equity method of accounting. Accordingly, the Company’s share of the earnings of these companies is included in “Other income, net”. The related equity investment is included in “Investments”. At 31 December 2001, the GlaxoSmithKline joint venture in Canada was the Company’s only such equity investment. Investments which are accounted for under the cost method are stated at cost, less provisions for other than temporary impairment in value. Impairment is assessed by reference to the fair value of the securities as determined using established financial methodologies. Investments in equities with readily determinable market values are marked to market. The fair value of debt investments in private entities and non-traded securities of public entities are measured by valuation methodologies including discounted cash flows. p) Intangible assets Intangible assets comprise goodwill and intellectual property rights. Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired, is capitalised and written off on a straight-line basis over its useful economic life. Goodwill recognised in each significant business combination is being amortised over a period of five to 30 years on a straight-line basis depending on the nature of the goodwill, and is evaluated periodically for realisability based on expectations of undiscounted cash flows and earnings from operations for each subsidiary having a material goodwill balance. The following factors are considered in estimating the useful lives. Where an intangible asset is a composite of a number of factors, the period of amortisation is determined from considering these factors together: regulatory and legal provisions, including the regulatory approval and review process, patent issues and actions by government agencies; the effects of obsolescence, changes in demand, competing products and other economic factors, including the development of competing drugs that are more effective clinically or economically; and actions of competitors, suppliers, regulatory agencies or others that may eliminate current competitive advantages. Impairments of goodwill are recognised if expected undiscounted cash flows are not sufficient to recover the goodwill. If a material impairment is identified, goodwill is written down to its estimated fair value. Fair value is determined based on the present value of expected net cash flows to be generated by the business, discounted using a rate commensurate with the risks involved. Intellectual property, including trademarks for products with an immediate defined revenue stream and acquired for valued consideration, is recorded at cost and amortised in equal annual instalments over the estimated useful life of the related product which range from five to 40 years. Intellectual property with no defined revenue stream where the related product has not yet completed the necessary approval process is written off on acquisition. Amounts recorded as intangible assets are reviewed for impairment on a periodic basis using expected undiscounted cash flows. Continuing milestone payments on intellectual property with no defined revenue stream are charged to operations. Royalty payments due on sales of products are charged to operations when a liability has been incurred.
48 Shire Pharmaceuticals Group plc 1 Summary of significant accounting policies continued q) Property, plant and equipment Property, plant and equipment is shown at cost less accumulated depreciation and any provision for impairment. Depreciation is provided on a straight-line basis at rates calculated to write off the cost less estimated residual value of each asset over its estimated useful life as follows: Buildings 20 to 50 years Office furniture, fittings and equipment 4 to 10 years Warehouse, laboratory and manufacturing equipment 4 to 10 years
The cost of land is not depreciated. Expenditures for maintenance and repairs are charged to expense as incurred; costs of major renewals and improvements are capitalised. At the time property, plant and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts and the profit or loss on such disposition is reflected in income. r) Concentration of credit risk Revenues are mainly derived from agreements with major pharmaceutical companies and relationships with pharmaceutical wholesale distributors and retail pharmacy chains. Significant customers are disclosed in note 22. Such clients have significant cash resources and therefore any credit risk associated with these transactions is considered minimal. Excess cash is invested in bank and building society term deposits and commercial paper from a variety of companies with strong credit ratings. These investments typically bear minimal credit risk. s) Related parties Management believes that transactions with related parties are conducted on the same basis as they would have been with unrelated parties. t) New accounting pronouncements In June 2001, the FASB issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after 30 June 2001. Had the BioChem transaction been initiated after this date, it would have been required to be accounted for under the purchase method rather than the pooling of interests method. SFAS No. 141 requires intangible assets to be recognised if they arise from contractual or legal rights or are “separable”, ie, it is feasible that they may be sold, transferred, licenced, rented, exchanged or pledged. As a result, it is likely that more intangibles will be recognised under SFAS No. 141 than its predecessor, APB Opinion No. 16, although in some instances previously recognised intangibles will be subsumed into goodwill. SFAS No. 142 is effective for fiscal years beginning after 15 December 2001 although goodwill on business combinations consummated after 1 July 2001 will not be amortised. On adoption the Company may need to record a cumulative effect adjustment to reflect the impairment of previously recognised intangible assets. In addition, goodwill recognised on prior business combinations will cease to be amortised. Had the Company adopted SFAS No. 142 at 1 January 2001 the Company would not have recorded a goodwill amortisation charge of $10.8 million for the year ended 31 December 2001. The Company has not determined the impact that these Statements will have on intangible assets or whether a cumulative effect adjustment will be required upon adoption. In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires the fair value of a liability for asset retirement obligations to be recognised in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalised as part of the carrying amount of the related long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after 15 June 2002. The Company does not believe the adoption of this Statement would have a material impact on its results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale consistent with the fundamental provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. While it supersedes APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, it retains the presentation of discontinued operations but broadens that presentation to include a component of an entity (rather than a segment of a business). However, discontinued operations are no longer recorded at net realisable value and future operating losses are no longer recognised before they occur. Under SFAS No. 144 there is no longer a requirement to allocate goodwill to long-lived assets to be tested for impairment. It also establishes a probability-weighted cash flow estimation approach to deal with situations in which there are a range of cash flows that may be generated by the asset being tested for impairment. SFAS No. 144 also establishes criteria for determining when an asset should be treated as held for sale. SFAS No. 144 is effective for fiscal years beginning after 15 December 2001 and interim periods within those fiscal years, with early application encouraged. The provisions of the Statement are generally to be applied prospectively. The Company is currently assessing whether the adoption of SFAS No. 144 will have any impact on its results of operations or financial position. u) Statutory accounts The consolidated financial statements for the years ended 31 December 2001, 2000 and 1999 do not comprise statutory accounts within the meaning of Section 240 of the UK Companies Act 1985. Statutory accounts for the years ended 31 December 2000 and 1999 have been delivered to the Registrar of Companies for England and Wales. The auditors’ report on those accounts was unqualified. Shire Pharmaceuticals Group plc 49 Notes to the financial statements
2 Business combinations and reorganisations Year ended 31 December 2001 a) BioChem merger On 11 May 2001, the Company acquired 100% of the outstanding stock of BioChem Pharma Inc. (BioChem), an international specialty pharmaceutical company based in Laval, Canada. The merger was achieved through an exchange of shares. The Company issued 179,447,629 ordinary shares and 17,292,148 exchangeable shares in order to effect the business combination. This transaction was accounted for by the pooling of interests method in accordance with APB Opinion No. 16, “Accounting for Business Combinations”. Consequently, the consolidated financial statements give retroactive effect to the merger. Details of the results of operations of BioChem for the period before the merger was consummated, which is the period from 1 January 2001 to 11 May 2001, that are included in the combined net income of the Company are as follows: $000 Revenue 51,592 Net income 23,003 Other changes in stock holders’ equity: Issue of common shares on exercise of stock options 2,170
The revenues and earnings previously reported by the Company for the years ended 31 December 2000 and 1999 can be reconciled to the combined amounts presented herein as follows: 2000 2000 1999 1999 Revenue Net income Revenue Net income $000 $000 $000 $000 As previously reported 517,608 76,171 401,532 (94,998) BioChem pooled results 198,478 174,346 185,694 93,098 Accounting policy alignment (see note 3) (44,976) (38,790) (49,973) (45,532) As restated 671,110 211,727 537,253 (47,432) b) Dispositions During 2001, the Company recorded a $8.1 million loss on the sale of its manufacturing facility in Toronto, Canada. As a result of the merger with BioChem, the decision was made to close the Toronto facility and to eliminate duplicate positions across the combined organisation. The Company’s existing Canada-based sales and marketing operations in Toronto have been combined with those of BioChem in Laval. During the third quarter of 2001, the Company disposed of certain non-strategic products for net proceeds of approximately $4.5 million. A loss on disposition of $2.0 million was recorded. Year ended 31 December 2000 a) Divestiture of a subsidiary In March 2000, BioChem concluded the divestiture of its diagnostics operations to a management-led group of this subsidiary. The diagnostic operations were previously accounted for as discontinued operations following the adoption of a formal plan of disposal on 29 January 1999. As consideration, BioChem received a debenture in the amount of $35.8 million to be paid out of future cash flows. For accounting purposes, the transaction was not recorded as a sale since certain significant risks of ownership were not transferred to the buyer. Accordingly, as at 31 December 2000, the net assets transferred to the buyer are presented in the non-current asset section of the balance sheet as “Net assets of business transferred under contractual arrangements”. As at 31 December 2000, the Company had guaranteed the reimbursement of a long-term debt of this company amounting to 37.3 billion Italian lira ($18.1 million). Summarised data relating to the discontinued operations of the diagnostics operations of BioChem for the year ended 31 December 1999 and net asset data for 1999 are as follows: 1999 $000 Loss from operations of diagnostics segment (less applicable income taxes of $948 in 1999) (738) Loss on disposal of diagnostics segment, including provision of $11,441 for operating losses during phase-out period (less applicable income taxes of nil) (11,441) Net loss (12,179) Net assets of discontinued operations Current assets 62,094 Property, plant and equipment 10,174 Other assets 13,382 Current liabilities (29,487) Long-term liabilities (24,088) 32,075
50 Shire Pharmaceuticals Group plc 2 Business combinations and reorganisations continued b) CliniChem Development Inc. CliniChem Development Inc. (CliniChem) was formed by BioChem to conduct research and development of certain of BioChem’s human therapeutic and vaccine product candidates. On 8 June 1998, BioChem made a $101.3 million cash contribution to CliniChem’s capital. Simultaneously, BioChem concluded a series of agreements with CliniChem. BioChem granted to CliniChem an exclusive perpetual licence to use BioChem technology to conduct the CliniChem programmes and related activities and to manufacture and commercialise the CliniChem products worldwide. CliniChem paid a fee to BioChem in exchange for the technology licences. The technology fee was payable monthly at a rate of $0.2 million per month over a period of 48 months. During 1998 BioChem spun off to its shareholders its investment in CliniChem. In connection with this spin off, BioChem retained rights in CliniChem including that BioChem had an option to reacquire all shares in CliniChem at any time. As a result, CliniChem was fully consolidated into the Company’s accounts even though the investment had been spun off to its shareholders, with the inter- company transactions eliminated, as BioChem still retained control of this company. On 15 December 2000, BioChem reacquired the shares in CliniChem for $32.5 million. This additional consideration was allocated to the net assets at that date as follows: $000 Other assets 5,560 Acquired in-process research and development charged to earnings 26,947 32,507
As a result of the transaction, the Company incurred a charge for the year ended 31 December 2000 representing the acquisition of in-process research and development in accordance with SFAS No. 2. The acquired in-process research and development charge of $26.9 million represents the value of CliniChem’s products in development at the date of the additional investment in CliniChem. Technological feasibility of these products was not established at this date. These products were considered to have no alternative future use other than the therapeutic indications for which they were in development. The work remaining to complete the development involved continuing formulation activity, clinical studies and the submission of regulatory filings to seek marketing approval. As pharmaceutical products cannot be marketed without regulatory approvals, the Company will not receive any benefit unless it receives such regulatory approvals. See note 3 for a discussion of the realignment of BioChem’s accounting policies in respect of CliniChem to conform with those of the Company.
3 Accounting policy alignment – consolidation of CliniChem In 1998, BioChem spun off to its shareholders its investments in CliniChem. In connection with this spin-off, BioChem retained rights in CliniChem, including the option to reacquire all shares in CliniChem at any time. Under EITF 99-16, this transaction would result in CliniChem continuing to be consolidated by BioChem, as BioChem would have significant continuing involvement in the operation of CliniChem. However, at the time that CliniChem was spun off, EITF 99-16 had not been issued and BioChem elected to de-consolidate CliniChem, an acceptable accounting principle at that time. The management of Shire believes that their accounting policies would have required Shire to continue to consolidate CliniChem, also an acceptable accounting alternative at the date of the spin-off and a policy that conforms with the later guidance issued under EITF 99-16. The effect of this accounting policy alignment is to reduce the net income from continuing operations previously reported by BioChem now included in the pooled financial statements for 2000 and 1999 by $38.8 million and $45.5 million respectively. On 15 December 2000 BioChem reacquired CliniChem. This acquisition has been reflected in the accompanying financial statements using purchase accounting. The allocation of the purchase price to the acquired net assets and liabilities is discussed in note 2 above.
4 Cash and cash equivalents 31 December 31 December 2001 2000 $000 $000 Cash at bank and in hand 118,040 93,266
Shire Pharmaceuticals Group plc 51 Notes to the financial statements
5 Marketable securities and other current asset investments 31 December 31 December 2001 2000 $000 $000 Commercial paper 246,174 304,680 Institutional cash funds 477,737 65,745 723,911 370,425
6 Accounts receivable 31 December 31 December 2001 2000 $000 $000 Trade receivables 187,694 95,130 Royalties receivable from shareholder – 35,663 Research and development contracts 3,998 4,466 Other receivables 2,221 8,916 193,913 144,175
Trade receivables included above are stated net of a provision for doubtful debts of $1.1 million (31 December 2000: $0.8 million). Included within trade receivables as at 31 December 2001 is approximately $17.0 million of unearned income relating to ADDERALL XR product sales. Research and development contracts receivable are in respect of an agreement with the Canadian government (Technology Partnerships Canada) under which a contribution is made towards certain eligible research and development costs incurred by the Company’s Canadian subsidiary, Shire BioChem Inc. At 31 December 2001 other receivables were in respect of research and development tax credits. At 31 December 2000 other receivables were in respect of accrued royalty income and notes receivable related to the divestment of certain products.
7 Inventory 31 December 31 December 2001 2000 $000 $000 Finished goods 19,880 24,118 Work-in-process 18,262 12,544 Raw materials 8,548 12,950 46,690 49,612
8 Prepaid expenses and other current assets 31 December 31 December 2001 2000 $000 $000 Prepaid expenses 18,780 5,456 Deferred financing costs 1,077 500 Tooling costs 1,300 1,000 Income tax receivable 7,712 – Other current assets 9,702 4,429 38,571 11,385
The deferred financing costs at 31 December 2001 were in respect of the $400 million convertible loan note (see note 16). These costs are being amortised over ten years. The deferred financing costs at 31 December 2000 were in respect of a $125.0 million long-term loan (see Note 16), which was being amortised over the five-year term of the loan. This loan was repaid in full during the year 2001. Tooling costs are being amortised over the manufacturing contract period. The Company does not own the tools but has a non- cancellable right to use the tools during the contract period. Production commenced during 2001 and, based on expected production volumes, $1.3 million of the costs are classified as current at 31 December 2001 (31 December 2000: $1.0 million) Included within other current assets at 31 December 2001 is valued added tax recoverable of $5.4 million (31 December 2000: $1.9 million).
52 Shire Pharmaceuticals Group plc 9 Investments 31 December 31 December 2001 2000 $000 $000 Investments in private companies 65,404 73,615 Investments in public companies – 699 Equity method investment 3,339 – 68,743 74,314 a) Investments in private companies The Company holds investments in private companies at cost, less provision for other than temporary impairments in value. The Company made investments in private companies and partnerships totalling $13.2 million during 2001. Total significant additions included investments made to Genechem Technologies Venture Fund and Genechem Therapeutic of approximately $4.7 million (C$ 7.5 million), EGS Private Healthcare of approximately $2.2 million (C$3.3 million) and Qualia Computing of approximately $6.0 million (C$9.2 million). During the year ended 31 December 2001, the Company wrote down the cost of investments by $24.9 million as part of the one time charge resulting from the merger with BioChem, due to a non-temporary impairment. b) Investments in public companies In December 2000, the Company signed a research, development and licensing agreement with CeNeS Pharmaceuticals plc for the development of CeNeS dopamine D1 agonist programme for the treatment of Parkinson’s disease. The Company undertook to make milestone payments and pay CeNeS royalties on products developed under the agreement. The Company made an equity investment in CeNeS of approximately $0.7 million and undertook to fund all development work. During the year ended 31 December 2001 the Company recorded an impairment charge of $0.7 million due to a non-temporary impairment. The Company recorded a loss of $0.1 million in respect of non-current investments marked to market at 31 December 2000. As explained above, the investment to which this relates has suffered a permanent diminution in value, and hence the cumulative marked to market adjustment has been recorded through the Consolidated Statement of Operations for the year ended 31 December 2001. c) Equity method investment The Company has accounted for its commercialisation partnership with GSK (through which the products 3TC and ZEFFIX are marketed in Canada) using the equity method of accounting as the Company owns a 50% share of the partnership. Accordingly, the Company’s share of the earnings of the partnership is included in “Other income, net” and the related equity investment is included above. The amount included in “Other income, net” for the year ended 31 December 2001 was $2.0 million.
10 Property, plant and equipment 31 December 31 December 2001 2000 $000 $000 Land and buildings 95,921 108,805 Office furniture, fittings and equipment 12,659 40,318 Warehouse, laboratory and manufacturing equipment 46,613 13,272 155,193 162,395 Less: Accumulated depreciation (41,846) (31,171) 113,347 131,224
Depreciation expense for the years ended 31 December 2001, 2000 and 1999 was $14.4 million, $10.7 million and $9.2 million respectively. Included within land and buildings at 31 December 2001 is a new office facility purchased for approximately $17.4 million, which became the Company’s new worldwide headquarters effective from March 2001. The building, purchased in October 2000, was not depreciated during the year ended 31 December 2000, as it did not become operational until March 2001. Also included within land and buildings at 31 December 2000 was $17.3 million in respect of items considered construction in progress that therefore were not depreciated.
Shire Pharmaceuticals Group plc 53 Notes to the financial statements
11 Intangible assets 31 December 31 December 2001 2000 $000 $000 Intellectual property rights acquired 459,506 453,559 Goodwill arising on businesses acquired 220,890 227,105 680,396 680,664 Less: Accumulated amortisation (131,352) (102,228) 549,044 578,436
Amortisation expense for the years ended 31 December 2001, 2000 and 1999 was $31.4 million, $27.3 million and $25.0 million respectively. During the first quarter of 2001, the Company purchased two new products, INDURGAN™ and MONOCID™, to be marketed and sold by the Company’s Spanish and Italian operations respectively. The purchase price was approximately $18.4 million. In October 2001, the Company acquired the exclusive pan-European rights to market ADEPT for £5.0 million (approximately $7.3 million), a new therapy containing ICODEXTRIN™, which reduces internal scarring following abdominal and pelvic surgery. ADEPT was developed by ML Laboratories plc, which retains all rights to ADEPT for the rest of the world. ADEPT has approval from the regulatory bodies for the EU and will be launched in early 2002 across continental Europe.
12 Other non-current assets 31 December 31 December 2001 2000 $000 $000 Deferred financing costs 8,617 2,341 Tooling costs 2,937 3,218 SERP investment 14,367 16,115 Other assets 247 4,601 26,168 26,275
The deferred financing costs at 31 December 2001 were in respect of the $400 million convertible loan note. These costs are being amortised over ten years. The current element of these costs is included in “Prepaid expenses and other current assets” (see note 8). The deferred financing costs and tooling costs at 31 December 2000 represent the non-current portion of the total assets respectively. For further details see note 8. For further details of the SERP investment, see note 24. The amount shown above is the cash surrender value of life insurance policies which is backed by marketable securities. A liability of $11.3 million is included within note 17 “Other non-current liabilities” (2000: $13.6 million).
13 Current portion of long-term debt 31 December 31 December 2001 2000 $000 $000 Current portion of notes payable (see note 16) 4,325 81,811
14 Accounts payable and accrued expenses 31 December 31 December 2001 2000 $000 $000 Trade accounts payable 51,952 53,604 Accrued expenses 115,200 59,842 167,152 113,446
Included within accrued expenses at 31 December 2001 is $55.9 million in respect of accrued Medicaid rebates, charge-backs and product return reserves, all relating to the Company’s US operations (31 December 2000: $25.3 million).
54 Shire Pharmaceuticals Group plc 15 Other current liabilities 31 December 31 December 2001 2000 $000 $000 Income taxes payable 25,604 13,746 Payable for termination of licence agreement 738 747 Interest on long-term debt 2,928 5,916 Other accrued liabilities 13,460 12,184 42,730 32,593
Included within other accrued liabilities at 31 December 2001 is $1.1 million for value added taxes, $7.3 million for social security liabilities, and $0.8 million payable to Knoll AG related to the acquisition of the Fuisz subsidiaries. At 31 December 2000 other accrued liabilities included $1.0 million for value added taxes, $0.8 million for social security liabilities, and $0.9 million payable to Knoll AG.
16 Long-term debt 31 December 31 December 2001 2000 $000 $000 Notes payable 406,806 213,874 Less: Current instalments (4,325) (81,811) Total, less current liabilities 402,481 132,063
Principal payments in each of the next five years and thereafter on long-term debt outstanding at 31 December 2001 amount to:
31 December 2001 $000 2002 4,325 2003 827 2004 400,827 2005 827 2006 – Thereafter – 406,806
The principal payments presented above have been calculated on the basis that the $400.0 million convertible notes due 2011 convert to ordinary shares at the earliest opportunity, which is 21 August 2004. Further details are presented below. Convertible notes due 2011 On 15 August 2001, Shire Finance Limited, a wholly-owned subsidiary of the Company, placed an offering of $350.0 million principal amount of Guaranteed Convertibles Notes due 2011 with international institutional investors at an issue price of 100%. In connection with the issue, the initial purchasers exercised in full the option to subscribe or procure subscribers for an additional $50.0 million principal amount of notes. The total principal amount of the issue was therefore $400.0 million. The notes are guaranteed by the Company and are convertible into redeemable preference shares of the issuer which upon issuance will be immediately exchanged for either (i) ordinary shares or (ii) American Depository Shares (ADSs) of Shire, or, at the issuer’s option, cash. The notes bear interest of 2% per annum, paid semi-annually. The effective initial exchange price is $20.154 per ordinary share and $60.4625 per ADS. This exchange price represented a premium of 25% over the closing price of Shire ADSs on August 14, 2001. Investors have the right to require the issuer to redeem the notes at par on 21 August 2004, 2006 or 2008. Subject to certain conditions, the notes will be callable after 21 August 2004. The interest expense recorded in the year ended 31 December 2001 was $2.9 million (2000: nil).
Shire Pharmaceuticals Group plc 55 Notes to the financial statements
16 Long-term debt continued Five year term loan The Company entered into a $125.0 million five year term loan and a $125.0 million revolving credit facility with Credit Suisse First Boston (CSFB), previously known as DLJ Capital Funding, Inc., on 19 November 1999. This loan replaced an existing $125.0 million loan facility in the name of Roberts Pharmaceutical Corporation that had been taken out to finance the acquisition of PENTASA in 1998. The new loan was in the name of the parent company, Shire Pharmaceuticals Group plc. The applicable interest rate ranged between 0.5% and 1.5% over the higher of the prime rate of CSFB or the Federal Funds Rate plus 0.5% or between 1.5% and 2.5% over the London Interbank Overnight Rate (as adjusted in accordance with the loan agreement), in each case depending on the Company’s credit rating. All obligations under the facility were jointly and severally guaranteed by the Company and by its subsidiaries and were initially secured by all material property owned by the Company and its subsidiaries and the capital stock of the subsidiaries. If the Company’s credit rating reached specified levels, the facility would no longer be secured. The facility contained covenants and maintenance tests that required the Company to maintain a minimum net worth, a specified leverage ratio and a specified coverage ratio. At 31 December 2000 the Company satisfied the aforementioned covenants and maintenance tests. In May 2001, the Company repaid the term loan in full and terminated the credit facility. Deferred financing costs of $2.6 million were written off and expressed as an extraordinary item. Unsecured Convertible Zero Coupon Loan Note The Company financed the purchase of intellectual property relating to the manufacture of ADDERALL from Arenol Corporation by a total of $11.8 million in loan notes. On 5 March 1999 the Company issued a $5.8 million principal amount Unsecured Convertible Zero Coupon Loan note due 30 July 2001 (the First Loan Note) and a $6.0 million principal amount Unsecured Convertible Zero Coupon Loan Note due 30 July 2004 (the Second Loan Note). Both loan notes are in the name of the parent company, Shire Pharmaceuticals Group plc. The agreement provides for the cancellation of certain specified amounts of the aggregate principal amount of the First Loan Note and of such amounts of the Second Loan Note on certain dates to the extent of certain indemnified losses or, to the extent that such amounts of the First Loan Note or the Second Loan Note (together the Loan Notes) are not so cancelled, for their conversion into ordinary shares. The number of ordinary shares is calculated by dividing the amount not cancelled by the lower of £3.565 (approximately $5.75) and the midweek closing price of the ordinary shares on the London Stock Exchange on the relevant date. Translation from pounds sterling to US dollars is made using the exchange rate on the relevant date. The Company issued 533,279, 560,076, 541,478 and 295,061 ordinary shares on 13 March 2000, 3 August and 6 November 2000 and 30 July 2001, respectively to Arenol Corporation (or its nominee broker) in consideration of the conversion of part of each of the Loan Notes in the Company. Promissory note Included in the current portion of long-term debt at 31 December 2000 is an $80.0 million promissory note to a shareholder, bearing interest at 5% per annum. This note was repaid in full during 2001. Canadian federal and provincial government loan The Company has a Canadian federal and provincial government loan outstanding of $3.1 million (C$5.0 million). This facility is non- interest bearing and is repayable in annual instalments of $0.8 million (C$1.2 million) commencing in May 2002. Bank term loan The Company has a bank loan at 31 December 2001 bearing interest at the lender’s prime rate. The loan is secured by a charge on land and buildings, and is repayable in annual instalments of $0.4 million (C$0.6 million) with a final payment of $2.4 million (C$3.6 million) in May 2002. The loan is renegotiable for an additional five year period.
17 Other non-current liabilities 31 December 31 December 2001 2000 $000 $000 Payable for termination of licence agreement – 373 SERP 11,348 13,609 Other accrued liabilities 2,297 214 13,645 14,196
For further details of the Supplemental Executive Retirement Plan (SERP) see note 24.
56 Shire Pharmaceuticals Group plc 18 Financial instruments The following methods and assumptions were used to estimate the fair value of each material class of financial instrument: Cash and cash equivalents – carrying amount approximates fair value due to the short-term nature of these instruments. Marketable securities and other current asset investments – the fair value of marketable securities is estimated based on quotes obtained from brokers. Investments – non-current investments with readily determinable market values are marked to market. The fair value of investments in private entities and non-traded securities is measured by valuation methodologies including discounted cash flows. Accounts receivable – carrying amount approximates fair value due to the short-term nature of these instruments. Accounts payable and accrued expenses – carrying amount approximates fair value due to the short-term nature of these instruments. Long-term debt – the fair value of long-term debt is estimated based on the discounted future cash flows using currently available interest rates or, where the debt instrument is traded, by reference to the market price. The carrying amounts and corresponding fair values of financial instruments at 31 December 2001 and 2000 were as follows: Carrying amount Fair value $000 $000 31 December 2001 Financial assets: Cash and cash equivalents 118,400 118,400 Marketable securities and other current asset investments 723,911 723,911 Investments 68,743 68,743 Financial liabilities: Accounts payable and accrued expenses 167,152 167,152 Long-term debt 406,806 394,206
31 December 2000 Financial assets: Cash and cash equivalents 93,266 93,266 Marketable securities and other current asset investments 370,425 370,425 Investments 74,314 74,314 Financial liabilities: Accounts payable and accrued expenses 113,446 113,446 Long-term debt 213,874 213,874
The carrying amounts in the table are included in the Consolidated Balance Sheet under the indicated captions.
19 Leases and other commitments a) Leases The Company leases facilities, motor vehicles and certain office equipment under operating leases. The Company’s commitments under the non-cancellable portion of all operating leases for the next five years and thereafter as of 31 December 2001 are as follows: 31 December 2001 $000 2002 6,166 2003 3,545 2004 1,693 2005 599 2006 311 Thereafter 1,996 14,310
Lease and rental expense included in selling, general and administrative expenses in the accompanying statements of operations amounts to approximately $6.1 million, $4.3 million and $3.2 million for the fiscal years ended 31 December 2001, 2000 and 1999 respectively.
Shire Pharmaceuticals Group plc 57 Notes to the financial statements
19 Leases and other commitments continued b) Contingent liabilities i) Phentermine Shire US Inc. (Shire US) has been named as a defendant in approximately 3,784 lawsuits, in both US federal and state courts, which seek damages for, among other things, personal injury arising from phentermine products supplied for the treatment of obesity by Shire US and several other pharmaceutical companies. Shire US has been sued as a manufacturer and distributor of phentermine, an anorectic used in the short-term treatment of obesity and one of the products addressed by the lawsuits. The suits relate to phentermine either alone or together with fenfluramine or dexenfluramine. As at 31 December 2001 Shire US had been named as a defendant in approximately 3,784 cases. Shire US has been dismissed from 3,619 cases. As at 31 December 2001 approximately 111 cases were pending dismissal. The lawsuits generally allege the following claims: the defendants marketed phentermine and other products for the treatment of obesity and misled users about the products and territory dangers associated with them; the defendants failed adequately to test phentermine individually and when taken in combination with the other drugs; and the defendants knew or should have known about the negative effects of the drugs and should have informed the public about such risks and/or failed to provide appropriate warning labels. Shire US became involved with phentermine through its acquisition of certain assets of Rexar in January 1994. In addition to Shire US potentially incurring liability as a result of its own production of Oby-Cap, the plaintiffs may additionally seek to impose liability on Shire US as successor to Rexar. Class certification has been sought for certain of the claims made against Shire US. In addition, pending US federal lawsuits have been consolidated as a multi-district litigation in the Eastern District of Pennsylvania. Shire US intends vigorously to defend all the lawsuits and pursue all available reasonable defences. Shire US currently has only one lawsuit pending against it in federal court. Shire US denies liability on a number of grounds including lack of scientific evidence that phentermine, properly described, causes the alleged side effects and that Shire US did not promote phentermine for long-term combined use as part of the “fen/phen” diet. Accordingly, Shire US intends to defend vigorously any and all claims made against the Group in respect of phentermine and believes that liability is neither probable nor quantifiable at this stage of litigation. Legal expenses have been paid by Eon, the supplier to Shire US, or Eon’s insurance carriers but such insurance is now exhausted. Eon has agreed to defend and indemnify Shire US in this litigation pursuant to an agreement dated 30 November 2000 made between Eon and Shire US. ii) ADDERALL On 22 September 2000, a lawsuit was filed against Shire in the United States District Court for the District of North Dakota. The suit involves an incident in 1999 in which a young North Dakota man, Ryan Ehlis, shot and killed his infant daughter and wounded himself, allegedly as a result of a psychotic reaction to ADDERALL. Mr Ehlis’ physician had prescribed ADDERALL for the treatment of ADHD. Shire filed its answer to the complaint on 24 November 2000 and discovery related to the litigation is ongoing. On 3 October 2001, a lawsuit was filed against Shire in a Kentucky state court. The lawsuit involves a 34 year old woman who alleges that she experienced a psychotic episode from her ingestion of ADDERALL which led to the death of her child in an auto accident. Shire intends to robustly defend such action. On 27 July 2001, Shire received service of a complaint filed in state court in Texas that alleged that ADDERALL caused or contributed to a stroke. The plaintiff, an adult female aged 39, was prescribed ADDERALL as treatment for her ADHD. The complaint alleges that the plaintiff used ADDERALL during the period from January 1999 to September 1999. Also named as defendants are two doctors who were involved in diagnosing the plaintiff’s ADHD and for prescribing ADDERALL for its treatment. Discovery in this litigation is ongoing. Shire intends to robustly defend such action. iii) AGRYLIN Shire US has been named as a defendant in a recently filed lawsuit in a Texas state court involving AGRYLIN. The complaint was filed in late December and served on Shire on 26 December 2001. Shire’s contract manufacturer for AGRYLIN, Mallinckrodt, Inc., is also a named defendant. The complaint alleges that the plaintiff suffered a debilitating stroke due to the fact that the plaintiff was allegedly unable to procure this product in some fashion. Shire has filed an answer to the complaint in which it denies the allegations in the plaintiff’s original petition. Shire intends to robustly defend such action. iv) Emory Shire BioChem is involved in worldwide patent disputes with Emory University (Emory) relating to lamivudine wherein Shire BioChem is opposing certain patents and patent applications of Emory and wherein Emory is opposing certain patents and patent applications of Shire BioChem. Further detail regarding these disputes is provided below. In November 2001, Shire and GlaxoSmithKline (GSK) signed an agreement as to the key terms of a global settlement agreement with Emory. The parties are in the process of finalising the settlement agreement. Pursuant to the settlement agreement, Emory will grant Shire and GSK an exclusive licence under Emory’s patent rights for lamivudine. The agreement provides for the resolution of the below noted worldwide patent disputes between the parties relating to lamivudine. The settlement involves an upfront payment to Emory by Shire of $2.5 million and a royalty payment from Shire of 0.5% on worldwide sales of lamivudine over an 11 year period commencing on 1 January 2001 and a licence under Shire’s FTC patent rights, in consideration for the settlement of all claims against Shire and GSK relating to lamivudine. The total cost to Shire in 2001 of the settlement (including upfront payment) was $7.7 million.
58 Shire Pharmaceuticals Group plc 19 Leases and other commitments continued Emory filed oppositions to two of Shire BioChem’s granted patent applications in Europe which cover oxathiolane nucleosides including lamivudine and dioxolane nucleosides, including troxacitabine, related nucleoside analogues and use of these analogues for treating viral infections. In oral hearings held in 1999, both of these oppositions were dismissed by the Opposition Division of the European Patent Office. Emory is not pursuing its appeal of the decision relating to oxathiolanes. Emory has not to date filed revocation actions with respect to any Shire BioChem lamivudine patents in issue in individual European countries. Emory has filed an appeal against the dioxolane-related decision and this appeal is pending in the European Patent Office. This appeal does not relate to lamivudine and is not included in the settlement agreement with Emory. In Japan, Emory filed an opposition to Shire BioChem’s granted patent which covers lamivudine, related analogues and use of the analogues for treating viral infections. The Trial Board of the Japanese Patent Office dismissed Emory’s opposition to Shire BioChem’s patent covering lamivudine. Emory has filed revocation actions in Australia and South Korea against Shire BioChem’s granted patents covering lamivudine. Shire BioChem is aggressively defending these patents. On 23 July 1996, Emory filed a complaint in the US alleging infringement from the commercialisation of EPIVIR by Shire BioChem and GSK, Shire BioChem’s exclusive licencee in the US, of an Emory US patent granted that same day. Shire BioChem considers this patent infringement suit to be without merit and has successfully challenged the validity of Emory’s patent. On 19 May 1998, the US Patent Office (USPTO) declared an interference between the Emory patent that is the subject of a lawsuit and a pending patent application of Shire BioChem. The Board of Patent Appeals and Interferences issued a decision on 21 December 2000 invalidating Emory’s patent. Emory has appealed the decision. Pusuant to the lamivudine settlement agreement, Emory will accept the Board’s decision as final and the infringement suit will be dismissed with prejudice. Emory has obtained a granted patent application in Europe relating to oxathiolane nucleosides, including lamivudine. Shire BioChem and GSK filed an opposition to this grant and are vigorously opposing the grant. An examined patent application filed by Emory, claiming lamivudine, was successfully opposed by Shire BioChem in Australia and Norway. Emory has filed an appeal from the Australian decision in the Federal Court of Australia. Shire BioChem also filed an appeal from certain portions of the decision. An examined patent application filed by Emory claiming lamivudine was also opposed by Shire BioChem in Japan. The opposition was dismissed in April 1999 because it was improperly filed by a representative who had previously represented Emory. Notwithstanding the dismissal, the Japanese Patent Office issued an ex-officio action rejecting all of Emory’s claims. There can be no assurance that Emory will not be able to overcome this rejection. An examined patent application filed by Emory claiming lamivudine was opposed by Shire BioChem and GSK in South Korea and such Emory claims to lamivudine were cancelled by the South Korean Patent Office. Shire BioChem is aware that Emory has filed patent applications in other countries, which Shire BioChem believes may claim similar subject matter. v) Yale On 23 November 1999, the USPTO declared an interference between BioChem’s hepatitis B patent for lamivudine and a patent application filed by Yale University (Yale) claiming methods of treating hepatitis B using lamivudine. The Company believes that this application is licenced to Vion Pharmaceuticals, Inc. (Vion), formerly known as OncoRx, Inc., a New Haven, Connecticut-based company. The Company believes that its patent is valid and intends to vigorously defend the patent. The Company is not aware of corresponding patent applications by Yale or Vion in countries other than the US. On 14 April 2000, the USPTO declared a further interference between BioChem’s hepatitis B patent for lamivudine and a patent application by GSK claiming methods of treating hepatitis B using lamivudine. There is no guarantee that Shire will be successful in both interferences and that Shire’s patent will be maintained. There can also be no reassurance that Yale will not prevail in both interferences and obtain claims in the US directed to methods of treatment for hepatitis B using lamivudine. vi) Interests in companies and partnerships The Company has undertaken to subscribe to interests in companies and partnerships for amounts totaling $37.7 million. As at 31 December 2001 an amount of $20.1 million (31 December 2000: $17.1 million) has been subscribed. In addition, the Company has undertaken to subscribe to additional amounts and to pay royalties on certain future sales upon realisation of certain conditions. vii) FLUVIRAL The Company has signed a ten-year contract with the Government of Canada to assure a state of readiness in the case of an influenza pandemic (worldwide epidemic) and to provide influenza vaccine for all Canadian citizens in such an event. Under the contract, Shire Biologics will also supply the Government of Canada with a substantial proportion of its annual influenza vaccine requirements over the ten-year period. The value of the agreement may exceed C$300 million (approximately $190 million) over the ten-year term, with an option for the Government of Canada to extend the contract. The concept of a state of readiness against an influenza pandemic requires the development of sufficient infrastructure and capacity in Canada to provide 100% of domestic vaccine needs in the event of an influenza pandemic. Canada would require 32 million doses of single-strain (monovalent) flu vaccine within a production period of 16 weeks. Shire Biologics will therefore begin expanding its current production capacity in order to meet this objective within a five-year period. Shire Biologics is committed to C$4.5 million (approximately $2.8 million) of capital expenditure on immoveables for the purpose of achieving the level of pandemic readiness required. In addition, a performance bond equal to 10% of the minimum estimated contract value in any year, which for 2001/2002 is C$17.5 million (approximately $11 million), would become payable to the Government of Canada if contracted penalty clauses were triggered. viii) Other matters In addition, the Company is involved in other claims and lawsuits in the normal course of business. It is not possible at this time to determine the ultimate outcome of any of these claims. Shire Pharmaceuticals Group plc 59 Notes to the financial statements
20 Related parties a) Mr Spitznagel Mr Spitznagel, a former director of the Company, who resigned during the year ended 31 December 2001, entered into a consultancy agreement with the Company in December 1999, which provided that; if he had good reason, as defined in his service agreement with Roberts, to terminate his employment with Roberts under his service agreement, the Company would cause Roberts to provide him with the payments and benefits he would be entitled to upon a “good reason” termination; Mr Spitznagel would provide consulting services to the Company for at least 42 months following the acquisition of Roberts, unless Mr Spitznagel terminated the consultancy agreement prior to the end of the 42nd month upon 30 days’ notice; and the Company would pay Mr Spitznagel at a rate of $400,000 per annum for his consulting services, $150,000 per annum as an office holder, $250,000 per annum to comply with certain restrictive covenants contained therein and $150,000 per annum for tax, financial and estate planning advice, life insurance and health insurance. b) Dr Bellini Prior to the Company’s merger with BioChem, Dr Bellini entered into an agreement with BioChem whereby BioChem granted to Dr Bellini an option to purchase from BioChem its interest in a company that owned land and buildings located on Province Island, Quebec for the fair market value of C$225,000 (approximately $141,000). Dr Bellini exercised his option and the transaction was completed in accordance with the terms of the option agreement on 29 November 2001. c) Professional fees The Company incurred professional fees with a law firm, in which the Hon James Andrews Grant is a partner, totalling $1.9 million for the year ended 31 December 2001 ($0.4 million for the year ended 31 December 2000 and $0.2 million for the year ended 31 December 1999). d) Immunosystems BioChem Immunosystems Inc (Immunosystems), formally a wholly owned subsidiary of BioChem, was sold in February 2000 to a third party. Dr Bellini, the former Chief Executive Officer of BioChem, continued as a director of Immunosystems. In December 2001, the Company acquired a 19.9% equity interest in Immunosystems in consideration for the release of a debt owing to the Company from Immunosystems. This debt existed prior to the Company’s merger with BioChem. As part of the same transaction, the Company was released from a pre-existing BioChem guarantee over other Immunosystems liabilities.
21 Net income/(loss) per share Basic net income/(loss) per share is based upon the income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net income/(loss) per share is based upon income available to common stockholders divided by the weighted average number of common shares outstanding during the period and adjusted for the effect of all dilutive potential common shares that were outstanding during the period. The following table sets forth the computation for basic and diluted net income/(loss) per share: 2001 2000 1999 $000 $000 $000 Years ended 31 December Numerator for basic and diluted net income/(loss) per share 38,759 211,727 (47,432)
Number Number Number of shares of shares of shares Weighted average number of shares Basic 492,594,226 482,890,070 484,358,876 Effect of dilutive shares – share options 11,362,332 11,801,735 – – convertible debt – –– – warrants 919,029 –– 12,281,361 11,801,735 – Diluted 504,875,587 494,691,805 484,358,876 Basic net income/(loss) per share 7.9c 43.8c (9.8)c Diluted net income/(loss) per share 7.7c 42.8c (9.8)c
The calculation of weighted average number of shares for the year ended 31 December 2000 does not include convertible debt because, after eliminating interest charged in the income statement from the numerator, the inclusion would be anti-dilutive. The calculation of weighted average number of shares for the year ended 31 December 1999 does not include potentially dilutive stock options and convertible debt because the inclusion would be anti-dilutive. The warrants included in the diluted net income per share calculation are issuable in respect of a research and development agreement. A charge of $4.5 million has been included in the results for the year ended 31 December 2001. No warrants have been issued as at 31 December 2001 although an obligation does exist. 60 Shire Pharmaceuticals Group plc 22 Analysis of revenue, operating income/(loss), assets and reportable segments The Company has disclosed segment information for the individual operating areas of the business, based on the way in which the business is managed and controlled. Shire’s principal reporting segments are geographic, each managed and monitored separately and serving different markets. The Company evaluates performance based on operating income or loss before interest and income taxes. All inter-company items are eliminated. The accounting policies of each reportable segment are the same as those of the Group.
US International R&D Total $000 $000 $000 $000 Year ended 31 December 2001 Product sales 612,062 111,902 – 723,964 Licensing and development 4,507 991 – 5,498 Royalties 264 144,891 – 145,155 Other revenues – 2,952 – 2,952 Total revenues 616,833 260,736 – 877,569 Cost of revenues 64,934 53,351 – 118,285 Research and development – – 171,029 171,029 Selling, general and administrative 203,061 108,042 – 311,103 Asset impairments and restructuring charges – 85,447 – 85,447 Merger transaction expenses – 83,470 – 83,470 Loss on disposition of assets 2,052 8,112 – 10,164 Total operating expenses 270,047 338,422 171,029 779,498 Operating income/(loss) 346,786 (77,686) (171,029) 98,071 Total assets 628,350 1,260,444 21,937 1,910,731 Long-lived assets 9,202 80,859 23,286 113,347 Capital expenditure on long-lived assets 3,077 8,039 2,488 13,604 Year ended 31 December 2000 Product sales 414,624 105,607 – 520,231 Licensing and development 1,326 12,821 – 14,147 Royalties 266 135,204 – 135,470 Other revenues 20 1,242 – 1,262 Total revenues 416,236 254,874 – 671,110 Cost of revenues 53,393 47,978 – 101,371 Research and development – – 155,145 155,145 Selling, general and administrative 122,834 113,455 – 236,289 Asset impairment and restructuring charges – 26,947 – 26,947 Total operating expenses 176,227 188,380 155,145 519,752 Operating income/(loss) 240,009 66,494 (155,145) 151,358 Total assets 560,864 943,687 43,944 1,548,495 Long-lived assets 7,895 75,249 48,080 131,224 Capital expenditure on long-lived assets 3,636 15,517 25,090 44,243 Year ended 31 December 1999 Product sales 313,582 87,377 – 400,959 Licensing and development 1,097 13,488 – 14,585 Royalties – 119,714 – 119,714 Other revenues 517 1,478 – 1,995 Total revenues 315,196 222,057 – 537,253 Cost of revenues 62,375 40,672 – 103,047 Research and development – – 141,112 141,112 Selling, general and administrative 109,327 85,186 – 194,513 Asset impairment and restructuring charges 93,603 3,529 – 97,132 Merger transaction expenses 9,312 22,967 – 32,279 Loss on disposition of assets 5,824 – – 5,824 Total operating expenses 280,441 152,354 141,112 573,907 Operating income/(loss) 34,755 69,703 (141,112) (36,654) Total assets 542,111 783,807 25,873 1,351,791 Long-lived assets 17,033 77,083 22,597 116,713 Capital expenditure on long-lived assets 1,738 5,226 19,495 26,459
Shire Pharmaceuticals Group plc 61 Notes to the financial statements
22 Analysis of revenue, operating income/(loss), assets and reportable segments continued Material customers In the periods set out below, certain customers accounted for greater than 10% of total revenues: 2001 2000 1999 Years ended 31 December $000 $000 $000 Customer A 176,941 132,913 100,267 Customer B 123,350 80,293 54,498
23 Other charges Year ended 31 December 2001 a) BioChem merger As a result of the merger with BioChem on 11 May 2001, the Company recorded pre-tax charges totalling $177.0 million, comprising asset impairment and restructuring costs ($85.4 million), merger-related transaction expenses ($83.5 million), and a loss on the sale of a duplicated facility in Toronto, Canada ($8.1 million). The restructuring costs include an impairment charge of $20.9 million to adjust intangible asset values, primarily trademark and patent costs but also an element of product rights, to their estimated fair value. These charges are consistent with the Company’s accounting policy to review periodically the carrying value of the intangibles and evaluate whether there has been any impairment in the value of those intangibles as compared with estimated undiscounted future cash flows relating to those intangibles. Other asset impairments included the write-down of long-term unquoted investments ($24.9 million) and a write-down of $30.8 million to a debenture held by BioChem, which was received on divestiture of its diagnostics subsidiary. These charges are consistent with the Company’s policy to provide for other than temporary impairments in investment by reference to the fair value of the investment using established financial methodologies. There was also a total of $8.8 million recorded in respect of employee-related costs. The employee terminations related to the closure of the Toronto facility and the elimination of duplicate positions across the combined organisation. Shire’s existing Canada-based sales and marketing operations in Toronto have been combined with those of BioChem in Laval. A total of 57 employees were identified to be terminated. As of 31 December 2001 all of the planned terminations were completed. b) Product disposals During the third quarter of 2001, we disposed of certain non-strategic products for net proceeds of approximately $4.5 million. A loss on disposition of $2.0 million was recorded. Year ended 31 December 2000 As a result of the merger with BioChem, the Company incurred a charge of $26.9 million relating to the acquisition of in-process research and development in accordance with SFAS No. 2. Year ended 31 December 1999 As a result of the merger with Roberts on 23 December 1999, which was accounted for as a pooling of interests, the Company recorded charges totalling $135.2 million pre tax which comprised asset impairments ($48.5 million), merger-related transaction expenses ($32.3 million), restructuring costs ($43.6 million), loss on product dispositions ($5.8 million) and other charges ($5.0 million). These charges are disclosed separately within operating expenses in the consolidated statements of operations. The Company recorded an impairment charge of $34.2 million to adjust intangible asset values, primarily product rights, to their estimated fair value. These charges are consistent with the Company’s accounting policy to review periodically the carrying value of the intangibles and evaluate whether there has been any impairment in the value of those intangibles as compared with estimated undiscounted future cash flows of the products. Other asset impairments consisted of the write-off of inventory held for research and development work and duplicate equipment ($3.2 million), adjustments to the carrying value of the RiboGene investment to market value at 31 December 1999 ($7.6 million), and write-down of receivables to their estimated realisable value ($3.5 million). The components of the restructuring charge were as follows: $m Employee termination costs 37.9 Property 5.7 43.6
In December 1999, the decision was made to close the office facility in Eatontown, New Jersey, and consolidate the sales and marketing operations into the existing facility in Florence, Kentucky, and to transfer the research and development activities to Shire’s facility in Rockville, Washington. Similarly, Roberts’ sales and marketing operation in the UK was combined with Shire’s established operation in Andover, Hampshire. The property at Eatontown was written down to its estimated fair value and subsequently sold. As a result of the restructuring and elimination of duplicate facilities, the Company identified a number of sales and marketing, research and development and administrative positions to be terminated. These employees were notified of their termination prior to 31 December 1999. The employee termination costs consisted of payments for severance, medical and other benefits, outplacement counselling, acceleration of pension benefits and excise taxes. The Company completed the restructuring programme during the fourth quarter of 2000, and the restructuring reserve of $43.6 million was fully utilised by 31 December 2000.
62 Shire Pharmaceuticals Group plc 24 Retirement benefits a) Personal defined contribution pension plans The Company makes contributions to defined contribution retirement plans that together cover substantially all employees within the Group. For the defined contribution retirement plans, the level of Company contribution is fixed at a set percentage of employees’ pay. Company contributions to personal defined contribution pension plans totalled $4.9 million, $2.6 million and $1.6 million for the years ended 31 December 2001, 2000 and 1999 respectively, and were charged to operations as they became payable. b) Defined benefit pension plan Roberts Pharmaceutical Corporation, a company with which the Company merged in December 1999, operated a defined Supplemental Executive Retirement Plan (SERP) for certain US employees, which was established in 1998. This plan was available to former employees of Roberts who met certain age and service requirements. As part of the restructuring of the Group following the merger, the SERP was closed to new members and contributions have ceased being paid into the plan for existing members. As part of this arrangement, the Company paid a lump sum contribution into the plan of $18.0 million, the result of which is that the Company has no future contributions under the plan. In accordance with EITF 97-14, the asset and liability of $14.4 million and $11.3 million respectively are shown on the balance sheet within the categories “Investments” and “Other non-current liabilities”. See notes 12 and 17 above.
25 Income taxes The provision for income taxes consists of: 2001 2000 1999 Years ended 31 December $000 $000 $000 Current US federal (44,781) (26,534) (14,007) State and foreign (26,850) (17,348) (7,365) Total current (71,631) (43,882) (21,372) Deferred US federal (20,586) (4,268) (622) State and foreign 19,357 486 331 Total deferred (1,229) (3,782) (291) Total attributable to continuing operations (72,860) (47,664) (21,663) Total attributable to discontinued operations – – (948) (72,860) (47,664) (22,611)
31 December 31 December 2001 2000 Approximate net operating loss carry-forwards against future US federal tax liabilities 55,803 60,451 Approximate net operating loss carry-forwards against future state and foreign tax liabilities 470,177 310,204 Total 525,980 370,655
The tax losses shown above have the following expiration dates: 31 December 2001 $000 2002 1,885 2003 1,327 2004 3,607 2005 150,404 2006 101,657 2007 57,772 2008 16,071 2009 3,346 2010 3,119 2011 4,820 Available indefinitely 181,972 525,980
The losses stated above include approximately $78.0 million of state tax losses for which relief is available at state tax rates of approximately 3%.
Shire Pharmaceuticals Group plc 63 Notes to the financial statements
25 Income taxes continued A comparison of the provision for income taxes as reported to a (provision)/benefit based on federal statutory rates and consolidated income before income taxes is as follows: 2001 2000 1999 Years ended 31 December $000 $000 $000 (Provision)/benefit at federal statutory rates (39,066) (90,787) 4,757 Adjusted for: Permanent differences (32,268) (963) (6,783) Difference in taxation rates 32,307 44,233 25,755 Adjustment to prior year liabilities 2,958 (1,950) 4,004 Goodwill amortisation (3,309) (3,783) (9,758) Other (6,087) (2,652) (531) Movement in valuation allowance (27,395) 8,238 (39,107) Provision for income taxes (72,860) (47,664) (21,663)
Permanent differences arising in the year ended 31 December 2001 are mainly attributed to non-deductible one time merger-related costs incurred as a result of the Company’s merger with BioChem during the year. An analysis of the deferred tax asset is as follows: 31 December 31 December 2001 2000 $000 $000 Losses carried forward 170,512 108,617 Amounts deductible when paid 6,238 34,307 Valuation reserves and provisions 7,874 6,915 Other 6,267 1,447 190,891 151,286 Valuation allowance (125,565) (97,585) Deferred tax assets 65,326 53,701 Excess of tax value over book value of assets (33,022) (20,168) Net deferred tax assets 32,304 33,533
Valuation allowances against deferred tax assets have not been provided to the extent that it is more likely than not that future income and tax planning strategies will enable losses brought forward to be utilised. The income/(loss) before taxes by tax jurisdiction is as follows: 2001 2000 1999 Years ended 31 December $000 $000 $000 US 200,160 77,974 (33,924) UK (101,756) (37,577) (33,996) Canada (164,188) 13,663 (50,806) Other 177,403 205,331 105,136 111,619 259,391 (13,590)
64 Shire Pharmaceuticals Group plc 26 Stock incentive plans The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” but applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its plans. In the years ended 31 December 2001, 2000 and 1999 the Company recognised a charge under APB 25 of $2.3 million, $21.9 million and $11.9 million respectively. Had compensation for stock options awarded under the plans been determined in accordance with SFAS 123, the Company’s net income/(loss) and per share data would have been changed to the pro forma amounts indicated below:
2001 2000 1999 Years ended 31 December $000 $000 $000 Net income/(loss) As reported 38,759 211,727 (47,432) Pro forma 8,791 227,018 (37,919) Income/(loss) per share As reported – basic 7.9c 43.8c (9.8)c As reported – diluted 7.7c 42.8c (9.8)c Pro forma – basic 1.8c 47.0c (7.8)c Pro forma – diluted 1.7c 45.9c (7.8)c
The fair value of stock options used to compute pro forma net income/(loss) and per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: 2001 2000 1999 Years ended 31 December $000 $000 $000 Risk free interest rate 3.43 – 5.22% 5.68% – 6.58% 4.76% – 6.25% Expected dividend yield 0% 0% 0% Expected life 5 years 5 years 5 years Expected volatility 59.5% 64.2% 53.4%
Directors and employees have been granted options over ordinary shares under the following stock option plans: the Shire Pharmaceuticals Group plc 2000 Executive Share Option Scheme (Parts A and B) (2000 Executive Scheme), the Shire Holdings Ltd Share Options Scheme (SHL Scheme), the Pharmavene 1991 Stock Option Plan (SLI Plan), the Shire Pharmaceuticals Executive Share Option Scheme (Parts A and B) (Executive Scheme), the Shire Pharmaceuticals Sharesave Scheme (Sharesave Scheme), the Shire Pharmaceuticals Group plc Employee Stock Purchase Plan (Stock Purchase Plan), the Richwood Stock Options Plan (Richwood Plan), the Roberts Stock Option Plans (Roberts Plan) and the BioChem Stock Option Plan (BioChem Plan). On 28 February 2000, the Remuneration Committee of the Board exercised its powers to amend the terms of the Executive Share Option Scheme so as to include a cliff vesting provision. No further options will be granted under the SHL Scheme, SLI Plan, Richwood Plan, Roberts Plan, Executive Scheme or BioChem Plan. In a period of five years, not more than 5% of the issued share capital of the Company may be placed under option under any employee share scheme. In addition, the following terms apply to options that may be granted under the various plans: Stock Purchase Plan: the maximum number of ordinary shares which shall be made available for sale is 2,000,000. 2000 Executive Scheme: the maximum number of shares over which incentive stock options may be granted under Part B of the scheme is 25,000,000.
Shire Pharmaceuticals Group plc 65 Notes to the financial statements
26 Stock incentive plans continued The Company has granted options through 31 December 2001 under the various plans as follows:
Scheme Number of options Expiry period from date of issue Vesting period SHL Scheme 556,560 7 years, or 3 months after end of employment 1 – 3 years Executive Scheme 4,994,638 10 years 3 years, subject to performance criteria 2000 Executive Scheme 3,657,289 10 years 3 years, subject to performance criteria Sharesave Scheme 178,023 6 months after vesting 3 or 5 years Stock Purchase Plan 429,026 27 months SLI Plan 42,909 10 years Immediate on acquisition by Shire Richwood Plan 358,215 5 years Immediate on acquisition by Shire Roberts Plan 790,914 6 years Immediate on acquisition by Shire BioChem Plan 5,242,270 10 years Immediate on acquisition by Shire Total 16,249,844
A summary of the status of the Company’s stock option plans as of 31 December 2001, 2000 and 1999 and the related transactions during the periods then ended is presented below:
Weighted average exercise price Year ended 31 December 2001 $ Number of shares Outstanding at beginning of period 7.83 24,790,322 Granted 17.24 4,405,089 Exercised 6.29 (11,443,831) Forfeited/expired 13.86 (1,501,736) Outstanding at end of period 10.80 16,249,844 Exercisable at end of period 7.50 9,054,150
All options granted under the Executive Scheme, 2000 Executive Scheme and the BioChem Stock Option Plan were issued with exercise prices equivalent to the fair market value of the Company’s common stock on the date of grant as these options were granted at market prices. 81,888 options were granted under the Sharesave Scheme at a price of £8.41 (approximately $12.24). These options were granted with an exercise price equal to 80% of the mid-market price on the day before invitations were issued to employees. The average fair value of options granted in the year ended 31 December 2001 is $17.30.
Weighted average exercise price Year ended 31 December 2000 $ Number of shares Outstanding at beginning of period 5.99 32,540,132 Granted 14.53 4,386,258 Exercised 4.30 (11,491,088) Forfeited/expired 10.95 (644,980) Outstanding at end of period 7.83 24,790,322 Exercisable at end of period 6.84 13,385,095
All options granted under the Executive Scheme, 2000 Executive Scheme and the BioChem Stock Option Plan were issued with exercise prices equivalent to the fair market value of the Company’s common stock on the date of grant as these options were granted at market prices. 79,424 options were granted under the Sharesave Scheme at a price of £8.56 (approximately $12.79). These options were granted with an exercise price equal to 80% of the mid-market price on the day before invitations were issued to employees.
66 Shire Pharmaceuticals Group plc 26 Stock incentive plans continued The average fair value of options granted in the year ended 31 December 2000 is $8.80. Weighted average exercise price Year ended 31 December 1999 $ Number of shares Outstanding at beginning of period 4.88 35,623,241 Granted 7.99 3,960,869 Exercised 2.60 (5,189,359) Forfeited/expired 5.54 (1,854,619) Outstanding at end of period 5.99 32,540,132 Exercisable at end of period 5.74 21,662,275
For the year ended 31 December 1999, the weighted average fair value of options granted equates to the weighted average exercise price of $7.99 as all options were granted at market prices. Options outstanding at 31 December 2001 have the following characteristics: Weighted average Weighted average Number Weighted average exercise price of exercise price of of options Exercise prices remaining life options outstanding Number of options options exercisable outstanding $ Years $ exercisable $ 1,021,402 1.01 – 2.00 0.9 1.49 1,021,402 1.49 445,488 2.01 – 3.00 1.5 2.54 445,488 2.54 721,794 3.01 – 4.00 2.3 3.59 707,055 3.59 668,796 4.01 – 5.00 3.5 4.93 668,796 4.93 826,631 5.01 – 6.00 3.3 5.27 826,631 5.27 1,451,724 6.01 – 7.00 4.1 6.69 338,724 6.12 46,344 7.01 – 8.00 4.8 7.44 26,344 7.20 204,530 8.01 – 9.00 5.3 8.70 174,530 8.78 187,051 9.01 – 10.00 5.0 9.17 187,051 9.17 4,097,796 10.01 – 11.00 5.2 10.34 4,047,796 10.34 528,071 11.01 – 12.00 4.6 11.72 226,415 11.71 145,811 12.01 – 13.00 3.7 12.34 – – 504,737 13.01 – 14.00 6.3 13.19 383,918 13.17 1,980,303 14.01 – 15.00 6.4 14.86 – – 3,415,366 18.01 – 19.00 9.2 18.31 – – 4,000 19.01 – 20.00 8.9 19.21 – – 16,249,844 5.4 10.80 9,054,150 7.50
Shire Pharmaceuticals Group plc 67 Summary financial statement General Auditors’ statement
This summary financial statement does not Independent auditors’ statement to the contain sufficient information to allow for a Shareholders of Shire Pharmaceuticals full understanding of the results and state Group plc: of affairs of the Company or Group. For We have examined the summary financial further information the full UK statutory statement of Shire Pharmaceuticals Group annual accounts, the auditors’ report on plc set out on pages 69 to 73. those accounts and the directors’ report should be consulted. Respective responsibilities of directors and auditors In accordance with Section 239 of the The directors are responsible for preparing Companies Act 1985 shareholders have the annual review and summary financial a right to obtain the full reports and statement in accordance with applicable accounts free of charge by writing to: law. Our responsibility is to report to you The Company Secretary our opinion on the consistency of the Shire Pharmaceuticals Group plc summary financial statement within the Hampshire International Business Park annual review and summary financial Chineham statement with the full annual statutory Basingstoke accounts and the directors’ report, and its Hampshire compliance with the relevant requirements RG24 8EP of Section 251 of the Companies Act 1985 and the regulations made thereunder. We The full UK statutory annual accounts also read the other information contained are signed on behalf of the Board by in the annual review and summary A C Russell, Group Finance Director. financial statement and consider the The Company’s auditors have given an implications for our report if we become unqualified report on the statutory accounts aware of any apparent misstatements or for the year ended 31 December 2001. material inconsistencies with the summary The report did not contain a statement financial statement. under Section 237 (2) or (3) of the Companies Act 1985. Basis of opinion We conducted our work in accordance with Bulletin 1999/6 The auditors’ statement on the summary financial statement issued by the Auditing Practices Board for use in the United Kingdom.
Opinion In our opinion the summary financial statement is consistent with the full annual accounts and directors’ report of Shire Pharmaceuticals Group plc for the year ended 31 December 2001 and complies with the applicable requirements of Section 251 of the Companies Act 1985, and the regulations made thereunder. Arthur Andersen Chartered Accountants and Registered Auditors Abbots House, Abbey Street Reading, RG1 3BD 12 April 2002
68 Shire Pharmaceuticals Group plc Summary financial statement Directors’ report
Results and dividends Directors Profit on ordinary activities before taxation The directors who served during the of the Group was £81.4 million (2000: year were as follows: £76.8 million). The directors do not Dr James Cavanaugh, Chairman and recommend the payment of a dividend. Non-executive Director Business review Mr Rolf Stahel, Chief Executive A review of the Group’s business and Mr Angus Russell, Group Finance Director important events during the year and likely future developments is set out in the Dr Wilson Totten, Group R&D Director Chairman’s review, the Chief Executive’s Dr Barry Price, Senior Non-executive Director review and the Financial review in the full (Chairman Remuneration Committee) UK statutory annual accounts, which are similar to the statements contained in the Dr Francesco Bellini, Non-executive Director annual review at the front of this document. Appointed 11 May 2001 Dr Bernard Canavan, Non-executive Director (Chairman Audit Committee) The Hon James Andrews Grant, Non-executive Director Appointed 11 May 2001 Dr Zola Horovitz, Non-executive Director Resigned 11 May 2001 Mr Ronald Nordmann, Non-executive Director Mr Joseph Smith, Non-executive Director Resigned 11 May 2001 Mr John Spitznagel, Non-executive Director Resigned 11 May 2001 Mr Gérard Veilleux, Non-executive Director Appointed 11 May 2001
Shire Pharmaceuticals Group plc 69 Summary financial statement Consolidated profit and loss account
Restated Year ended Year ended 31 December 31 December 2001 2000 £000 £000 Turnover Existing operations 509,594 343,624 Acquisitions 70,775 – Continuing operations 580,369 343,624 Cost of sales (83,149) (58,596) Gross profit 497,220 285,028 Other operating expenses (420,798) (205,371) Operating profit Existing operations 56,781 79,657 Acquisitions 19,641 – Continuing operations 76,422 79,657 Profit on ordinary activities before finance charges 76,422 79,657 Finance charges, net 4,955 (2,885) Profit on ordinary activities before taxation 81,377 76,772 Tax on profit on ordinary activities (45,668) (6,109) Profit on ordinary activities after taxation 35,709 70,663 Earnings per share – basic 8.7p 28.0p Earnings per share – diluted 8.5p 27.1p
70 Shire Pharmaceuticals Group plc Summary financial statement Consolidated balance sheet
Restated 31 December 31 December 2001 2000 £000 £000 Fixed assets Intangible assets – intellectual property 259,850 247,278 Intangible assets – goodwill 2,643,578 446,983 Tangible assets 77,880 33,261 Fixed asset investments 45,045 4,142 3,026,353 731,664 Current assets Stocks 32,080 31,536 Deferred tax asset – due within one year 13,351 18,055 – due after one year 8,845 4,217 Debtors – due within one year 159,586 69,107 – due after one year 11,953 15,358 Investments 497,397 93,550 Cash at bank and in hand 81,434 31,194 804,646 263,017 Creditors: Amounts falling due within one year Convertible debt (1,032) (1,004) Other creditors (158,229) (73,576) (159,261) (74,580) Net current assets 645,385 188,437 Total assets less current liabilities 3,671,738 920,101 Creditors: amounts falling due after more than one year Convertible debt (268,178) (1,004) Other creditors (9,654) (93,182) (277,832) (94,186) Net assets 3,393,906 825,915 Capital and reserves Called-up share capital 24,091 12,854 Share premium 3,206,280 873,567 Exchangeable shares 194,972 – Capital reserve 2,755 2,755 Other reserves 24,247 24,247 Profit and loss account (58,439) (87,508) Equity shareholders’ funds 3,393,906 825,915
Shire Pharmaceuticals Group plc 71 Summary financial statement Consolidated cash flow statement
Year ended Year ended 31 December 31 December 2001 2000 £000 £000 Net cash inflow from operating activities 202,876 52,925 Returns on investments and servicing of finance: Interest received 13,077 4,125 Interest paid (8,122) (7,009) Interest element of finance lease rentals – (1) Net cash inflow/(outflow) from returns on investments and servicing of finance 4,955 (2,885) Taxation: Corporation tax paid (44,982) (4,397) Capital expenditure and financial investments: Purchase of long-term investment – (2,398) Purchase of intangible fixed assets (20,159) (25,776) Purchase of tangible fixed assets (9,593) (19,251) Proceeds from sale of intangible fixed assets 3,200 1,027 Proceeds from sale of tangible fixed assets 4,974 7,903 Net cash outflow for capital expenditure and financial investments (21,578) (38,495) Acquisitions and disposals: Expenses of acquisitions (16,450) (964) Net cash acquired with subsidiary undertakings 44,452 – Net cash inflow/(outflow) from acquisitions 28,002 (964) Cash inflow before management of liquid resources and financing 169,273 6,184 Management of liquid resources: Increase in cash placed on short-term deposit (325,479) (39,171) Financing: Issue of ordinary share capital 1,050 7,904 Exercise of share options 46,961 29,085 Expenses of share issues (23,584) (2,089) Capital element of finance leases – (22) Net increase/(decrease) in loans during the year 182,808 (9,329) Net cash inflow from financing 207,235 25,549 Increase/(decrease) in cash in the year 51,029 (7,438)
72 Shire Pharmaceuticals Group plc Notes to the summary financial statement
1 Basis of preparation The summary financial statement has been prepared in accordance with the accounting policies set out in the full UK statutory annual accounts for the year ended 31 December 2001.
2 Directors’ remuneration, interests and transactions Aggregate remuneration The total amounts for directors’ remuneration and other benefits were as follows: 2001 2000 Years ended 31 December £000 £000 Aggregate emoluments 2,019 1,332 Compensation for loss of office 2,754 – Gains on exercise of share options 22,005 11,053 Company contributions to money purchase pension schemes 103 76 Total 26,881 12,461
Directors’ emoluments Compensation Fees/basic for loss Taxable Annual salary of office benefits bonus 2001 2000 Name of director £000 £000 £000 £000 £000 £000
Executive directors Mr Rolf Stahel 482 – 19 225 726 604 Mr Angus Russell 262 – 18 113 393 284 Dr Wilson Totten 288 – 21 110 419 302
Non-executive directors Dr James Cavanaugh 42–––42 35 Dr Barry Price 31–––31 20 Dr Francesco Bellini 221 2,754 37 – 3,012 – Dr Bernard Canavan 60–––60 20 The Hon James Andrews Grant 19–––19 – Dr Zola Horovitz 7 – – – 7 20.5 Mr Ronald Nordmann 29–––29 20.5 Mr Joseph Smith 7 – – – 7 20.5 Mr John Spitznagel 7 – – – 7 20.5 Mr Gérard Veilleux 21–––21 – Aggregate emoluments 1,476 2,754 95 448 4,773 1,347
3 Earnings per share Earnings per share (EPS) has been calculated by dividing the profit on ordinary activities after taxation for each period by the weighted average number of shares in issue during those periods. The weighted average number of shares used in calculating fully diluted earnings per share has been adjusted for the effects of all dilutive potential ordinary shares. The convertible loan note has no impact on the numerator for diluted EPS.
Years ended 31 December 2001 2000 Basic earnings per share 8.7p 28.0p Diluted earnings per share 8.5p 27.1p
Basic earnings per share – weighted average shares 412,183,058 252,497,255 Conversion of convertible debt 289,101 – Exercise of share options 6,270,923 8,411,015 Exercise of warrants 919,029 – Fully diluted earnings per share – weighted average shares 419,662,111 260,908,270
Shire Pharmaceuticals Group plc 73 Summary of significant differences between US generally accepted accounting principles followed by the Group and UK generally accepted accounting principles
The Group’s consolidated financial statements set out in the annual review have been prepared under US GAAP, which differs in certain respects from UK GAAP.The principal differences between the Group’s accounting policies under US GAAP and UK GAAP are set out in the tables below:
Reconciliation of net income from US GAAP to UK GAAP 2001 2000 2001 2000 Years ended 31 December $000 $000 £000 £000 Net income as reported under US GAAP 38,759 211,727 24,847 141,603 Adjustments to conform to UK GAAP: Merger accounting adjustments 131,923 (135,796) 93,899 (89,923) Amortisation of capitalised goodwill 9,763 10,277 6,791 6,792 Amortisation under acquisition accounting (137,936) (34,538) (96,024) (22,824) Stock option compensation costs 6,780 21,914 4,641 13,633 Tax benefit from exercise of non-qualified stock options 3,805 30,782 2,456 20,488 Difference in accounting for convertible debt (41) 470 (29) 298 Accrued taxes on share options 60 (111) 39 (75) Foreign exchange on US$ denominated assets and liabilities – – (911) 671 Net income as reported under UK GAAP 53,113 104,725 35,709 70,663
Shareholders’ equity 2001 2000 2001 2000 As of 31 December $000 $000 £000 £000 Shareholders’ equity as reported under US GAAP 1,262,989 1,174,386 867,799 786,173 Adjustments to conform to UK GAAP: Merger accounting adjustments – (421,457) – (282,136) Goodwill written off to reserves (195,749) (200,914) (134,498) (134,499) Goodwill amortisation 43,394 34,393 29,816 23,024 Net book value of goodwill on acquisition accounting for Roberts 597,094 646,942 410,261 433,085 Net book value of goodwill on acquisition accounting for BioChem 3,231,391 – 2,220,274 – Difference in accounting for convertible debt 423 465 290 311 Difference in valuation of fixed asset investments – 48 – 32 Accrued taxes on share options (52) (111) (36) (75) Shareholders’ equity as reported under UK GAAP 4,939,490 1,233,752 3,393,906 825,915
74 Shire Pharmaceuticals Group plc Shire head office and main operating locations
Shire Pharmaceuticals Group plc Shire US, Inc. Shire Biologics Chief Executive: Rolf Stahel President and Chief Executive Officer: President: Randal Chase William Nuerge Senior Vice President R&D: Ronald Ellis Hampshire International Business Park Chineham, Basingstoke 7900 Tanners Gate Drive Canada Hampshire RG24 8EP, UK Florence, KY4 1042, USA 275, Armand-Frappier Blvd. Tel +44 (0)1256 894 000 Tel +1 859 282 2100 Laval, Quebec, Canada H7V 4A7 Fax +44 (0)1256 894 708 Fax +1 859 282 1794 Tel +1 450 978 7800 Fax +1 450 978 7755 Shire Pharmaceuticals Ltd Shire Laboratories, Inc 2323 du Parc Technologique Blvd President and Chief Executive Officer: Sainte-Foy, Quebec, Canada G1P 4RB UK Jack Khattar Managing Director: John Freeman Tel +1 418 650 0010 1550 East Gude Drive Fax +1 418 650 0080 Hampshire International Business Park Rockville, MD20850, USA Chineham, Basingstoke USA Tel +1 301 838 2500 Hampshire RG24 8EP, UK 30 Bearfoot Rd, Fax +1 301 838 2501 Tel +44 (0)1256 894 000 Northborough Fax +44 (0)1256 894 708 MA 01532, USA Shire Pharmaceutical Tel +1 508 351-9944 Ireland Development, Inc Fax +1 508 351-9675 Business Manager: Brian Martin Senior Vice President: Simon Tulloch Pharmapark, Chapelizod, Dublin 20 1901 Research Boulevard Shire BioChem Tel +00 353 1 630 5411 Rockville, Maryland, 20850 USA President and CEO: Joseph Rus Fax +00 353 1 623 7469 Tel +1 240 453 6400 275, Armand-Frappier Blvd Fax +1 240 453 6404 Laval, Quebec, Canada H7V 4A7 Singapore representative office Managing Director: Tony Ooi Tel +1 450 978-7800 Fax +1 450 978-7755 LiFung Centre 58 Toh Guan Road # 03-03 Singapore 608829 CADx Medical Systems Tel +65 568 0114 275, Armand-Frappier Blvd Fax +65 425 6330 Laval, Quebec, Canada H7V 4A7 Shire France S.A. Tel +1 450 978-6193 General Manager: Vincent Lucet Fax +1 450 978-6199 160 rue de Paris 92771 Boulogne Cedex, France Tel +33 (1) 41 10 25 25 Fax +33 (1) 41 10 92 02
Shire Italia S.p.A General Manager: Dr Riccardo Palmisano Via Lucchese 70 Sesto Fiorentino 50019(Firenze), Italy Tel +39(0)553025050 Fax +39 (0)553025051
Shire Pharma Managing Director: José Antonio Senz de Broto C/Benito Gutierrez 26 – 1B, 28008 Madrid, Spain Tel +34 9 1550 0691
Shire Pharmaceuticals Group plc 75 Shareholder information
Registered office address US shareholders Hampshire International Business Park i) ADSs Chineham, Basingstoke The Company’s American Depository Hampshire RG24 8EP, UK Shares (ADSs, each representing three Registered in England ordinary shares) are listed on the Nasdaq No. 2883758 national market under the symbol “SHPGY”. The Company files reports and Investor relations other documents with the Securities and Global outside US and Canada Exchange Commission (SEC) which are Cléa Rosenfeld available for inspection and copying at the SEC’s public reference facilities or can be Tel +44 (0)1256 894000 obtained by writing to the Company Fax +44 (0)1256 894716 Secretary.
Email [email protected] ii) ADR Depositary Internet www.shire.com Morgan Guaranty Trust Company of New York is the depositary for Shire Canada and US Pharmaceuticals Group plc. All enquiries Gordon Ngan concerning American Depositary Receipts records, certificates or transfer of ordinary Tel +1 450 978 7938 shares into ADSs should be addressed to: Fax +1 450 975 7755 Morgan Guaranty Trust Company Email [email protected] of New York PO Box 8205, Boston Registrars and transfer office MA 02266-8205, USA All administrative enquiries relating to shareholdings should be addressed to Tel +(1) 781 575 4328 Lloyds TSB Registrars, clearly stating Fax +(1) 781 575 4088 the registered shareholder’s name and address.
Lloyds TSB Registrars The Causeway, Worthing West Sussex BN99 6DA, UK
Cautionary statement Statements included herein which are not historical facts are forward-looking statements. The forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialise, the Company’s results could be materially affected. The risks and uncertainties include, but are not limited to, risks associated with the inherent uncertainty of pharmaceutical research, product development and commercialisation, the impact of competitive products, government regulation and approval, product liability claims and the lack of adequate insurance.
76 Shire Pharmaceuticals Group plc Glossary
5HT 5-hydroxytryptamine (also known Dopamine a neurotransmitter that can Pivotal study a major clinical trial that as enteramine or serotonin), a affect brain processes that control has a significant impact on the labelling neurotransmitter that can affect mood, movement, emotional response, and (approved usage) of a drug aggression, and other CNS functions ability to experience pleasure and pain Platelet a constituent of blood that ADHD see attention deficit and Guanosine a nucleoside consisting helps form clots to control bleeding hyperactivity disorder of guanine (a component of DNA and Preclinical studies of compounds RNA) linked to ribose Adverse effects an undesirable conducted in the laboratory, in isolated medical occurrance in a patient or Meningitis an infection of the fluid of tissues, or in living animals clinical trial subject a person’s spinal cord and the fluid that Proof-of-concept study a study surrounds the brain Alzheimer’s disease a degenerative intended to show that a hypothesis or brain disease that usually begins Noradrenaline a neurotransmitter concept is valid gradually, causing a person to forget involved in temperature regulation, Renal osteodystrophy a bone disease recent events or familiar tasks appetite and aggression that occurs when the kidneys fail to Anaemia a condition in which the Nosocomial infection an infection maintain the proper levels of calcium number of red blood cells or the originating from a hospital environment and phosphorus in the blood amount of haemoglobin in a given that was not present when the patient Retrovirus a type of virus containing volume of blood is less than normal was admitted RNA instead of DNA Analgesic a pain-relieving agent that Nucleoside reverse transcriptase Ribonucleic acid (RNA) a nucleic acid does not cause loss of consciousness inhibitors a family of antiviral found in all living cells that plays a role compounds which interfere with the Attention deficit and hyperactivity in the flow of genetic information activity of the viral enzyme reverse disorder (ADHD) a CNS disorder transcriptase Septicaemia a life threatening condition characterised by inattention, in which the blood is infected by impulsiveness and hyperactivity Pharmacokinetics the movements bacteria of drugs within biological systems, CNS central nervous system as affected by uptake, distribution, Serogroup a group of bacteria, all Cytidine a nucleoside consisting of elimination and biotransformation of which contain a common element cytosine (a component of DNA and (antigen) that can elicit an immune Phase I clinical trials usually conducted RNA) linked to ribose response in healthy human volunteers to Deoxyribonucleic acid (DNA) the determine if a drug candidate is safe Stimulant a compound which chemical basis of heredity and the for more extensive testing increases the level of neurotransmitters carrier of genetic information in the brain Phase II clinical trials conducted in DNA chain terminator a compound patients with relevant disease to assess Trigeminal neuralgia a painful which blocks the continuation of a the safety and efficacy of the drug condition involving the trigeminal nerve, DNA chain candidate one of the largest nerves in the head, characterised by sudden, severe pain DNA polymerase an enzyme that Phase III clinical trials conducted in in areas surrounding this nerve catalyses the elongation of DNA chains the target patient population to assess comprehensively the safety and efficacy of the drug candidate
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Shire Pharmaceuticals Group plc 77 Shire Pharmaceuticals Group plc Shire Pharmaceuticals
Shire Pharmaceuticals Group plc
Hampshire International Business Park Chineham Basingstoke Hampshire RG24 8EP
Tel +44 (0)1256 894 000 Fax +44 (0)1256 894 708 www.shire.com