Shire plc Shire Plc : Half-yearly Report -19-
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Half-yearly Report
August 4, 2017 - Shire plc (LSE: SHP, NASDAQ: SHPG), ("Shire" / the
"Group") in accordance with the Financial Conduct Authority's Disclosure
Guidance and Transparency Rules, is publishing its Half-yearly Report
for the six months ended June 30, 2017.
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AdvertisementOn August 3, 2017, the Group announced its results for the same period.
Stephen Williams
Deputy Company Secretary
For further information please contact:
Investor Relations
Ian Karp ikarp@shire.com +1 781 482 9018
Robert Coates rcoates@shire.com +44 1256 894874
Media
Lisa Adler lisa.adler@shire.com +1 617 588 8607
Debbi Ford debbi.ford@shire.com +1 617 949 9083
NOTES TO EDITORS
About Shire
Shire is the leading global biotechnology company focused on serving
people with rare diseases. We strive to develop best-in-class products,
many of which are available in more than 100 countries, across core
therapeutic areas including Hematology, Immunology, Neuroscience,
Ophthalmics, Lysosomal Storage Disorders, Gastrointestinal / Internal
Medicine / Endocrine and Hereditary Angioedema; and a growing franchise
in Oncology.
Our employees come to work every day with a shared mission: to develop
and deliver breakthrough therapies for the hundreds of millions of
people in the world affected by rare diseases and other high-need
conditions, and who lack effective therapies to live their lives to the
fullest.
www.shire.com
Shire plc
Half-yearly Report 2017
Registered in Jersey, No. 99854, 22 Grenville Street, St Helier, Jersey
JE4 8PX
Contents
The "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995
Trademarks
Chief Executive Officer's review
Business overview for the six months to June 30, 2017
Results of operations for the six months to June 30,
2017 and June 30, 2016
Principal risks and uncertainties
Directors' responsibility statement
Unaudited consolidated balance sheets at June 30,
2017 and December 31, 2016
Unaudited consolidated statements of operations for
the six months to June 30, 2017 and June 30, 2016
Unaudited consolidated statements of comprehensive
income for the six months to June 30, 2017
and June 30, 2016
Unaudited consolidated statement of changes in equity
for the six months to June 30, 2017
Unaudited consolidated statement of cash flows for
the six months to June 30, 2017 and
June 30, 2016
Notes to the unaudited consolidated financial statements
Independent review report to Shire plc
THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements included herein that are not historical facts, including
without limitation statements concerning future strategy, plans,
objectives, expectations and intentions, the anticipated timing of
clinical trials and approvals for, and the commercial potential of,
inline or pipeline products, are forward-looking statements. Such
forward-looking statements involve a number of risks and uncertainties
and are subject to change at any time. In the event such risks or
uncertainties materialize, Shire's results could be materially adversely
affected. The risks and uncertainties include, but are not limited to,
the following:
-- Shire's products may not be a commercial success;
-- increased pricing pressures and limits on patient access as a result of
governmental regulations and market developments may affect Shire's
future revenues, financial condition and results of operations;
-- Shire conducts its own manufacturing operations for certain of its
products and is reliant on third party contract manufacturers to
manufacture other products and to provide goods and services. Some of
Shire's products or ingredients are only available from a single approved
source for manufacture. Any disruption to the supply chain for any of
Shire's products may result in Shire being unable to continue marketing
or developing a product or may result in Shire being unable to do so on a
commercially viable basis for some period of time;
-- the manufacture of Shire's products is subject to extensive oversight by
various regulatory agencies. Regulatory approvals or interventions
associated with changes to manufacturing sites, ingredients or
manufacturing processes could lead to, among other things, significant
delays, an increase in operating costs, lost product sales, an
interruption of research activities or the delay of new product launches;
-- certain of Shire's therapies involve lengthy and complex processes, which
may prevent Shire from timely responding to market forces and effectively
managing its production capacity;
-- Shire has a portfolio of products in various stages of research and
development. The successful development of these products is highly
uncertain and requires significant expenditures and time, and there is no
guarantee that these products will receive regulatory approval;
-- the actions of certain customers could affect Shire's ability to sell or
market products profitably. Fluctuations in buying or distribution
patterns by such customers can adversely affect Shire's revenues,
financial conditions or results of operations;
-- Shire's products and product candidates face substantial competition in
the product markets in which it operates, including competition from
generics;
-- adverse outcomes in legal matters, tax audits and other disputes,
including Shire's ability to enforce and defend patents and other
intellectual property rights required for its business, could have a
material adverse effect on the Group's revenues, financial condition or
results of operations;
-- inability to successfully compete for highly qualified personnel from
other companies and organizations;
-- failure to achieve the strategic objectives, including expected operating
efficiencies, cost savings, revenue enhancements, synergies or other
benefits at the time anticipated or at all with respect to Shire's
acquisitions, including of NPS Pharmaceuticals Inc. ("NPS"), Dyax Corp.
("Dyax") or Baxalta Incorporated ("Baxalta"), may adversely affect
Shire's financial condition and results of operations;
-- Shire's growth strategy depends in part upon its ability to expand its
product portfolio through external collaborations, which, if unsuccessful,
may adversely affect the development and sale of its products;
-- a slowdown of global economic growth, or economic instability of
countries in which Shire does business, as well as changes in foreign
currency exchange rates and interest rates, that adversely impact the
availability and cost of credit and customer purchasing and payment
patterns, including the collectability of customer accounts receivable;
-- failure of a marketed product to work effectively or if such a product is
the cause of adverse side effects could result in damage to Shire's
reputation, the withdrawal of the product and legal action against Shire;
-- investigations or enforcement action by regulatory authorities or law
enforcement agencies relating to Shire's activities in the highly
regulated markets in which it operates may result in significant legal
costs and the payment of substantial compensation or fines;
-- Shire is dependent on information technology and its systems and
infrastructure face certain risks, including from service disruptions,
the loss of sensitive or confidential information, cyber-attacks and
other security breaches or data leakages that could have a material
adverse effect on Shire's revenues, financial condition or results of
operations;
-- Shire incurred substantial additional indebtedness to finance the Baxalta
acquisition, which has increased its borrowing costs and may decrease its
business flexibility; and
a further list and description of risks, uncertainties and other matters
can be found in Shire's most recent Annual Report on Form 10-K and in
Shire's subsequent Quarterly Reports on Form 10-Q, in each case
including those risks outlined in "ITEM 1A: Risk Factors", and in
subsequent reports on Form 8-K and other Securities and Exchange
Commission filings, all of which are available on Shire's website.
All forward-looking statements attributable to the Group or any person
acting on its behalf are expressly qualified in their entirety by this
cautionary statement. Readers are cautioned not to place undue reliance
on these forward-looking statements that speak only as of the date
hereof. Except to the extent otherwise required by applicable law, the
Group does not undertake any obligation to update or revise
forward-looking statements, whether as a result of new information,
future events or otherwise.
Trademarks
The Group owns or has rights to trademarks, service marks or trade names
that are used in connection with the operation of its business. In
addition, its names, logos and website names and addresses are owned by
the Group or licensed by the Group. The Group also owns or has the
rights to copyrights that protect the content of its solutions. Solely
for convenience, the trademarks, service marks, trade names and
copyrights referred to in this Quarterly Report on Form 10-Q are listed
without the (c), (R) and (TM) symbols, but the Group will assert, to the
fullest extent under applicable law, its rights or the rights of the
applicable licensors to these trademarks, service marks, trade names and
copyrights.
This Half-yearly Report may include trademarks, service marks or trade
names of other companies. The Group's use or display of other parties'
trademarks, service marks, trade names or products is not intended to,
and does not imply a relationship with, or endorsement or sponsorship of
the Group by, the trademark, service mark or trade name.
Chief Executive Officer's review
We are pleased to enclose our financial results for the six-month period
ended June 30, 2017. This Half-yearly Report includes condensed
consolidated financial statements prepared in accordance with generally
accepted accounting principles in the United States of America ("U.S.
GAAP").
Flemming Ornskov, M.D., M.P.H. Shire's Chief Executive Officer,
commented:
"Shire delivered strong top-line growth and significantly advanced our
pipeline during the first half of 2017. We saw significant contributions
from our broad and diverse portfolio and further realized cost synergies
from our integration with Baxalta, which continued ahead of schedule.
"Total reported product sales in the first half of 2017 were $7.0
billion, up 77% against first half of 2016, primarily due to the
inclusion of Baxalta product revenues. We also delivered product sales
growth in Shire's legacy business versus first half of 2016: Genetic
Diseases up 8% to $1,401 million and Internal Medicine up 12% to $903
million.
"We continued to drive the late-stage clinical pipeline, with milestones
achieved in programs across our core therapeutic areas. Most recently,
we announced positive topline data from our Phase 3 pivotal trial of
SHP643 in Hereditary Angioedema, and anticipate submission of the BLA in
late 2017 or early 2018. MYDAYIS, a once-daily treatment for patients
with ADHD, received US FDA approval and will be launched in September.
In addition, we were granted European Union (EU) Conditional Marketing
Authorisation for NATPAR (Parathyroid Hormone) for the treatment of
patients with chronic hypoparathyroidism, and received European
Medicines Agency (EMA) validation of the VEYVONDI [von Willebrand factor
(Recombinant)] Marketing Authorization Application for treatment of von
Willebrand Disease (VWD).
"We are at an exciting inflection point, with both our rare disease and
neuroscience businesses performing strongly and each having significant
growth potential over the coming years. The strength and scale of our
business provides us with the opportunity to further optimize our
franchise portfolio - one of our key priorities communicated earlier
this year. By year end, we expect to complete a formal evaluation of the
full range of strategic options for the neuroscience franchise,
including the potential for its independent public listing.
"As we enter the second half of 2017, we are focused on generating
strong organic growth while continuing to deliver on our key priorities
- launching more than 80 products globally by leveraging our expanded
commercial platform, progressing our late-stage pipeline, integrating
Baxalta, and paying down debt. We remain very confident about Shire's
long-term prospects."
Flemming Ornskov, M.D., M.P.H.
Chief Executive Officer
Business overview for the six months to June 30, 2017
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and related notes
appearing elsewhere in this Half-yearly Report.
Significant Events in the Six Months Ended June 30, 2017 and Recent
Developments
Corporate Strategy
Shire to assess strategic options for its Neuroscience franchise
-- As part of the Board's ongoing commitment to optimize Shire's portfolio
and strategic focus, Shire is assessing strategic options for our
Neuroscience franchise. These options may include the independent public
listing of the Neuroscience franchise. Shire intends to complete this
strategic review by year end.
Business Development
Shire entered into a licensing agreement for SHP659 (formerly known as
P-321)
-- On May 1, 2017, Shire announced it agreed to license the exclusive
worldwide rights to P-321 from Parion Sciences. P-321 is a Phase 2
investigational epithelial sodium channel inhibitor for the potential
treatment of dry eye disease in adults. Shire will develop, and if
approved, commercialize this compound which would expand our leadership
position in ophthalmics and provide another important treatment option
for patients with dry eye disease.
Shire entered into a licensing agreement for Novimmune bi-specific
antibody
-- On July 18, 2017, Shire entered into a licensing agreement with Novimmune
S.A. The license grants Shire exclusive worldwide rights to develop and
commercialize a bi-specific antibody in pre-clinical development for the
treatment of hemophilia A and hemophilia A patients with inhibitors.
Products
FIRAZYR for the treatment of Hereditary Angioedema ("HAE") in Japan
-- On July 6, 2017, Shire submitted a Japanese New Drug Application to the
Pharmaceutical and Medical Devices Agency in Japan for the treatment of
HAE.
VEYVONDI for the treatment of adults affected by Von Willebrand Disease
("VWD")
-- On June 22, 2017, Shire announced that the European Medicines Agency
("EMA") validated the Marketing Authorization Application for VEYVONDI to
prevent and treat bleeding episodes and peri-operative bleeding in adults
(age 18 and older) diagnosed with VWD.
MYDAYIS for the treatment of attention deficit hyperactivity disorder
("ADHD")
-- On June 20, 2017, Shire announced that the U.S. Food and Drug
Administration ("FDA") approved MYDAYIS (mixed salts of a single-entity
amphetamine product), a once-daily treatment comprised of three different
types of drug-releasing beads for patients aged 13 years and older with
ADHD.
NATPAR for the treatment of chronic hypoparathyroidism
-- On April 26, 2017, Shire announced the European Commission (EC) granted
Conditional Marketing Authorization for NATPAR (rhPTH[1-84]), the first
recombinant human protein with the full length 84-aminoacid sequence of
endogenous parathyroid hormone (PTH), as an adjunctive treatment for
adult patients with chronic hypoparathyroidism who cannot be adequately
controlled with standard therapy alone.
VYVANSE for the treatment of ADHD and Binge Eating Disorder ("BED")
-- On April 18, 2017, Shire announced that VYVANSE (lisdexamfetamine
dimesylate) CII is now available in the United States in a new chewable
tablet formulation, following FDA approval in January 2017.
INTUNIV for the treatment of ADHD in Japan
-- On March 30, 2017, Shire's partner in Japan, Shionogi & Co., Ltd,
received approval from the Japanese Ministry of Health, Labor and Welfare
to manufacture and market INTUNIV for ADHD in Japan.
-- On May 29, 2017, Shire's partner in Japan, Shionogi & Co., Ltd, launched
INTUNIV for the treatment of ADHD in children and adolescents from six to
17 years old.
CINRYZE for the treatment of HAE
-- On March 16, 2017, the EC approved a label extension for CINRYZE (C1
inhibitor [human]), broadening its use to children with HAE. CINRYZE is
now the first and only treatment indicated for routine prevention of
angioedema attacks in children aged six years or older who have severe
and recurrent attacks of HAE and cannot tolerate or are not adequately
protected by oral preventative treatments, or who are inadequately
managed with repeated acute treatment. CINRYZE is also now approved for
acute treatment and pre-procedure prevention of angioedema attacks in
children aged two years or older with HAE.
Pipeline
SHP654 for the treatment of hemophilia A
-- On July 6, 2017, Shire announced the submission of an Investigational New
Drug ("IND") application to the FDA for SHP654, an investigational factor
VIII (FVIII) gene therapy for the treatment of hemophilia A.
SHP643 for the treatment of HAE
-- On May 18, 2017, Shire announced positive topline Phase 3 results for the
HELP Study, which evaluated the efficacy and safety of subcutaneously
administered lanadelumab in patients 12 years of age or older with HAE.
The study met its primary endpoint and all secondary endpoints.
SHP647 for the treatment of ulcerative colitis
-- On May 17, 2017, Shire announced the publication of positive Phase 2
results for the TURANDOT Study. The study met its primary endpoint,
demonstrating significantly greater remission rates in patients receiving
the anti-MAdCAM antibody. Shire continues to work towards the initiation
of a pivotal Phase 3 trial for SHP647 in the second half of 2017.
SHP680 for the treatment of multiple neurological conditions
-- Shire is advancing clinical development of SHP680 targetting indications
for multiple neurological conditions with high unmet need. SHP680 is a
new chemical entity prodrug of d-amphetamine, which has previously been
studied in Phase 1 clinical trials, demonstrating a unique PK profile. It
belongs to a class of molecules with an established and well understood
safety profile.
SHP655 for the treatment of congenital thrombotic thrombocytopenic
purpura (cTTP)
-- On March 22, 2017, the FDA granted Fast Track Designation for recombinant
ADAMTS13 (SHP655) for the treatment of acute episodes of cTTP in patients
with a congenital deficiency of the von Willebrand factorcleaving
protease ADAMTS13.
SHP640 for the treatment of bacterial and adenoviral conjunctivitis
-- The global Phase 3 clinical development program will have clinical sites
in over 20 countries. Patient recruitment has started and the first
patient visit occurred in March 2017. The topline data is expected in Q2
2018.
SHP639 for the treatment of Glaucoma
-- In March 2017, Shire submitted an (IND) application for SHP639. The IND
is for the initiation of first in human clinical studies of SHP639 for
the reduction of elevated intraocular pressure in patients with primary
open-angle glaucoma or ocular hypertension.
Board Changes
In accordance with Shire's normal succession planning, the Group
announced that the following Non-Executive Directors will retire from
the Board with effect from the conclusion of the 2018 Annual General
Meeting ("AGM"):
-- William M. Burns, Senior Independent Director
-- David Ginsburg, Chairman of the Science & Technology Committee
-- Anne Minto, Chairman of the Remuneration Committee
Al Stroucken, Non-Executive Director, assumed the position of Chairman
of the Remuneration Committee effective August 3, 2017. Anne Minto will
continue to serve as a member of the Remuneration Committee to enable a
period of transition until her retirement from the Board. Anne will
fully support Al in the shareholder consultation process ahead of the
publication of the new Directors' Remuneration Policy that will be put
forward for shareholder approval at the 2018 AGM. The Board, supported
by the Nomination & Governance Committee, will continue to evaluate
Board and committee membership, including succession plans for the roles
of Senior Independent Director and Chairman of the Science & Technology
Committee, and will announce further changes once finalized.
Dividend
In respect of the six months ended June 30, 2017, the Board resolved to
pay an interim dividend of 0.0509 U.S. dollars per ordinary share (2016:
0.0463 U.S. dollars per ordinary share).
Dividend payments will be made in Pounds sterling to holders of ordinary
shares and in U.S. dollars to holders of ADSs. A dividend of 0.0385 (1)
Pounds sterling per ordinary share (2016: 0.0351 Pounds sterling) and
0.1527 U.S. dollars per ADS (2016: 0.1389 U.S. dollars) will be paid on
October 20, 2017, to shareholders on the register as of the close of
business on September 8, 2017.
Holders of ordinary shares are notified that, in order to receive UK
sourced dividends via Shire's Income Access Share arrangements ("IAS
Arrangements"), they need to have submitted a valid IAS Arrangements
election form to the Group's Registrar, Equiniti, by no later than 5pm
(BST) on September 22, 2017. Holders of ordinary shares are advised
that:
-- any previous elections made using versions of the IAS Arrangements
election form in use prior to February 16, 2016, and any elections deemed
to have been made prior to April 28, 2016, are no longer valid; and
-- if they do not elect, or have not elected using the newly formatted IAS
Arrangements election forms published on or after February 16, 2016, to
receive UK sourced dividends via Shire's IAS Arrangements, their
dividends will be Irish sourced and therefore incur Irish dividend
withholding tax, subject to applicable exemptions.
Internet links to the newly formatted IAS Arrangements election forms
can be found at:
http://investors.shire.com/shareholder-information/shareholder-forms.aspx
(1) Translated using a GBP:USD exchange rate of 1.3221.
Going Concern
As stated in Note 1 to the unaudited consolidated financial statements,
the Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable
future. Accordingly, the Directors consider it appropriate to adopt the
going concern basis of accounting in preparing the Half-yearly Report.
Results of Operations for the Three and Six Months Ended June 30, 2017
and 2016
Product sales
The following table provides an analysis of the Group's Product sales:
(In millions,
except %) Three months ended June 30, Six months ended June 30,
Product Product
sales sales
Product sales: 2017 2016 growth 2017 2016 growth
HEMOPHILIA $ 743.9 $ 275.6 N/M $1,394.3 $ 275.6 N/M
INHIBITOR
THERAPIES 220.7 74.0 N/M 441.2 74.0 N/M
Hematology total 964.6 349.6 N/M 1,835.5 349.6 N/M
CINRYZE 175.9 173.0 2% 401.8 337.2 19%
ELAPRASE 161.0 154.0 5% 301.6 277.6 9%
FIRAZYR 137.4 136.7 1% 265.9 265.0 -%
REPLAGAL 122.1 118.4 3% 231.8 221.6 5%
VPRIV 87.9 88.0 -% 167.7 171.6 (2)%
KALBITOR 20.6 17.7 16% 32.3 28.1 15%
Genetic Diseases
total 704.9 687.8 2% 1,401.1 1,301.1 8%
IMMUNOGLOBULIN
THERAPIES 510.5 138.2 N/M 1,008.8 138.2 N/M
BIO THERAPEUTICS 172.2 51.3 N/M 350.1 51.3 N/M
Immunology total 682.7 189.5 N/M 1,358.9 189.5 N/M
VYVANSE 518.2 517.7 -% 1,081.9 1,026.9 5%
ADDERALL XR 71.4 101.8 (30)% 136.3 200.6 (32)%
MYDAYIS 15.7 - N/A 15.7 - N/A
Other
Neuroscience 30.1 35.7 (16)% 54.8 57.8 (5)%
Neuroscience
total 635.4 655.2 (3)% 1,288.7 1,285.3 -%
LIALDA/MEZAVANT 207.8 193.7 7% 382.9 361.7 6%
PENTASA 83.3 72.9 14% 152.4 136.9 11%
GATTEX/REVESTIVE 75.3 44.5 69% 144.3 96.2 50%
NATPARA 34.5 19.9 73% 64.2 35.5 81%
Other Internal
Medicine 83.4 88.7 (6)% 159.3 173.3 (8)%
Internal Medicine
total 484.3 419.7 15% 903.1 803.6 12%
Oncology total 62.5 20.3 N/M 120.8 20.3 N/M
Ophthalmology
total 57.4 - N/A 96.0 - N/A
Total Product
sales $3,591.8 $2,322.1 55% $7,004.1 $3,949.4 77%
N/M: Baxalta sales have only been included in the consolidated results
of the Group since the date of acquisition; therefore, Product sales
growth as a percentage is not meaningful.
Hematology
Hematology was acquired with Baxalta in June 2016 and includes sales of
recombinant and plasma-derived hemophilia products (primarily factor
VIII and factor IX) and inhibitor therapies. Hematology product sales,
totaling $964.6 million and $1,835.5 million, respectively, are included
in Product sales for the three and six months ended June 30, 2017,
representing 27% and 26% of Shire's reported Product sales,
respectively.
Genetic Diseases
Genetic Diseases product sales for the three and six months ended June
30, 2017 increased by 2% and 8%, respectively, compared to the
corresponding periods in 2016. Growth was primarily driven by the
Group's lysosomal storage diseases portfolio and CINRYZE.
ELAPRASE product sales for the three and six months ended June 30, 2017
increased by 5% and 9%, respectively, while REPLAGAL sales increased by
3% and 5%, respectively, compared to the corresponding periods in 2016.
Both products benefited from an increase in the number of patients on
therapy.
CINRYZE product sales for the three and six months ended June 30, 2017
increased by 2% and 19%, respectively. The growth in the three months
ended June 30, 2017 was primarily due to an increase in number of
patients, partially offset by destocking during the second quarter of
2017. The growth in the six months ended June 30, 2017 was primarily due
to an increase in number of patients and the impact of U.S. stocking in
the first half of 2017.
Immunology
Immunology was acquired with Baxalta in June 2016 and includes product
sales of antibody-replacement immunoglobulin and bio therapeutics
therapies. Immunology product sales, totaling $682.7 million and
$1,358.9 million, respectively, are included in Product sales for the
three and six months ended June 30, 2017, representing 19% of Shire's
reported Product sales, in each respective period.
Neuroscience
Neuroscience product sales for the three months ended June 30, 2017
decreased by 3% compared to the corresponding period in 2016, primarily
driven by ADDERALL XR. Product sales for the six months ended June 30,
2017 increased less than 1% compared to the corresponding period in
2016.
ADDERALL XR sales decreased by 30% and 32%, respectively, during the
three and six months ended June 30, 2017 compared to the corresponding
periods in 2016, primarily due to additional generic competition since
August 2016.
VYVANSE product sales increased by less than 1% and 5% for the three and
six months ended June 30, 2017, respectively, compared with the
corresponding periods in 2016. The three months ended June 30, 2017
growth was impacted by destocking in the second quarter of 2017 compared
to stocking in the corresponding period in 2016. During the six months
ended June 30, 2017, VYVANSE sales increased due to year-over-year
prescription growth in the U.S., the benefit of a price increase taken
since the first quarter of 2016 and growth in international markets,
partially offset by destocking.
MYDAYIS, approved by the FDA on June 20, 2017, contributed $15.7 million
of product sales related to launch stocking.
Internal Medicine
Internal Medicine product sales increased by 15% and 12%, respectively,
during the three and six months ended June 30, 2017, compared to the
corresponding periods in 2016, with growth primarily driven by
GATTEX/REVESTIVE and NATPARA.
GATTEX/REVESTIVE and NATPARA reported increased product sales of 69% and
73% during the three months ended June 30, 2017 and 50% and 81% during
the six months ended June 30, 2017, respectively, primarily due to an
increase in the numbers of patients on therapy.
During the second quarter of 2017, a generic version of LIALDA was
approved by the FDA; Shire expects generic competition to negatively
impact future LIALDA product sales.
Oncology
Oncology was acquired with Baxalta in June 2016 and includes sales of
ONCASPAR and ONIVYDE, the latter of which was approved in the EU on
October 18, 2016. Oncology product sales, totaling reported sales of
$62.5 million and $120.8 million respectively, are included in Product
sales for the three and six months ended June 30, 2017, representing 2%
Shire's reported Product sales, in each respective period.
Ophthalmology
Ophthalmology product sales relate to XIIDRA, which was made available
to patients starting on August 29, 2016. XIIDRA contributed $57.4
million and $96.0 million of product sales during the three and six
months ended June 30, 2017.
Royalties and other revenues
The following table provides an analysis of Shire's income from
royalties and other revenues:
Three months ended June
30, Six months ended June 30,
(In millions,
except %) 2017 2016 Change % 2017 2016 Change %
SENSIPAR
Royalties $ 46.4 $ 35.6 30% $ 85.3 $ 73.5 16%
ADDERALL XR
Royalties 13.4 5.2 158% 25.9 11.0 135%
FOSRENOL
Royalties 12.1 11.4 6% 20.7 20.6 -%
3TC and ZEFFIX
Royalties 8.2 12.1 (32)% 22.7 27.1 (16)%
Other
Royalties and
Revenues 73.9 42.7 73% 159.4 56.8 181%
Total
Royalties and
other
revenues $154.0 $107.0 44% $314.0 $189.0 66%
Royalties and other revenues increased 44% and 66%, respectively, during
the three and six months ended June 30, 2017 compared to the
corresponding periods in 2016, primarily due to the inclusion of
contract manufacturing revenue acquired with Baxalta.
Cost of sales
Cost of sales as a percentage of Total revenues decreased to 30% for the
three months ended June 30, 2017, compared to 32% for the corresponding
period in 2016, primarily due to lower expense related to the unwind of
inventory fair value adjustments. Cost of sales as a percentage of Total
revenues increased to 33% for the six months ended June 30, 2017,
compared to 25% in the corresponding period in 2016, primarily due to
the impact of the unwind of inventory fair value adjustments and
increased depreciation following the acquisition of Baxalta on June 3,
2016.
For the three and six months ended June 30, 2017, Cost of sales included
depreciation of $67.0 million and $139.1 million, respectively (2016:
$22.4 million and $30.7 million, respectively).
Research and development
In the three and six months ended June 30, 2017, Research and
development expenses increased by $247.6 million and $409.8 million, or
84% and 80%, respectively, compared to the corresponding periods in
2016, primarily due to milestone and upfront payments associated with
license arrangements and the inclusion of Baxalta costs.
For the three and six months ended June 30, 2017, Research and
development included depreciation of $12.8 million and $26.2 million,
respectively (2016: $5.8 million and $11.7 million, respectively).
Selling, general and administrative
In the three and six months ended June 30, 2017, Selling, general and
administrative expenses increased by $223.8 million and $637.8 million,
or 33% and 55%, compared to the corresponding periods in 2016, primarily
due to the inclusion of Baxalta related costs and increased XIIDRA
marketing costs.
For the three and six months ended June 30, 2017, Selling, general and
administrative expenses included depreciation of $40.9 million and $78.3
million, respectively (2016: $19.7 million and $39.8 million,
respectively).
Amortization of acquired intangible assets
For the three and six months ended June 30, 2017, Shire recorded
Amortization of acquired intangible assets of $434.1 million and $798.1
million, respectively, compared to $213.0 million and $347.6 million,
respectively, in the corresponding periods in 2016. The increase is
primarily related to amortization on the intangible assets acquired with
the acquisition of Baxalta.
Integration and acquisition costs
In the three and six months ended June 30, 2017, Shire recorded
Integration and acquisition costs of $343.7 million and $459.7 million,
respectively, compared to $363.0 million and $454.1 million,
respectively, in the corresponding periods in 2016.
In 2017, Integration and acquisition costs included a net charge of
$151.2 million, primarily relating to the change in fair value of
contingent consideration for SHP643, which was acquired from Dyax in
2016. The Baxalta integration and acquisition costs include $80.2
million and $117.1 million, respectively, of employee severance and
acceleration of stock compensation, $50.4 million and $85.6 million,
respectively, of third-party professional fees and $17.2 million and
$41.7 million, respectively, of expenses associated with facility
consolidations for the three and six months ended June 30, 2017. The
Group also recognized $33.6 million of expenses during the three and six
months ended June 30, 2017 related to asset impairments.
For the three and six months ended June 30, 2016, Integration and
acquisition costs primarily consist of $67.1 million and $125.6 million,
respectively, of acquisition costs including legal, investment banking
and other transaction-related fees, $254.5 million and $265.5 million,
respectively, of employee severance and acceleration of stock
compensation, $79.2 million and $89.2 million, respectively, of
third-party professional fees and $56.5 million and $45.1 million,
respectively, of change in fair value of contingent consideration.
Interest expense
For the three and six months ended June 30, 2017, Shire incurred
Interest expense of $141.3 million and $283.6 million, respectively,
primarily due to higher interest expense incurred on borrowings used to
fund the acquisitions of Dyax and Baxalta.
For the three and six months ended June 30, 2016, Shire incurred
Interest expense of $87.2 million and $131.9 million, respectively,
primarily related to the interest and amortization of financing fees
incurred on borrowings to fund the acquisition of Dyax and the
amortization of one-time upfront arrangement fees incurred on borrowings
associated with the acquisition of Baxalta.
Taxation
The effective tax rate on income from continuing operations for the
three and six months ended June 30, 2017 was 9% and 5% (2016: -427% and
2%), respectively.
The effective tax rate for the three and six months ended June 30, 2017
and 2016 was driven by the combined impact of the relative quantum of
profit before tax for the period by jurisdiction as well as acquisition
and integration costs in higher tax territories.
Discontinued Operations
The loss from discontinued operations for the three months ended June
30, 2017 was $1.2 million, net of taxes, and the gain for the six months
ended June 30, 2017 was $19.0 million, net of taxes. The loss during the
three months ended June 30, 2017 was primarily related to the divested
DERMAGRAFT business and the gain during the six months ended June 30,
2017 was primarily due to the return of funds previously held in escrow
related to the acquisition of the DERMAGRAFT business.
The loss from discontinued operations for the three and six months ended
June 30, 2016 was $248.7 million and $239.2 million, respectively, net
of taxes, primarily related to the establishment of legal contingencies
related to the divested DERMAGRAFT business.
Financial condition at June 30, 2017 and December 31, 2016
Cash and cash equivalents:
Cash and cash equivalents decreased by $265.1 million to $263.7 million
at June 30, 2017 (December 31, 2016: $528.8 million). The net decrease
was primarily related to $1,681.9 million of net cash provided by
operating activities, which was partially offset by net repayments of
debt ($1,416.0 million), purchases of fixed assets ($391.1 million), and
payment of dividends ($234.7 million).
Accounts receivable, net:
Accounts receivable, net increased by $138.7 million to $2,755.2 million
at June 30, 2017 (December 31, 2016: $2,616.5 million) due to higher
revenue, in part related to our newly launched product, MYDAYIS.
Inventories
Inventories decreased by $237.0 million to $3,325.3 million at June 30,
2017 (December 31, 2016: $3,562.3 million) primarily due to the
amortization of the unwind of inventory fair value adjustments ($625.4
million), offset by increases in inventory levels to support higher
demand of immunology and hematology products and expected demand for our
ophthalmology product.
Goodwill
Goodwill increased by $1,593.9 million to $19,482.1 million at June 30,
2017 (December 31, 2016: $17,888.2 million), principally due to
finalizing the purchase accounting related to the Baxalta acquisition.
Intangible assets, net
Intangible assets, net decreased by $1,263.2 million to $33,434.3
million at June 30, 2017 (December 31, 2016: $34,697.5 million),
principally due to finalizing the purchase accounting related to the
Baxalta acquisition. As of June 30, 2017, we completed our purchase
accounting. We had previously disclosed that the fair values of those
assets were preliminary and subject to change pending the completion of
our valuation work.
Accounts payable and accrued expenses
Accounts payable and accrued expenses decreased by $470.4 million to
$3,842.0 at June 30, 2017 (December 31, 2016: $4,312.4 million)
primarily related to the settlement of legal contingencies
(approximately $350 million) related to the divested Dermagraft
business.
Short and long term borrowings and capital leases
Short and long term borrowings and capital leases decreased by a net of
$1,407.8 million to $21,560.0 million at June 30, 2017 (December 31,
2016: $22,967.8 million) primarily related to the repayments of senior
notes and other long term debt ($1,701.0 million), partially offset by
an increase in short term borrowings under the revolving credit facility
($285.0 million).
Non-current deferred tax liabilities
Non-current deferred tax liabilities decreased by $534.7 million to
$7,788.0 million at June 30 2017 (December 31, 2016: $8,322.7 million)
primarily due to adjustments for the deferred tax liabilities arising on
intangible assets acquired with Baxalta. As of June 30, 2017 we
completed our purchase accounting related to the Baxalta transaction.
Other non-current liabilities
Other non-current liabilities increased by $224.6 million to $2,346.2
million at June 30, 2017 (December 31, 2016: $2,121.6 million)
principally due the increase in the fair value of contingent
consideration payable primarily associated with the SHP643 (lanadelumab)
IPR&D intangible asset acquired with the Dyax transaction, an increase
in income tax payable as well as an increase in pension liability.
Liquidity and Capital Resources
General
The Group's funding requirements depend on a number of factors,
including the timing and extent of its development programs; corporate,
business and product acquisitions; the level of resources required for
the expansion of certain manufacturing and marketing capabilities as the
product base expands; increases in accounts receivable and inventory
which may arise with any increase in product sales; technological
developments; the timing and cost of obtaining required regulatory
approvals for new products; the timing and quantum of milestone payments
on business combinations, in-licenses and collaborative projects; the
timing and quantum of tax and dividend payments; the timing and quantum
of purchases by the Employee Benefit Trust of Shire shares in the market
to satisfy awards granted under Shire's employee share plans and the
amount of cash generated from sales of Shire's products and royalty
receipts.
An important part of Shire's business strategy is to protect its
products and technologies through the use of patents, proprietary
technologies and trademarks, to the extent available. The Group intends
to defend its intellectual property and as a result may need cash for
funding the cost of litigation.
The Group finances its activities through cash generated from operating
activities, credit facilities, private and public offerings of equity
and debt securities and the proceeds of asset or investment disposals.
Shire's Consolidated Balance Sheets include $263.7 million of Cash and
cash equivalents as of June 30, 2017.
Shire has a revolving credit facility ("RCF") of $2,100.0 million, which
matures in 2021, $735.0 million of which was utilized as of June 30,
2017. The RCF incorporates a $250.0 million U.S. dollar and Euro
swingline facility operating as a sub-limit thereof.
In connection with the acquisition of Dyax, Shire entered into a $5.6
billion amortizing term loan facility in November 2015. As of June 30,
2017, $3.3 billion of this term loan facility was outstanding. The
facility matures in different tranches through November 2018 and $1.7
billion is due within the next twelve months.
In connection with the acquisition of Baxalta, Shire assumed $5.0
billion of unsecured senior notes previously issued by Baxalta, of which
$750.0 million is due within the next twelve months and issued $12.1
billion of unsecured senior notes in September 2016, of which none are
due for repayment in the next twelve months.
The details of these financing arrangements are included in Note 13,
Borrowings and Capital Leases, to these Unaudited Consolidated Financial
Statements.
In addition, Shire also has access to certain short-term uncommitted
lines of credit which are available to utilize from time to time to
provide short-term cash management flexibility. As of June 30, 2017,
these lines of credit were not utilized.
The Group may also engage in financing activities from time to time,
including accessing the debt or equity capital markets.
Financing
Shire anticipates that its operating cash flow together with available
cash, cash equivalents, and the RCF will be sufficient to meet its
anticipated future operating expenses, capital expenditures, tax and
interest payments, lease obligations, repayment of borrowings and
milestone payments as they become due over the next twelve months.
If the Group decides to acquire other businesses, it expects to fund
these acquisitions from cash resources, the RCF and through new
borrowings (including issuances of debt securities) or the issuance of
new equity, if necessary.
Sources and uses of cash
The following table provides an analysis of the Group's gross and net
debt position (excluding restricted cash), as of June 30, 2017 and
December 31, 2016:
(In millions) June 30, 2017 December 31, 2016
Cash and cash equivalents $ 263.7 $ 528.8
Long term borrowings (excluding
capital leases) (18,011.3) (19,552.6)
Short term borrowings (excluding
capital leases) (3,198.1) (3,061.6)
Capital leases (350.6) (353.6)
Total debt $ (21,560.0) $ (22,967.8)
Net debt $ (21,296.3) $ (22,439.0)
-- Net debt is a Non-GAAP measure. Net debt represents U.S. GAAP Cash and
cash equivalents less U.S. GAAP short and long term borrowings and
capital leases (see above). The Group believes that Net debt is a useful
measure as it indicates the level of borrowings after taking account of
the Cash and cash equivalents that could be utilized to pay down the
outstanding borrowings.
-- Substantially all of the Group's Cash and cash equivalents are held by
foreign subsidiaries (i.e., those subsidiaries incorporated outside of
Jersey, Channel Islands, the jurisdiction of incorporation of Shire plc,
Shire's holding company). The amount of Cash and cash equivalents held by
foreign subsidiaries has not had, and is not expected to have, a material
impact on the Group's liquidity and capital resources.
Cash flow activity
Net cash provided by operating activities increased by $701.5 million,
or 72%, to $1,681.9 million (2016: $980.4 million) during the six months
ended June 30, 2017, primarily due to increased cash receipts from
higher sales, partially offset by a payment of $351.6 million associated
with the settlement of the DERMAGRAFT litigation.
Net cash used in investing activities was $355.9 million during the six
months ended June 30, 2017, principally relating to cash paid for
purchases of PP&E and long term investments.
Net cash used in financing activities was $1,595.2 million during the
six months ended June 30, 2017. This includes $1,700.0 million of
scheduled and advance repayments under the November 2015 Facility B and
a dividend payment of $234.7, which was partially offset by $285.0
million of increased borrowings under the RCF and $79.5 million of cash
proceeds from the exercise of options.
Obligations and commitments
There were no material changes to the Group's contractual obligations
previously disclosed in Review of our Business in Shire's Annual Report
and Accounts for the year ended December 31, 2016.
Recent Accounting Pronouncements
A description of recently issued accounting standards is included under
the heading "New Accounting Pronouncements" in Note 1, Summary of
Significant Accounting Policies.
Principal risks and uncertainties
The Group's risk management strategy is to identify, assess and mitigate
any significant risks that it faces. Despite this, it should be noted
that no risk management strategy can provide absolute assurance against
loss.
The Group's processes for managing these risks are consistent with those
outlined in Shire's Annual Report and Accounts for the year ended
December 31, 2016, which is available on the Group's website,
www.shire.com.
The principal risks and uncertainties affecting the Group for the
remaining six months of 2017 are those described under the headings
below. It is not anticipated that the nature of the principal risks and
uncertainties disclosed in full in Shire's Annual Report and Accounts
for the year ended December 31, 2016, will change in respect of the
second half of 2017. The Group believes that these risk factors apply
equally and therefore all should be carefully considered before any
investment is made in Shire.
Shire's combination with Baxalta closed on June 3, 2016. All references
to the "Group," "Shire," "we," "us," or "our" used herein refer to Shire
plc and its subsidiaries, including Baxalta and its subsidiaries.
In summary, these risks and uncertainties are as follows:
Risks Related to Our Business
-- The Group's products may not be a commercial success.
-- Increased pricing pressures and limits on patient access as a result of
governmental regulations and market developments may affect the Group's
future revenues, financial condition and results of operations.
-- The Group depends on third-parties to supply certain inputs and services
critical to its operations including certain inputs, services and
ingredients critical to its manufacturing processes.
-- Any disruption to the supply chain for any of the Group's products, or
any difficulties or delays in the manufacturing, distribution and sale of
its products may result in the Group being unable to continue marketing
or developing a product, or may result in the Group being unable to do so
on a commercially viable basis for some period of time.
-- The manufacture of the Group's products is subject to extensive oversight
by various regulatory agencies. Regulatory approvals or interventions
associated with changes to manufacturing sites, ingredients or
manufacturing processes could lead to significant delays, an increase in
operating costs, lost product sales, an interruption of research
activities or the delay of new product launches.
-- The nature of producing plasma-based therapies may prevent Shire from
timely responding to market forces and effectively managing its
production capacity.
-- The Group has a portfolio of products in various stages of research and
development. The successful development of these products is
highly uncertain and requires significant expenditures and time, and
there is no guarantee that these products will receive regulatory
approval.
-- The actions of certain customers could affect the Group's ability to sell
or market products profitably. Fluctuations in buying or distribution
patterns by such customers can adversely affect the Group's revenues,
financial conditions or results of operations.
-- Failure to comply with laws and regulations governing the sales and
marketing of its products could materially impact Shire's revenues and
profitability.
-- The Group's products and product candidates face substantial
competition in the product markets in which it operates.
-- The Group's patented products are subject to significant competition from
generics.
-- Adverse outcomes in legal matters and other disputes, including the
Group's ability to enforce and defend patents and other intellectual
property rights required for its business, could have a material adverse
effect on the Group's revenues, financial condition or results of
operations.
-- The Group may fail to obtain, maintain, enforce or defend the
intellectual property rights required to conduct its business.
-- The Group faces intense competition for highly qualified personnel from
other companies and organizations.
-- Failure to successfully execute or attain strategic objectives from the
Group's acquisitions and growth strategy may adversely affect the Group's
financial condition and results of operations.
-- Shire's growth strategy depends in part upon its ability to expand its
product portfolio through external collaborations, which, if unsuccessful,
may adversely affect the development and sale of its products.
-- A slowdown of global economic growth, or economic instability of
countries in which the Group does business, could have negative
consequences for the Group's business and increase the risk of
non-payment by the Group's customers.
-- Changes in foreign currency exchange rates and interest rates could have
a material adverse effect on Shire's operating results and liquidity.
-- The Group is subject to evolving and complex tax laws, which may result
in additional liabilities that may adversely affect the Group's financial
condition or results of operations.
-- If a marketed product fails to work effectively or causes adverse side
effects, this could result in damage to the Group's reputation, the
withdrawal of the product and legal action against the Group.
-- The Group is dependent on information technology and its systems and
infrastructure face certain risks, including from service disruptions,
the loss of sensitive or confidential information, cyber-attacks and
other security breaches or data leakages that could have a material
adverse effect on the Group's revenues, financial condition or results of
operations.
-- Shire faces risks relating to the expected exit of the United Kingdom
from the European Union.
Risks Related to the Combination with Baxalta Incorporated
-- The Group may not successfully integrate the businesses of Shire
and Baxalta.
-- Shire has incurred significant additional indebtedness in connection with
the acquisition, which has decreased the Group's business flexibility and
increased its interest expense. All of the Group's debt obligations have
priority over the Group's Ordinary Shares and ADSs with respect to
payment in the event of a liquidation, dissolution or winding up.
-- Uncertainties associated with the combination may cause a loss of
employees and may otherwise affect the future business and operations of
Shire and the combined Group.
-- Baxalta only operated as an independent company from July 1, 2015 until
the consummation of its merger with Shire on June 3, 2016, and Baxalta's
historical financial information is not necessarily representative of the
results that Baxalta would have achieved as a separate, publicly traded
company, and may not be a reliable indicator of future results of
Baxalta. Moreover, any pro forma financial information published by
the Group is not necessarily representative of the results that the Group
would have achieved, and may not be a reliable indicator of
future results.
-- Baxter may not satisfy its obligations under various transaction
agreements that have been executed as part of the separation or Shire may
fail to have necessary systems and services in place when certain of the
transaction agreements expire.
-- The acquisition of Baxalta could result in significant liability to the
Group if the combination causes the spin-off of Baxalta from Baxter or a
Later Distribution to be taxable.
-- In connection with the merger with Baxalta, the separation and the Later
Distributions could result in significant liability to the Group due to
Baxalta's spin-off from Baxter.
-- Certain Baxalta agreements may contain change of control provisions that
may have been triggered by the merger that, if acted upon or not waived,
could cause the Group to lose the benefit of such agreement and incur
liabilities or replacement costs, which could have a material adverse
effect on the Group.
-- New regulations issued by the U.S. Department of Treasury may impact
the Group following the merger with Baxalta.
Directors' responsibility statement
The Directors confirm that, to the best of their knowledge, the
condensed consolidated set of financial statements has been prepared in
accordance with U.S. GAAP and that the Half-yearly Report herein
includes a fair review of the information required by DTR 4.2.7R and DTR
4.2.8R.
The Directors of Shire plc are listed in Shire's Annual Report and
Accounts for the year ended December 31, 2016.
Details of all current Directors are available on Shire's website at
www.shire.com
Approved by the Board of Directors and signed on its behalf by:
Flemming Ornskov, M.D., M.P.H.
Chief Executive Officer
August 3, 2017
Jeffrey Poulton
Chief Financial Officer
August 3, 2017
SHIRE PLC
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value of shares)
June 30, 2017 December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 263.7 $ 528.8
Restricted cash 34.2 25.6
Accounts receivable, net 2,755.2 2,616.5
Inventories 3,325.3 3,562.3
Prepaid expenses and other current assets 778.5 806.3
Total current assets 7,156.9 7,539.5
Investments 197.0 191.6
Property, plant and equipment ("PP&E"), net 6,554.5 6,469.6
Goodwill 19,482.1 17,888.2
Intangible assets, net 33,434.3 34,697.5
Deferred tax asset 132.2 96.7
Other non-current assets 233.9 152.3
Total assets $ 67,190.9 $ 67,035.4
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,842.0 $ 4,312.4
Short term borrowings and capital leases 3,204.9 3,068.0
Other current liabilities 389.6 362.9
Total current liabilities 7,436.5 7,743.3
Long term borrowings and capital leases 18,355.1 19,899.8
Deferred tax liability 7,788.0 8,322.7
Other non-current liabilities 2,346.2 2,121.6
Total liabilities 35,925.8 38,087.4
Commitments and contingencies
Equity:
Common stock of 5p par value; 1,500 shares authorized;
and 915.3 shares issued and outstanding (2016: 1,500
shares authorized; and 912.2 shares issued and outstanding) 81.5 81.3
Additional paid-in capital 24,951.2 24,740.9
Treasury stock: 8.4 shares (2016: 9.1 shares) (283.0) (301.9 )
Accumulated other comprehensive income/(loss) 200.1 (1,497.6 )
Retained earnings 6,315.3 5,925.3
Total equity 31,265.1 28,948.0
Total liabilities and equity $ 67,190.9 $ 67,035.4
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
Three months ended June
30, Six months ended June 30,
2017 2016 2017 2016
Revenues:
Product sales $3,591.8 $2,322.1 $7,004.1 $3,949.4
Royalties & other revenues 154.0 107.0 314.0 189.0
Total revenues 3,745.8 2,429.1 7,318.1 4,138.4
Costs and expenses:
Cost of sales 1,108.9 778.1 2,435.9 1,026.7
Research and development 542.4 294.8 921.7 511.9
Selling, general and administrative 899.1 675.3 1,788.0 1,150.2
Amortization of acquired intangible assets 434.1 213.0 798.1 347.6
Integration and acquisition costs 343.7 363.0 459.7 454.1
Reorganization costs 13.6 11.0 19.1 14.3
Loss/(gain) on sale of product rights 4.8 (2.3) (0.7) (6.5)
Total operating expenses 3,346.6 2,332.9 6,421.8 3,498.3
Operating income from continuing operations 399.2 96.2 896.3 640.1
Interest income 1.1 1.6 4.2 2.6
Interest expense (141.3) (87.2) (283.6) (131.9)
Other income/(expense), net 2.5 6.0 7.0 (2.5)
Total other expense, net (137.7) (79.6) (272.4) (131.8)
Income from continuing operations before income taxes
and equity in earnings/(losses) of equity method investees 261.5 16.6 623.9 508.3
Income taxes (24.3) 70.9 (31.1) (11.2)
Equity in earnings/(losses) of equity method investees,
net of taxes 4.3 (0.9) 3.5 (1.0)
Income from continuing operations, net of taxes 241.5 86.6 596.3 496.1
(Loss)/gain from discontinued operations, net of taxes (1.2) (248.7) 19.0 (239.2)
Net income/(loss) $ 240.3 $ (162.1) $ 615.3 $ 256.9
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(Unaudited, in millions, except per share amounts)
Three months ended June Six months ended June
30, 30,
2017 2016 2017 2016
Earnings/(loss)
per Ordinary
Share - basic
Earnings from
continuing
operations $ 0.27 $ 0.12 $ 0.66 $ 0.78
(Loss)/gain from
discontinued
operations - (0.36) 0.02 (0.38)
Earnings/(loss)
per Ordinary
Share - basic $ 0.27 $ (0.24) $ 0.68 $ 0.40
Earnings/(loss)
per Ordinary
Share - diluted
Earnings from
continuing
operations $ 0.26 $ 0.12 $ 0.65 $ 0.77
(Loss)/earnings
from
discontinued
operations - (0.36) 0.02 (0.37)
Earnings/(loss)
per Ordinary
Share -
diluted $ 0.26 $ (0.24) $ 0.67 $ 0.40
Weighted average
number of
shares:
Basic 906.4 682.8 905.3 637.3
Diluted 912.7 682.8 912.3 640.1
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions)
Three months ended Six months ended June
June 30, 30,
2017 2016 2017 2016
Net income/(loss) $ 240.3 $(162.1) $ 615.3 $256.9
Other comprehensive income/(loss):
Foreign currency translation adjustments 1,431.0 (220.2) 1,696.5 (195.5)
Pension and other employee benefits (net of tax expense
of $1.3 and $0.9 for the three and six months ended
June 30, 2017 and $nil for both the three and six
months ended June 30, 2016) 3.2 - 10.6 -
Unrealized loss on available-for-sale securities (net
of tax benefit of $0.5 and tax expense of $1.7 for
the three and six months ended June 30, 2017 and tax
benefit of $1.4 for both the three and six months
ended June 30, 2016) (5.6) (4.4) (3.5) (4.7)
Hedging activities (net of tax benefit of $0.5 and
$3.2 for the three and six months ended June 30, 2017
and $1.6 for both the three and six months ended June
30, 2016) (1.4) (1.8) (5.9) (1.8)
Comprehensive income/(loss) $1,667.5 $(388.5) $2,313.0 $ 54.9
The components of Accumulated other comprehensive income/(loss) as of
June 30, 2017 and December 31, 2016 are as follows:
June
30, December 31,
2017 2016
Foreign currency translation adjustments $191.1 $(1,505.4)
Pension and other employee benefits, net of taxes 5.4 (5.2)
Unrealized holding gain on available-for-sale securities,
net of taxes 3.1 6.6
Hedging activities, net of taxes 0.5 6.4
Accumulated other comprehensive income/(loss) $200.1 $(1,497.6)
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited, in millions)
Common
stock Accumulated
number Additional other
of Common paid-in Treasury comprehensive Retained Total
shares stock capital stock income earnings equity
As of January 1, 2017 912.2 $ 81.3 $ 24,740.9 $(301.9) $ (1,497.6 )$5,925.3 $ 28,948.0
Net income - - - - - 615.3 615.3
Other comprehensive income net of tax - - - - 1,697.7 - 1,697.7
Shares issued under employee benefit plans and other 3.1 0.2 93.2 - - - 93.4
Cumulative-effect adjustment from adoption of ASU
2016-09 - - 10.7 - - 28.3 39.0
Share-based compensation - - 106.4 - - - 106.4
Shares released by employee benefit trust to satisfy
exercise of stock options - - - 18.9 - (18.9 ) -
Dividends - - - - - (234.7 ) (234.7)
As of June 30, 2017 915.3 $ 81.5 $ 24,951.2 $(283.0) $ 200.1 $6,315.3 $ 31,265.1
Dividends per share
During the six months ended June 30, 2017, Shire plc declared and paid
dividends of $0.257 U.S. per ordinary share (equivalent to $0.771 U.S.
per ADS) totaling $234.7 million.
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Six months ended June 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 615.3 $ 256.9
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,041.7 429.8
Share based compensation 106.4 194.8
Amortization of deferred financing fees 6.8 50.1
Expense related to the unwind of inventory fair value
adjustments 625.4 293.5
Change in deferred taxes (293.3) (329.2)
Change in fair value of contingent consideration 147.7 (45.0)
Impairment of PP&E and intangible assets 53.6 8.9
Other, net 14.8 (17.6)
Changes in operating assets and liabilities:
Increase in accounts receivable (181.5) (181.0)
Increase in sales deduction accrual 57.1 66.4
Increase in inventory (171.6) (116.4)
Decrease in prepayments and other assets 104.6 26.5
(Decrease)/increase in accounts payable and other
liabilities (445.1) 342.7
Net cash provided by operating activities 1,681.9 980.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of PP&E and long term investments (391.1) (179.1)
Purchases of businesses, net of cash acquired - (17,476.2)
Proceeds from sale of investments 40.6 -
Movements in restricted cash (8.6) 67.2
Other, net 3.2 3.3
Net cash used in investing activities (355.9) (17,584.8)
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited, in millions)
Six months ended June 30,
2017 2016
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, long term
and short term borrowings 2,111.9 18,895.0
Repayment of revolving line of credit, long term and
short term borrowings (3,527.9) (1,500.3)
Payment of dividend (234.7) (130.2)
Debt issuance costs - (112.3)
Proceeds from exercise of options 79.5 0.1
Other, net (24.0) 11.9
Net cash (used in)/provided by financing activities (1,595.2) 17,164.2
Effect of foreign exchange rate changes on cash and
cash equivalents 4.1 (1.9)
Net (decrease)/increase in cash and cash equivalents (265.1) 557.9
Cash and cash equivalents at beginning of period 528.8 135.5
Cash and cash equivalents at end of period $ 263.7 $ 693.4
Supplemental information:
Six months ended June 30,
2017 2016
Interest paid $ 267.0 $ 111.4
Income taxes paid, net $ 176.0 $ 253.7
For stock issued as purchase consideration for the acquisition of
Baxalta related to non-cash investing activities, refer to Note 2,
Business Combinations, to these Unaudited Consolidated Financial
Statements.
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
These interim financial statements of Shire plc and its subsidiaries
(collectively "Shire" or the "Group") are unaudited. They have been
prepared in accordance with generally accepted accounting principles in
the United States of America ("U.S. GAAP").
The Consolidated Balance Sheet as of December 31, 2016 was derived from
the Audited Consolidated Financial Statements as of that date.
These interim Unaudited Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and
accompanying notes included in the Group's Annual Report and Accounts
for the year ended December 31, 2016, as filed with the SEC on February
22, 2017.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. GAAP have been
condensed or omitted from these interim financial statements. However,
these interim financial statements include all adjustments, consisting
of normal recurring adjustments, which are, in the opinion of management,
necessary to fairly state the results of the interim period and the
Group believes that the disclosures are adequate to make the information
presented not misleading. Interim results are not necessarily indicative
of results to be expected for the full year.
On June 3, 2016, the Group completed its acquisition of Baxalta for
$32.4 billion, representing the fair value of purchase consideration.
The Group's Unaudited Consolidated Financial Statements include the
results of Baxalta from the date of acquisition. For further details
regarding the acquisition, refer to Note 2, Business Combinations, of
these Unaudited Consolidated Financial Statements.
Use of Estimates
The preparation of Financial Statements, in conformity with U.S. GAAP
and SEC regulations, requires management to make estimates, judgments
and assumptions that affect the reported and disclosed amounts of assets,
liabilities and equity at the date of the Unaudited Consolidated
Financial Statements and reported amounts of revenues and expenses
during the period. On an on-going basis, the Group evaluates its
estimates, judgments and methodologies. Estimates are based on
historical experience, current conditions and on various other
assumptions that are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets, liabilities and equity and the amounts of revenues and expenses.
Actual results may differ from these estimates under different
assumptions or conditions.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board ("FASB") or other standard setting
bodies that the Group adopts as of the specified effective date. Unless
otherwise discussed below, the Group does not believe that the impact of
recently issued standards that are not yet effective will have a
material impact on the Group's financial position or results of
operations upon adoption.
Adopted during the current period
Inventory
In July 2015, the FASB issued new guidance which requires an entity to
measure inventory at the lower of cost and net realizable value. Net
realizable value is defined as the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of
completion, disposal and transportation. The Group adopted this standard
as of January 1, 2017, which did not impact the Group's financial
position or results of operations.
Share-Based Payment Accounting
In March 2016, the FASB issued Accounting Standards Update ("ASU") No.
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting. The new standard requires
recognition of the income tax effects of vested or settled awards in the
income statement and involves several other aspects of the accounting
for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities
and classification on the statement of cash flows and allows a one-time
accounting policy election to account for forfeitures as they occur. The
new standard was effective January 1, 2017.
The Group adopted ASU 2016-09 in the first quarter of 2017. Before
adoption, excess tax benefits or deficiencies from the Group's equity
awards were recorded as Additional paid-in capital in its Consolidated
Balance Sheets. Upon adoption, the Group recorded any excess tax
benefits or deficiencies from its equity awards in its Consolidated
Statements of Operations in the reporting periods in which vesting or
settlement occurs.
Amendments related to accounting for excess tax benefits have been
adopted prospectively, resulting in recognition of excess tax benefits
against Income taxes rather than Additional paid-in capital of $11.5
million for the six months ended June 30, 2017.
As a result of the adoption, the Group recorded an adjustment to
Retained earnings of $39.0 million to recognize net operating loss
carryforwards attributable to excess tax benefits on stock compensation
that had not been previously recognized to Additional paid-in capital.
Excess tax benefits for share-based payments are now included in Net
cash provided by operating activities rather than Net cash provided by
financing activities. The changes have been applied prospectively in
accordance with the ASU and prior periods have not been adjusted.
Upon adoption of ASU 2016-09, the Group elected to account for
forfeitures in relation to service conditions as they occur. The change
was applied on a modified retrospective basis with a cumulative effect
adjustment to Retained earnings of $10.7 million as of January 1, 2017.
Definition of a Business
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a Business. This new standard
clarifies the definition of a business and provides guidance to
determine when an integrated set of assets and activities is not a
business. The Group adopted this standard prospectively on January 1,
2017.
To be adopted in future periods
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill
and Other (Topic 350): Simplifying the Test of Goodwill Impairment. This
new standard simplifies how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test. Step
2 measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit's goodwill with the carrying amount of that
goodwill. This standard will be effective for the Group as of January 1,
2020, with early adoption permitted for annual goodwill impairment tests
performed after January 1, 2017. The Group does not expect the adoption
of this standard to have a material impact on its financial position and
results of operations.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which supersedes all existing revenue
recognition requirements, including most industry-specific guidance. The
new standard requires a Group to recognize revenue when it transfers
goods or services to customers in an amount that reflects the
consideration that the Group expects to receive for those goods or
services. The new standard also requires additional qualitative and
quantitative disclosures.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date, which
delayed the effective date of the new standard from January 1, 2017 to
January 1, 2018. The FASB also agreed to allow entities to choose to
adopt the standard as of the original effective date.
The FASB has subsequently issued five additional ASUs amending the
guidance in Topic 606, each with the same effective date and transition
date of January 1, 2018. This amended guidance has been considered in
the Group's overall assessment of the new standard.
Shire will adopt this standard on the effective date of January 1, 2018.
The Group is currently evaluating the method of adoption and the
potential impact on its financial position and results of operations of
adopting this guidance. The Group has identified two primary revenue
streams from contracts with customers as part of its initial assessment:
1) product sales and 2) licensing arrangements. Shire is in the process
of evaluating these contracts and is not yet able to estimate the
anticipated impact to the Group's financial statements from the
application of the new standard.
Financial Instrument Accounting
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments
- Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities. The new standard amends certain
aspects of accounting and disclosure requirements of financial
instruments, including the requirement that equity investments with
readily determinable fair values be measured at fair value with changes
in fair value recognized in the results of operations. This standard
will be effective for the Group as of January 1, 2018. The Group is
currently evaluating the method of adoption and the potential impact on
its financial position and results of operations of adopting this
guidance.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).
The new accounting guidance will require the recognition of all lease
assets and lease liabilities by lessees and sets forth new disclosure
requirements for those lease assets and liabilities. The standard
requires lessees to recognize right-of-use assets and lease liabilities
on the balance sheet using a modified retrospective approach at the
beginning of the earliest comparative period in the financial
statements. This standard will be effective for the Group as of January
1, 2019. Early adoption is permitted. The Group is currently evaluating
the potential impact on its financial position and results of operations
of adopting this guidance.
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments.
The new standard clarifies certain aspects of the statement of cash
flows, and aims to reduce diversity in practice regarding how certain
transactions are classified in the statement of cash flows. This
standard will be effective for the Group as of January 1, 2018. Early
adoption is permitted. The adoption of this guidance is not expected to
have a significant impact on the Group's Consolidated Statement of Cash
Flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows
(Topic 230): Restricted Cash. The new guidance is intended to reduce
diversity in the presentation of restricted cash and restricted cash
equivalents in the statement. The guidance requires that restricted
cash and restricted cash equivalents be included as components of total
cash and cash equivalents as presented on the statement of cash flows.
This standard will be effective for the Group as of January 1, 2018. The
adoption of this guidance is not expected to have a significant impact
on the Group's Consolidated Statements of Cash Flows.
Income Taxes
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic
740): Intra-Entity Transfers Other than Inventory. This standard removes
the current exception in U.S. GAAP prohibiting entities from recognizing
current and deferred income tax expenses or benefits related to transfer
of assets, other than inventory, within the consolidated entity. The
current exception to defer the recognition of any tax impact on the
transfer of inventory within the consolidated entity until it is sold to
a third party remains unaffected. This standard will be effective for
the Group as of January 1, 2018, with the early adoption permitted. The
Group is currently evaluating the method of adoption and the potential
impact on its financial position and results of operations of adopting
this guidance.
Retirement Benefits Income Statement Presentation
In March 2017, the FASB issued ASU 2017-07 Compensation - Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost. The standard amends
the income statement presentation of the components of net periodic
benefit cost for defined benefit pension and other postretirement plans.
The standard requires entities to (1) disaggregate the
current-service-cost component from the other components of net benefit
cost (the "other components") and present it with other current
compensation costs for related employees in the income statement and (2)
present the other components elsewhere in the income statement and
outside of income from operations if such a subtotal is presented. The
standard also requires entities to disclose the income statement lines
that contain the other components if they are not presented on
appropriately described separate lines. This standard will be effective
for the Group as of January 1, 2018. The Group does not expect the
adoption of this standard to have a material impact on its financial
position and results of operations.
Share-Based Payment Accounting
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock
Compensation (Topic 718): Scope Modification Accounting. The new
standard clarifies when changes to the terms or conditions of a
share-based payment award must be accounted for as modifications. This
standard will be effective for the Group as of January 1, 2018. Early
adoption is permitted. The adoption of this guidance is not expected to
have a significant impact on the Group's financial position and results
of operations.
Going concern
The Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable
future. Accordingly, the Directors consider it appropriate to adopt the
going concern basis of accounting in preparing the Half-yearly Report.
2. Business Combinations
Acquisition of Baxalta
On June 3, 2016, Shire acquired all of the outstanding common stock of
Baxalta for $18.00 per share in cash and 0.1482 Shire American
Depository Shares ("ADSs") per Baxalta share, or if a former Baxalta
shareholder properly elected, 0.4446 Shire ordinary shares per Baxalta
share.
Baxalta was a global biopharmaceutical company that focused on
developing, manufacturing and commercializing therapies for orphan
diseases and underserved conditions in hematology, immunology and
oncology.
The purchase price consideration for the acquisition of Baxalta was
finalized in the second quarter of 2017. The fair value of the purchase
price consideration consisted of the following:
(In millions) Fair value
Cash paid to shareholders $ 12,366.7
Fair value of stock issued to shareholders 19,353.2
Fair value of partially vested stock options and RSUs
assumed 508.8
Contingent consideration payable 165.0
Total purchase price consideration $ 32,393.7
The acquisition of Baxalta was accounted for as a business combination
using the acquisition method of accounting. Shire issued 305.2 million
shares to former Baxalta shareholders at the date of the acquisition.
For a more detailed description of the fair value of the partially
vested stock options and RSUs assumed, refer to Note 27, Share-based
Compensation Plans, of the Group's Annual Report and Accounts for the
year ended December 31, 2016.
The assets acquired and the liabilities assumed from Baxalta have been
recorded at their fair value as of June 3, 2016, the date of
acquisition. The Group's Unaudited Consolidated Financial Statements
included the results of Baxalta from the date of acquisition.
The purchase price allocation for the acquisition of Baxalta was
finalized in the second quarter of 2017. The Group's allocation of the
purchase price to the assets acquired and liabilities assumed as of the
acquisition date, including measurement period adjustments, is outlined
below.
Measurement Values as
Preliminary value as of acquisition date (as previously period of June 30,
(In millions) reported as of December 31, 2016) adjustments 2017
ASSETS
Current assets:
Cash and cash equivalents $ 583.2 $ - $ 583.2
Accounts receivable 1,069.7 (96.4) 973.3
Inventories 3,893.4 81.2 3,974.6
Other current assets 576.0 5.3 581.3
Total current assets 6,122.3 (9.9) 6,112.4
Property, plant and equipment 5,452.7 (46.5) 5,406.2
Investments 128.2 - 128.2
Goodwill 11,422.4 1,076.2 12,498.6
Intangible assets
Currently marketed products 21,995.0 (830.0) 21,165.0
In-Process Research and Development ("IPR&D") 730.0 (570.0) 160.0
Contract based arrangements 42.2 - 42.2
Other non-current assets 155.0 69.7 224.7
Total assets $ 46,047.8 $ (310.5) $45,737.3
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 1,321.9 $ (2.7) $ 1,319.2
Other current liabilities 354.4 9.0 363.4
Long term borrowings and capital leases 5,424.9 - 5,424.9
Deferred tax liability 5,445.3 (315.0) 5,130.3
Other non-current liabilities 1,103.6 2.2 1,105.8
Total liabilities $ 13,650.1 $ (306.5) $13,343.6
Fair value of identifiable assets acquired and liabilities
assumed $ 32,397.7 $ (4.0) $32,393.7
Consideration
Fair value of purchase consideration $ 32,397.7 $ (4.0) $32,393.7
The measurement period adjustments for Intangible assets reflect changes
in the estimated fair value of currently marketed products and IPR&D.
Changes are mainly related to finalizing the unit of account judgments
and other changes in estimates including Cost of sales allocation and
royalty expense. The measurement period adjustments for Inventory
primarily reflect refinements in the estimated selling price of
inventory. The changes in the estimated fair values primarily are to
more accurately reflect market participant assumptions about facts and
circumstances existing as of the acquisition date. The measurement
period adjustments did not result from intervening events subsequent to
the acquisition date.
As a result of measurement period adjustments related to the change in
fair value of currently marketed products and inventory, a charge of
$85.2 million was recognized in Cost of sales and a benefit of $23.3
million was recognized in Amortization of acquired intangible assets,
respectively, in the Group's Unaudited Consolidated Statements of
Operations for the six months ended June 30, 2017. These adjustments
would have been recorded during the year ended December 31, 2016 if
these adjustments had been recognized as of the acquisition date.
Intangible assets
The fair value of the identifiable intangible assets has been estimated
using an income approach, which is a valuation technique that provides
an estimate of the fair value of an asset based on market participant
expectations of the incremental after tax cash flows an asset would
generate over its remaining useful life. The useful lives for currently
marketed products were determined based upon the remaining useful
economic lives of the assets that are expected to contribute to future
cash flows.
Currently marketed products totaling $21,165.0 million relate to
intellectual property ("IP") rights acquired for Baxalta's currently
marketed products. The estimated useful life of the intangible assets
related to currently marketed products range from 6 to 23 years
(weighted average 21 years), with amortization being recorded on a
straight-line basis.
IPR&D intangible assets totaling $160.0 million represent the value
assigned to research and development ("R&D") projects acquired. The
IPR&D intangible assets are capitalized and accounted for as
indefinite-lived intangible assets and will be subject to impairment
testing until completion or abandonment of the projects. Upon successful
completion of each project, the Group will make a separate determination
of the estimated useful life of the IPR&D intangible asset and the
related amortization will be recorded as an expense over the estimated
useful life.
Some of the more significant assumptions inherent in the development of
those asset valuations include the estimated net cash flows for each
year for each asset or product (including net revenues, cost of sales,
R&D costs, selling and marketing costs, working capital/asset
contributory asset charges and other cash flow assumptions), the
appropriate discount rate to select in order to measure the risk
inherent in each future cash flow stream, the assessment of each asset's
life cycle, the potential regulatory and commercial success risks,
competitive trends impacting the asset and each cash flow stream as well
as other factors.
The discount rate used to arrive at the present value at the acquisition
date of the IPR&D intangible assets was 9.5% to reflect the internal
rate of return and incremental commercial uncertainty in the cash flow
projections. No assurances can be given that the underlying assumptions
used to prepare the discounted cash flow analysis will not change. For
these and other reasons, actual results may vary significantly from
estimated results.
Goodwill
Goodwill of $12,498.6 million, which is not deductible for tax purposes,
includes the expected synergies that will result from combining the
operations of Baxalta with Shire, intangible assets that do not qualify
for separate recognition at the time of the acquisition, the value of
the assembled workforce, and impacted by establishing a deferred tax
liability for the acquired identifiable intangible assets which have no
tax basis.
Contingent consideration
The Group acquired certain contingent obligations classified as
contingent consideration related to Baxalta's historical business
combinations. Additional consideration is conditionally due upon the
achievement of certain milestones related to the development, regulatory,
first commercial sale and other sales milestones, which could total up
to approximately $1.5 billion. The Group may also pay royalties based on
certain product sales. The Group estimated the fair value of the assumed
contingent consideration to be $165.0 million using a probability
weighting approach that considered the possible outcomes based on
assumptions related to the timing and probability of the product launch
date, discount rates matched to the timing of first payment and
probability of success rates and discount adjustments on the related
cash flows.
Inventory
The estimated fair value of work-in-process and finished goods inventory
was determined utilizing the net realizable value, based on the expected
selling price of the inventory, adjusted for incremental costs to
complete the manufacturing process and for direct selling efforts, as
well as for a reasonable profit allowance. The estimated fair value of
raw material inventory was valued at replacement cost, which is equal to
the value a market participant would pay to acquire the inventory.
The fair value adjustment related to inventory is expensed based on the
expected product-specific inventory utilization, which is reviewed on a
periodic basis and is recorded within Cost of sales in the Group's
Unaudited Consolidated Statements of Operations.
Retirement plans
The Group assumed pension plans as part of the acquisition of Baxalta,
including defined benefit and post-retirement benefit plans in the U.S.
and foreign jurisdictions, which had a net liability balance of $610.4
million. As of June 3, 2016, the Baxalta defined benefit pension plans
had assets with a fair value of $358.5 million.
Integration and acquisition costs
In the three and six months ended June 30, 2017, the Group expensed
$192.4 million and $310.9 million, respectively, relating to the
acquisition and integration of Baxalta, which have been recorded within
Integration and acquisition costs in the Group's Unaudited Consolidated
Statements of Operations. Refer to Note 4, Integration and Acquisition
Costs, for further information regarding the Group's Integration and
acquisition costs for the three and six months ended June 30, 2017.
Supplemental disclosure of pro forma information
The following unaudited pro forma financial information presents the
combined results of the operations of Shire and Baxalta as if the
acquisition of Baxalta had occurred as of January 1, 2015. The unaudited
pro forma financial information is not necessarily indicative of what
the consolidated results of operations actually would have been had the
respective acquisitions been completed on January 1, 2015. In addition,
the unaudited pro forma financial information does not purport to
project the future results of operations of the combined Group.
Three
months
ended Six months
June ended June
30, 30,
(In millions, except per share amounts) 2016 2016
Revenues $3,484.1 $6,741.4
Net income from continuing operations 621.3 923.9
Per share amounts:
Net income from continuing operations per share -
basic $ 0.70 $ 1.04
Net income from continuing operations per share -
diluted $ 0.70 $ 1.04
The unaudited pro forma financial information above reflects the
following pro forma adjustments:
1. an adjustment to increase net income for the three and six months ended
June 30, 2016 by $371.8 million and $411.3 million, respectively, to
eliminate integration and acquisition related costs incurred by Shire and
Baxalta;
2. an adjustment to increase net income for the three and six months ended
June 30, 2016 by $218.5 million and $171.6 million, respectively, to
reflect the expense related to the unwind of inventory fair value
adjustments as inventory is sold;
3. an adjustment to increase amortization expense for the three and six
months ended June 30, 2016 by $121.8 million and $306.0 million,
respectively, related to the identifiable intangible assets acquired; and
4. an adjustment to decrease net income for the three and six months ended
June 30, 2016 by $33.8 million and $94.2 million, respectively, primarily
related to the additional interest expense associated with the debt
incurred to partially fund the acquisition of Baxalta and the
amortization of related deferred debt issuance costs.
The adjustments above are stated net of their tax effects, where
applicable.
Acquisition of Dyax
On January 22, 2016, Shire acquired all of the outstanding common stock
of Dyax for $37.30 per share in cash. Under the terms of the merger
agreement, former Dyax shareholders may receive additional value through
a non-tradable contingent value right worth $4.00 per share, payable
upon U.S. Food and Drug Administration ("FDA") approval of SHP643
(formerly DX-2930) in Hereditary Angioedema ("HAE").
Dyax was a publicly-traded, Massachusetts-based rare disease
biopharmaceutical company primarily focused on the development of plasma
kallikrein ("pKal") inhibitors for the treatment of HAE. Dyax's most
advanced clinical program was SHP643, a Phase 3 program with the
potential for improved efficacy and convenience for HAE patients. SHP643
has received Fast Track, Breakthrough Therapy, and Orphan Drug
Designations by the FDA and has also received Orphan Drug status in the
EU. Dyax's sole marketed product, KALBITOR, is a pKal inhibitor for the
treatment of acute attacks of HAE in patients 12 years of age and older.
The acquisition of Dyax was accounted for as a business combination
using the acquisition method. The acquisition-date fair value
consideration was $6,330.0 million, comprising cash paid on closing of
$5,934.0 million and the fair value of the contingent value right of
$396.0 million (maximum payable $646.0 million). The assets acquired and
the liabilities assumed from Dyax have been recorded at their fair value
as of January 22, 2016, the date of acquisition. The Group's Unaudited
Consolidated Financial Statements include the results of Dyax as of
January 22, 2016.
The purchase price allocation for the acquisition of Dyax was finalized
in the first quarter of 2017. The allocation of the total purchase price
is outlined below.
(In millions) Fair value
ASSETS
Current assets:
Cash and cash equivalents $ 241.2
Accounts receivable 22.5
Inventories 20.2
Other current assets 8.1
Total current assets 292.0
Property, plant and equipment 5.8
Goodwill 2,702.1
Intangible assets
Currently marketed projects 135.0
IPR&D 4,100.0
Contract based royalty arrangements 425.0
Other non-current assets 28.6
Total assets $ 7,688.5
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 30.0
Other current liabilities 1.7
Deferred tax liability 1,325.4
Other non-current liabilities 1.4
Total liabilities $ 1,358.5
Fair value of identifiable assets acquired and liabilities
assumed $ 6,330.0
Consideration
Fair value of purchase consideration $ 6,330.0
Currently marketed products
Currently marketed products totaling $135.0 million relate to
intellectual property rights acquired for KALBITOR. The fair value of
the currently marketed product has been estimated using an income
approach, based on the present value of incremental after tax cash flows
attributable to KALBITOR.
The estimated useful life of the KALBITOR intangible asset is 18 years,
with amortization being recorded on a straight-line basis.
IPR&D
The IPR&D asset of $4,100.0 million relates to Dyax's clinical program
SHP643, a Phase 3 program with the potential for improved efficacy and
convenience for HAE patients. The IPR&D intangible asset is capitalized
and accounted for as indefinite-lived intangible assets and will be
subject to impairment testing until completion or abandonment of the
projects. The fair value of this IPR&D asset was estimated based on an
income approach, using the present value of incremental after tax cash
flows expected to be generated by this development project. The
estimated cash flows have been probability adjusted to take into account
the development stage of completion and the remaining risks and
uncertainties surrounding the future development and commercialization.
The estimated probability adjusted after tax cash flows used to estimate
the fair value of intangible assets have been discounted at 9%.
Royalty rights
Intangible assets totaling $425.0 million relate to royalty rights
arising from licensing agreements of a portfolio of product candidates.
This portfolio includes two approved products, marketed by Eli Lilly &
Company, and various development-stage products. Multiple product
candidates with other pharmaceutical companies are in various stages of
clinical development for which the Group is eligible to receive future
royalties and/or milestone payments.
The fair value of these royalty rights has been estimated using an
income approach, based on the present value of incremental after-tax
cash flows attributable to each royalty right.
The estimated useful lives of these royalty rights range from seven to
nine years (weighted average eight years), with amortization being
recorded on a straight-line basis.
Goodwill
Goodwill of $2,702.1 million, which is not deductible for tax purposes,
includes the expected synergies that will result from combining the
operations of Dyax with Shire; intangible assets that do not qualify for
separate recognition at the time of the acquisition; the value of the
assembled workforce; and impacted by establishing a deferred tax
liability for the acquired identifiable intangible assets which have no
tax basis.
Integration and acquisition costs
Refer to Note 4, Integration and Acquisition Costs, for further
information regarding the Group's Integration and acquisition costs for
the three and six months ended June 30, 2017.
Supplemental disclosure of pro forma information
The following unaudited pro forma financial information presents the
combined results of the operations of Shire and Dyax as if the
acquisitions of Dyax had occurred as of January 1, 2015. The unaudited
pro forma financial information is not necessarily indicative of what
the consolidated results of operations actually would have been had the
respective acquisitions been completed at the date indicated. In
addition, the unaudited pro forma financial information does not purport
to project the future results of operations of the combined Group.
Six months ended June 30,
(In millions, except per share amounts) 2016
Revenues $ 4,144.3
Net income from continuing operations 490.2
Per share amounts:
Net income from continuing operations per share -
basic $ 0.77
Net income from continuing operations per share -
diluted $ 0.77
The unaudited pro forma financial information above reflects the
following pro forma adjustments:
1. an adjustment to increase net income for the three and six months ended
June 30, 2016 by $2.0 million and $101.2 million, respectively, to
eliminate acquisition related costs incurred by Shire and Dyax; and
2. an adjustment to increase amortization expense for the six months ended
June 30, 2016 by $1.3 million related to the identifiable intangible
assets acquired.
The adjustments above are stated net of their tax effects, where
applicable.
3. Collaborative and Other Licensing Arrangements
The Group is party to certain collaborative or licensing arrangements.
In some of these arrangements, Shire and the licensee are both actively
involved in the development and commercialization of the licensed
product and have exposure to risks and rewards dependent on its
commercial success.
During the second quarter of 2017, Shire entered into an agreement to
license the exclusive worldwide rights to SHP659 (formerly known as
P-321) from Parion Sciences ("Parion"). SHP659 is a Phase 2
investigational epithelial sodium channel inhibitor for the potential
treatment of dry eye disease in adults. Under the terms of the agreement,
Shire will develop, and if approved, commercialize this compound. Shire
made an initial $20.0 million upfront license payment, which was
included in Research and development expense in the Group's Unaudited
Consolidated Statements of Operations. Parion will be entitled to
receive additional potential milestone payments up to $515.0 million
based on clinical, regulatory and commercial milestones and Parion has
the option to co-fund through additional stages of development in
exchange for enhanced tiered low double-digit royalties. In addition,
Parion has the option to co-fund commercialization activities and
participate in the financial outcome from those activities.
4. Integration and Acquisition Costs
In the three and six months ended June 30, 2017, Shire recorded
Integration and acquisition costs of $343.7 million and $459.7 million,
respectively, primarily due to the acquisition and integration of
Baxalta and Dyax. In the three and six months ended June 30, 2017,
$151.2 million and $147.7 million is included in Integration and
acquisition costs relating to the change in fair value of contingent
consideration payable.
During the second quarter of 2017, Shire entered its second phase of
integration activities. The costs associated with this phase will
primarily relate to headcount reduction as The Group continues to
advance and complete activities related to exiting the transition
services agreements ("TSA") with Baxter, integrating legal entities and
rationalization of the Group's manufacturing facilities. The Group also
plans to drive savings through the continued prioritization of its
research and development programs and continued consolidation of its
commercial operations. The integration of Baxalta is estimated to be
completed by mid to late 2019.
The Baxalta integration and acquisition costs include $80.2 million and
$117.1 million, respectively, of employee severance and acceleration of
stock compensation, $50.4 million and $85.6 million, respectively, of
third-party professional fees and $17.2 million and $41.7 million,
respectively, of expenses associated with facility consolidations for
the three and six months ended June 30, 2017. The Group expects the
majority of these expenses, except for certain costs related to facility
consolidations, to be paid within the next 12 months. The Group also
recognized $33.6 million of expenses during the three and six months
ended June 30, 2017 related to asset impairments in Integration and
acquisition costs.
The following table summarizes the type and amount of integration costs
recorded as of June 30, 2017:
Severance and employee
(In millions) benefits Lease terminations Total
As of January
1, $ 74.0 $ - $ 74.0
Amount charged
to
integration
costs 97.7 41.7 139.4
Paid/utilized (74.6) (4.1) (78.7)
As of June 30, $ 97.1 $ 37.6 $134.7
For the three and six months ended June 30, 2016, Shire recorded
Integration and acquisition costs of $363.0 million and $454.1 million,
respectively, primarily related to the acquisition and integration of
Dyax and Baxalta. These costs primarily consist of $67.1 million and
$125.6 million, respectively, of acquisition costs including legal,
investment banking and other transaction-related fees, $254.5 million
and $265.5 million, respectively, of employee severance and acceleration
of stock compensation, $79.2 million and $89.2 million, respectively, of
third-party professional fees and offset by $56.5 million and $45.1
million, respectively, of change in fair value of contingent
consideration.
5. Results of Discontinued Operations
Following the divestment of the Group's DERMAGRAFT business in January
2014, the operating results associated with the DERMAGRAFT business have
been classified as discontinued operations in the Group's Unaudited
Consolidated Statements of Operations for all periods presented.
For the three and six months ended June 30, 2017, the Group recorded a
loss of $1.2 million and gain of $19.0 million (net of tax benefit of
$0.6 million and expense of $10.9 million), respectively, primarily
related to legal contingencies related to the divested DERMAGRAFT
business and the release of escrow to Shire, respectively.
In January 2017, Shire entered into a final settlement agreement with
the Department of Justice ("DOJ") in the amount of $350.0 million, plus
interest which was accrued in 2016 and paid during the six months ended
June 30, 2017.
After the civil settlement with the DOJ had been finalized, Shire and
ABH's equity holders entered into a settlement agreement and ABH's
equity holders released the $37.5 million escrow to Shire. Shire
released the claims against ABH equity holders upon receiving the entire
amount held in escrow.
For a more detailed description of the DERMAGRAFT legal proceedings,
refer to Note 25, Legal and Other Proceedings, of Shire's Annual Report
and Accounts for the year ended December 31, 2016.
For the three and six months ended June 30, 2016, the Group recorded a
loss of $248.7 million and $239.2 million (net of tax benefit of $100.9
million and $95.4 million), respectively, related to costs associated
with the divestment.
6. Accounts Receivable, Net
Accounts receivable as of June 30, 2017 of $2,755.2 million (December
31, 2016: $2,616.5 million), are stated at the invoiced amount and net
of reserve for discounts and doubtful accounts of $182.0 million
(December 31, 2016: $169.6 million).
Reserve for discounts and doubtful accounts:
(In millions) 2017 2016
As of January 1, $169.6 $ 55.8
Provision charged to operations 600.3 269.6
Payments/credits (587.9) (201.0)
As of June 30, $182.0 $124.4
As of June 30, 2017, accounts receivable included $99.0 million
(December 31, 2016: $102.2 million) related to royalty receivable.
7. Inventories
Inventories are stated at the lower of cost and net realizable value.
Inventories comprise:
(In millions) June 30, 2017 December 31, 2016
Finished goods $ 947.6 $ 1,380.0
Work-in-progress 1,672.7 1,491.0
Raw materials 705.0 691.3
$ 3,325.3 $ 3,562.3
For a more detailed description of inventories acquired, refer to Note
2, Business Combinations, to these Unaudited Consolidated Financial
Statements.
8. Property, Plant and Equipment, Net
Property, plant and equipment are recorded at historical cost, net of
accumulated depreciation. Components of Property, plant and equipment,
net are summarized as follows:
(In millions) June 30, 2017 December 31, 2016
Land $ 338.6 $ 337.9
Buildings and leasehold
improvements 1,931.3 1,915.4
Machinery, equipment and other 2,833.1 2,547.2
Assets under construction 2,640.6 2,632.5
Total property, plant and
equipment at cost 7,743.6 7,433.0
Less: Accumulated depreciation (1,189.1) (963.4)
Property, plant and equipment,
net $ 6,554.5 $ 6,469.6
Depreciation expense for the three and six months ended June 30, 2017
was $120.7 million and $243.6 million, respectively, and for the three
and six months ended June 30, 2016 was $47.9 million and $82.2 million,
respectively.
During the second quarter of 2017, the Group determined it would divest
certain facilities as part of the Group's integration efforts. The Group
classified $74.8 million of property, plant and equipment as held for
sale, which is reported in Prepaid expenses and other current assets.
The $74.8 million of property, plant and equipment is net of a $25.4
million impairment charge reported in Integration and acquisition costs
during the second quarter of 2017.
9. Intangible Assets
The following table summarizes the Group's intangible assets:
Currently Other
marketed intangible
(In millions) products IPR&D assets Total
June 30, 2017
Gross acquired
intangible
assets $ 31,389.2 $5,111.7 $ 840.3 $37,341.2
Accumulated
amortization (3,644.1) - (262.8) (3,906.9)
Intangible
assets, net $ 27,745.1 $5,111.7 $ 577.5 $33,434.3
December 31,
2016
Gross acquired
intangible
assets $ 31,217.5 $5,746.6 $ 842.2 $37,806.3
Accumulated
amortization (2,908.6 ) - (200.2) (3,108.8)
Intangible
assets, net $ 28,308.9 $5,746.6 $ 642.0 $34,697.5
Other intangible assets are comprised primarily of royalty rights and
other contract rights associated with Baxalta, Dyax and NPS.
The change in the net book value of intangible assets for the six months
ended June 30, 2017 and 2016 is shown in the table below:
(In millions) 2017 2016
As of January 1, $34,697.5 $ 9,173.3
Acquisitions (1,398.9) 32,222.2
Amortization charged (798.1) (347.6)
Impairment charges (20.0) (8.9)
Foreign currency translation 953.8 (148.7)
As of June 30, $33,434.3 $40,890.3
The decrease in Intangible assets, net during the six months ended June
30, 2017 relates to the measurement period adjustments of the
acquisition of Baxalta. For a more detailed description of measurement
period adjustments, refer to Note 2, Business Combinations, to these
Unaudited Consolidated Financial Statements.
In connection with the acquisition of Baxalta, the Group acquired IP
rights related to currently marketed products of $21,165.0 million,
IPR&D assets of $160.0 million and other contract rights of $42.2
million. For a more detailed description of this acquisition, refer to
Note 2, Business Combinations, to these Unaudited Consolidated Financial
Statements.
In connection with the acquisition of Dyax on January 22, 2016, the
Group acquired IP rights related to currently marketed products of
$135.0 million, IPR&D assets of $4,100.0 million and royalty rights of
$425.0 million. For a more detailed description of this acquisition,
refer to Note 2, Business Combinations, to these Unaudited Consolidated
Financial Statements.
The Group reviews its amortized intangible assets for impairment
whenever events or circumstances suggest that their carrying value may
not be recoverable. Unamortized intangible assets are reviewed for
impairment annually or whenever events or circumstances suggest that
their carrying value may not be recoverable.
Estimated amortization expense can be affected by various factors
including future acquisitions, disposals of product rights, regulatory
approval and subsequent amortization of acquired IPR&D projects, foreign
exchange movements and the technological advancement and regulatory
approval of competitor products. The estimated future amortization of
acquired intangible assets for the next five years is expected to be as
follows:
Anticipated
(In millions) future amortization
2017 (remaining six months) $ 955.0
2018 1,882.9
2019 1,659.8
2020 1,562.1
2021 1,528.6
2022 1,500.9
10. Goodwill
The following table provides a roll-forward of the Goodwill balance:
(In millions) 2017 2016
As of January 1, $17,888.2 $ 4,147.8
Acquisitions 1,076.2 8,834.3
Foreign currency translation 517.7 (19.7)
As of June 30, $19,482.1 $12,962.4
The increase in Goodwill during the six months ended June 30, 2017
related to the measurement period adjustments of the acquisition of
Baxalta. For a more detailed description of measurement period
adjustments, refer to Note 2, Business Combinations, to these Unaudited
Consolidated Financial Statements.
11. Fair Value Measurement
Assets and liabilities that are measured at fair value on a recurring
basis
As of June 30, 2017 and December 31, 2016, the following financial
assets and liabilities are measured at fair value on a recurring basis
using quoted prices in active markets for identical assets (Level 1);
significant other observable inputs (Level 2); and significant
unobservable inputs (Level 3).
Fair value
(In millions) Total Level 1 Level 2 Level 3
As of June 30,
2017
Financial assets:
Marketable equity
securities $ 63.8 $ 63.8 $ - $ -
Marketable debt
securities 15.9 3.5 12.4 -
Contingent
consideration
receivable 9.8 - - 9.8
Derivative
instruments 22.8 - 22.8 -
Total assets $ 112.3 $ 67.3 $ 35.2 $ 9.8
Financial
liabilities:
Joint venture net
written option $ 25.0 $ - $ - $ 25.0
Derivative
instruments 9.5 - 9.5 -
Contingent
consideration
payable 1,190.3 - - 1,190.3
Total liabilities $1,224.8 $ - $ 9.5 $1,215.3
(In millions) Total Level 1 Level 2 Level 3
As of December 31,
2016
Financial assets:
Marketable equity
securities $ 65.8 $ 65.8 $ - $ -
Marketable debt
securities 15.5 3.6 11.9 -
Contingent
consideration
receivable 15.6 - - 15.6
Derivative
instruments 18.0 - 18.0 -
Total assets $ 114.9 $ 69.4 $ 29.9 $ 15.6
Financial
liabilities:
Derivative
instruments $ 8.3 $ - $ 8.3 $ -
Contingent
consideration
payable 1,058.0 - - 1,058.0
Total liabilities $1,066.3 $ - $ 8.3 $1,058.0
Marketable equity and debt securities are included within Investments in
the Unaudited Consolidated Balance Sheets. Contingent consideration
receivable is included within Prepaid expenses and other current assets
and Other non-current assets in the Unaudited Consolidated Balance
Sheets. Contingent consideration payable is included within Other
current liabilities and Other non-current liabilities in the Unaudited
Consolidated Balance Sheets. For information regarding the Group's
derivative arrangements, refer to Note 12, Financial Instruments, to
these Unaudited Consolidated Financial Statements.
Certain estimates and judgments were required to develop the fair value
amounts. The estimated fair value amounts shown above are not
necessarily indicative of the amounts that the Group would realize upon
disposition, nor do they indicate the Group's intent or ability to
dispose of the financial instrument.
The following methods and assumptions were used to estimate the fair
value of each material class of financial instrument:
-- Marketable equity securities: the fair values of marketable equity
securities are estimated based on quoted market prices for those
investments.
-- Marketable debt securities: the fair values of debt securities are
obtained from pricing services or broker/dealers who either use quoted
prices in an active market or proprietary pricing applications, which
include observable market information for like or same securities.
-- Contingent consideration receivable: the fair value of the contingent
consideration receivable has been estimated using the income approach
(using a probability weighted discounted cash flow method).
-- Derivative instruments: the fair values of the swap and forward foreign
exchange contracts have been determined using the month-end interest rate
and foreign exchange rates, respectively.
-- Contingent consideration payable: the fair value of the contingent
consideration payable has been estimated using the income approach (using
a probability weighted discounted cash flow method).
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using
Significant Unobservable Inputs (Level 3)
The following table provides a roll forward of the fair values of the
Group's contingent consideration receivable and payables which include
Level 3 measurements:
Contingent consideration receivable
(In millions) 2017 2016
Balance as of January 1, $15.6 $13.8
Change in fair value included in earnings (2.3) 2.1
Other (3.5) 1.6
Balance as of June 30, $ 9.8 $17.5
Contingent consideration payable
(In millions) 2017 2016
Balance as of January 1, $1,058.0 $475.9
Acquisitions (4.0) 562.5
Change in fair value included in earnings 147.7 (45.0)
Other (11.4) 0.4
Balance as of June 30, $1,190.3 $993.8
In 2017, the increase in contingent consideration payable was primarily
related to the Group's change in fair value of contingent consideration
resulting from positive topline data for SHP643. In 2016, the increase
in contingent consideration payable was related to the Group's
acquisition of Dyax and Baxalta. Other contingent consideration payable
primarily relates to foreign currency adjustments.
Of the $1,190.3 million of contingent consideration payable as of June
30, 2017, $67.4 million is recorded within Other current liabilities and
$1,122.9 million is recorded within Other non-current liabilities in the
Group's Unaudited Consolidated Balance Sheets.
Joint venture net written option
During the six months ended June 30, 2017, Shire executed option
agreements related to a joint venture that provides Shire with a call
option on the partner's investment in joint venture equity and the
partner with a put option on its investment in joint venture equity.
The Group has recorded a liability of $25.0 million for the net written
option based on the estimated fair value of these options as of June 30,
2017 and in the future will re-measure the instrument to fair value
through the Consolidated Statements of Operations.
Quantitative Information about Assets and Liabilities Measured at Fair
Value on a Recurring Basis Using Significant Unobservable Inputs (Level
3)
Quantitative information about the Group's recurring Level 3 fair value
measurements is as follows:
Financial
assets: Fair value as of the measurement date
As of June 30,
2017
(In millions, Valuation
except %) Fair value technique Significant unobservable inputs Range
Contingent
consideration Income approach (probability weighted discounted cash -- Probability weightings applied to different
receivable $ 9.8 flow) sales scenarios -- 10 to 90%
-- Future forecast consideration receivable based -- $0 to $20.7
on contractual terms with purchaser million
-- Assumed market participant discount rate -- 7.4%
Financial
liabilities: Fair value as of the measurement date
As of June 30,
2017
(In millions, Valuation
except %) Fair value technique Significant unobservable inputs Range
Contingent
consideration Income approach (probability weighted discounted cash
payable $ 1,190.3 flow) -- Cumulative probability of milestones being achieved -- 5 to 90%
-- Assumed market participant discount rate -- 1.8 to 10.5%
-- Periods in which milestones are expected to be
achieved -- 2017 to 2037
-- Forecast quarterly royalties payable on net sales -- $0.1 to $6.5
of relevant products million
Joint venture
net written Income approach (probability weighted discounted cash
option $ 25.0 flow) -- Cash flow scenario probability weighting -- 0 to 65%
-- Assumed market participant discount rate -- 16%
Contingent consideration payable represents future milestones and
royalties the Group may be required to pay in conjunction with various
business combinations and license agreements. Contingent consideration
receivable represents future royalties the Group may be entitled to
receive in conjunction with sales and purchase agreements. The fair
value of the Group's contingent consideration receivable and payable
could significantly increase or decrease due to changes in certain
assumptions which underpin the fair value measurements. Each set of
assumptions is specific to the individual contingent consideration
receivable or payable.
Financial assets and liabilities that are disclosed at fair value
The carrying amounts and estimated fair values as of June 30, 2017 and
December 31, 2016 of the Group's financial assets and liabilities that
are not measured at fair value on a recurring basis are as follows:
June 30, 2017 December 31, 2016
Carrying Fair Carrying
(In millions) amount value amount Fair value
Financial
liabilities:
SAIIDAC notes $12,044.7 $11,973.6 $12,039.2 $11,633.8
Baxalta notes 5,066.9 5,295.8 5,063.6 5,066.5
Capital lease
obligation 350.6 350.6 353.6 353.6
The estimated fair values of long-term debt were based upon recent
observable market prices and are considered Level 2 in the fair value
hierarchy. The estimated fair value of capital lease obligations is
based on Level 2 inputs.
The carrying amounts of other financial assets and liabilities
approximate their estimated fair value due to their short-term nature,
such as liquidity and maturity of these amounts, or because there have
been no significant changes since the asset or liability was last
re-measured to fair value on a non-recurring basis.
12. Financial Instruments
Foreign Currency Contracts
Due to the global nature of its operations, portions of the Group's
revenues and operating expenses are recorded in currencies other than
the U.S. dollar. The value of revenues and operating expenses measured
in U.S. dollars is therefore subject to changes in foreign currency
exchange rates. The main trading currencies of the Group are the U.S.
dollar, Euro, British pound sterling, Swiss franc, Canadian dollar and
Japanese yen.
Transactional exposure arises where transactions occur in currencies
different to the functional currency of the relevant subsidiary. It is
the Group's policy that these exposures are minimized to the extent
practicable by denominating transactions in the subsidiary's functional
currency. Where significant exposures remain, the Group uses foreign
exchange contracts (spot, forward and swap contracts) to manage the
exposure for balance sheet assets and liabilities that are denominated
in currencies different to the functional currency of the relevant
subsidiary.
The Group has master netting agreements with a number of counterparties
to these foreign exchange contracts and on the occurrence of specified
events, the Group has the ability to terminate contracts and settle them
with a net payment by one party to the other. The Group has elected to
present derivative assets and derivative liabilities on a gross basis in
the Unaudited Consolidated Balance Sheet. The Group does not have credit
risk related contingent features or collateral linked to the
derivatives.
Designated Foreign Currency Derivatives
Certain foreign currency forward contracts were designated as cash flow
hedges and accordingly, to the extent effective, any unrealized gains or
losses on these foreign currency forward contracts were reported in
AOCI. Realized gains and losses for the effective portion of such
contracts were recognized in revenue or cost of sales when the sale of
product in the currency being hedged was recognized. To the extent
ineffective, hedge transaction gains and losses were reported in Other
income/(expense), net.
The Group did not have any designated foreign currency contracts as of
June 30, 2017. As of December 31, 2016 the Group had designated foreign
currency forward contracts with a total notional value of $78.7 million,
a maximum duration of six months; the fair value of these contracts was
a net asset of $4.2 million.
The amount of ineffectiveness for the three and six months ended June
30, 2017 was immaterial.
As of June 30, 2017, the Group had a total of $0.4 million of deferred
gains included in AOCI which are expected to be recognized in earnings
during the next 12 months, coinciding with when the hedged items are
expected to impact earnings.
Undesignated Foreign Currency Derivatives
The Group uses forward contracts to mitigate the foreign currency risk
related to certain balance sheet positions, including intercompany and
third-party receivables and payables. The Group has not elected hedge
accounting for these derivative instruments as the duration of these
contracts is typically three months or less. The changes in fair value
of these derivatives are reported in earnings.
The table below presents the notional amount, maximum duration and fair
value for the undesignated foreign currency derivatives:
(In millions, except duration) June 30, 2017 December 31, 2016
Notional amount $ 1,495.1 $ 1,309.1
Maximum duration (in months) 3 months 3 months
Fair value - net asset $ 10.9 $ 6.7
The Group considers the impact of its and its counterparties' credit
risk on the fair value of the contracts as well as the ability of each
party to execute its contractual obligations. As of June 30, 2017,
credit risk did not materially change the fair value of the Group's
foreign currency contracts.
Interest Rate Contracts
The Group is exposed to the risk that its earnings and cash flows could
be adversely impacted by fluctuations in benchmark interest rates
relating to its debt obligations on which interest is set at floating
rates. The Group's policy is to manage this risk to an acceptable level.
The Group is principally exposed to interest rate risk on any borrowings
under the Group's various debt facilities and on part of the senior
notes assumed in connection with the acquisition of Baxalta. Interest on
each of these debt obligations is set at floating rates, to the extent
utilized. Shire's exposure under these facilities is to changes in U.S.
dollar interest rates. For further details related to interest rates on
the Group's various debt facilities, refer to Note 13, Borrowings and
Capital Leases, to these Unaudited Consolidated Financial Statements.
Designated Interest Rate Derivatives
The effective portion of the changes in the fair value of interest rate
swap contracts are recorded as a component of the senior notes assumed
in connection with the acquisition of Baxalta with the ineffective
portion recorded in Interest expense. Any net interest payments made or
received on the interest rate swap contracts are recognized as a
component of Interest expense in the Unaudited Consolidated Statements
of Operations.
The table below presents the notional amount, maturity and fair value
for the designated interest rate derivatives:
(In millions,
except maturity) June 30, 2017 December 31, 2016
Notional amount $ 1,000.0 $ 1,000.0
Maturity June 2020 and June 2025 June 2020 and June 2025
Fair value - net
asset/(liability) $ 2.4 $ (1.2)
For the three and six months ended June 30, 2017, the Group recognized
losses of $0.2 million and $1.4 million, respectively, as
ineffectiveness related to these contracts as a component of Interest
expense.
Undesignated Interest Rate Derivatives
As of June 30, 2017 and December 31, 2016, the Group did not have any
outstanding undesignated interest rate derivative instruments.
Summary of Derivatives
The following tables summarize the income statement locations and gains
and losses on the Group's designated and undesignated derivative
instruments:
Income Gain reclassified
Loss recognized Statement from AOCI into
(In millions) in OCI location income
Three months ended
June 30, 2017 2016 2017 2016
Designated
derivative
instruments
Cash flow hedges
Foreign exchange Cost of
contracts $(0.1) $(3.4) sales $ 1.7 $ -
Income Statement
(In millions) location Gain (loss) recognized in income
Three months ended
June 30, 2017 2016
Fair value hedges
Interest rate Interest
contracts, net (expense)/income $ (0.2) $ 2.1
Undesignated
derivative
instruments
Other
Foreign exchange income/(expense),
contracts net 35.9 (4.7)
Interest rate swap
contracts Interest expense - (2.6)
Income Gain reclassified
Loss recognized in Statement from AOCI into
(In millions) OCI location income
Six months
ended June
30, 2017 2016 2017 2016
Designated derivative
instruments
Cash flow
hedges
Foreign
exchange Cost of
contracts $(0.7) $(3.4) sales $ 8.3 $ -
Income Statement
(In millions) location Gain (loss) recognized in income
Six months
ended June
30, 2017 2016
Fair value
hedges
Interest rate
contracts, Interest
net (expense)/income $ (1.4) $ 2.1
Undesignated
derivative
instruments
Foreign Other
exchange income/(expense),
contracts net 20.7 (28.8)
Interest rate
swap
contracts Interest expense - (4.6)
Summary of Derivatives
The following table presents the classification and estimated fair value
of derivative instruments:
Asset position Liability position
Fair value Fair value
Balance Balance
Sheet June 30, December 31, Sheet June 30, December 31,
(In millions) location 2017 2016 location 2017 2016
Designated
derivative
Instruments
Prepaid Accounts
expenses payable
Foreign and other and
exchange current accrued
contracts assets $ - $ 4.3 expenses $ - $ 0.1
Interest rate Long term Long term
contracts borrowings 3.2 0.1 borrowings 0.8 1.3
$ 3.2 $ 4.4 $0.8 $ 1.4
Undesignated
derivative
instruments
Prepaid Accounts
Foreign expenses payable
exchange and other and
forward current accrued
contracts assets $19.6 $ 13.6 expenses $8.7 $ 6.9
Total derivative fair value $22.8 $ 18.0 $9.5 $ 8.3
Potential effect of rights
to offset (3.9) (1.7) (3.9) (1.7)
Net derivative $18.9 $ 16.3 $5.6 $ 6.6
13. Borrowings and Capital Leases
(In millions) June 30, 2017 December 31, 2016
Short term borrowings:
Baxalta notes (short term portion) $ 747.6 $ -
Borrowings under the Revolving
Credit Facilities Agreement 735.0 450.0
Borrowings under the November 2015
Facilities Agreement 1,696.9 2,594.8
Capital leases (short term
portion) 6.8 6.4
Other borrowings (short term
portion) 18.6 16.8
$ 3,204.9 $ 3,068.0
Long term borrowings:
SAIIDAC notes $ 12,044.7 $ 12,039.2
Baxalta notes (long term portion) 4,319.3 5,063.6
Borrowings under the November 2015
Facilities Agreement 1,595.0 2,391.8
Capital leases (long term portion) 343.8 347.2
Other borrowings (long term
portion) 52.3 58.0
$ 18,355.1 $ 19,899.8
Total borrowings and capital
leases $ 21,560.0 $ 22,967.8
For a more detailed description of the Group's financing agreements,
refer below and to Note 17, Borrowings and Capital Lease Obligations, of
Shire's Annual Report and Accounts for the year ended December 31, 2016.
SAIIDAC Notes
On September 23, 2016, Shire Acquisitions Investments Ireland Designated
Activity Company ("SAIIDAC"), a wholly owned subsidiary of Shire plc,
issued unsecured senior notes with a total aggregate principal value of
$12.1 billion ("SAIIDAC Notes"), guaranteed by Shire plc and, as of
December 1, 2016, by Baxalta. Below is a summary of the SAIIDAC Notes as
of June 30, 2017:
Carrying
Effective amount as
(In millions, Aggregate Coupon interest rate of June 30,
except %) amount rate in 2017 2017
Fixed-rate
notes due
2019 $ 3,300.0 1.900% 2.05% 3,289.7
Fixed-rate
notes due
2021 3,300.0 2.400% 2.53% 3,284.7
Fixed-rate
notes due
2023 2,500.0 2.875% 2.97% 2,488.7
Fixed-rate
notes due
2026 3,000.0 3.200% 3.30% 2,981.6
$12,100.0 $12,044.7
As of June 30, 2017, there was $55.3 million of debt issuance costs and
discount recorded as a reduction of the carrying amount of debt. These
costs will be amortized as additional interest expense using the
effective interest rate method over the period from issuance through
maturity. For further details on the SAIIDAC Notes, refer to Note 17,
Borrowings and Capital Lease Obligations, of Shire's Annual Report and
Accounts for the year ended December 31, 2016.
Baxalta Notes
Shire plc guaranteed senior notes issued by Baxalta with a total
aggregate principal amount of $5.0 billion in connection with the
acquisition of Baxalta ("Baxalta Notes"). Below is a summary of the
Baxalta Notes as of June 30, 2017:
Carrying
Effective amount as
(In millions, Aggregate interest rate of June
except %) principal Coupon rate in 2017 30, 2017
Variable-rate
notes due LIBOR plus
2018 $ 375.0 0.78% 2.50% $ 372.7
Fixed-rate
notes due
2018 375.0 2.000% 2.10% 374.9
Fixed-rate
notes due
2020 1,000.0 2.875% 2.80% 1,005.1
Fixed-rate
notes due
2022 500.0 3.600% 3.30% 507.6
Fixed-rate
notes due
2025 1,750.0 4.000% 3.90% 1,775.4
Fixed-rate
notes due
2045 1,000.0 5.250% 5.20% 1,031.2
Total assumed
Senior Notes $ 5,000.0 $5,066.9
The effective interest rates above exclude the effect of any related
interest rate swaps. The book values above include any premiums and
adjustments related to hedging instruments. For further details related
to the interest rate derivative contracts, please see Note 12, Financial
Instruments, to these Unaudited Consolidated Financial Statements.
Revolving Credit Facilities Agreement
On December 12, 2014, Shire entered into a $2.1 billion revolving credit
facilities agreement (the "RCF") with a number of financial
institutions. As of June 30, 2017, the Group utilized $735.0 million of
the RCF. The RCF, which terminates on December 12, 2021, may be used for
financing the general corporate purposes of Shire. The RCF incorporates
a $250.0 million U.S. dollar and Euro swingline facility operating as a
sub-limit thereof.
Term Loan Facilities Agreements
November 2015 Facilities Agreement
On November 2, 2015, Shire entered into a $5.6 billion facilities
agreement (the "November 2015 Facilities Agreement"), which is comprised
of three amortizing credit facilities with the following amounts
outstanding as of June 30, 2017, and their respective ultimate maturity
dates:
(In millions) Amount outstanding Maturity
November 2015 Facility A $ 400.0 November 2, 2017
November 2015 Facility B 500.0 November 2, 2017
November 2015 Facility C 2,400.0 November 2, 2018
Total November 2015 Facilities $ 3,300.0
For the six month period ended June 30, 2017, the Group made $1.7
billion of scheduled and advance repayments under the November 2015
Facility B; consequently, $3.3 billion is outstanding as of June 30,
2017.
Short-term uncommitted lines of credit ("Credit lines")
Shire has access to various Credit lines from a number of banks which
are available to be utilized from time to time to provide short-term
cash management flexibility. These Credit lines can be withdrawn by the
banks at any time. The Credit lines are not relied upon for core
liquidity. As of June 30, 2017, these Credit lines were not utilized.
Capital Lease Obligations
The capital leases are primarily related to office and manufacturing
facilities. As of June 30, 2017, the total capital lease obligations,
including current portions, were $350.6 million.
14. Retirement and Other Benefit Programs
The Group sponsors various pension and other post-employment benefit
("OPEB") plans in the U.S. and other countries. The net periodic benefit
cost associated with these plans consisted of the following components:
Three months ended June 30,
2017 2016
OPEB
U.S. International (U.S U.S. International OPEB
(In millions) pensions pensions .) pensions pensions (U.S.)
Net periodic
benefit cost
Service cost $ 3.7 $ 9.4 $0.4 $ 1.9 $ 2.6 $0.1
Interest cost 3.9 1.2 0.3 1.6 0.4 0.1
Expected
return on
plan assets (4.0) (1.8) - (1.3) (0.5) -
Net periodic
benefit cost $ 3.6 $ 8.8 $0.7 $ 2.2 $ 2.5 $0.2
Six months ended June 30,
2017 2016
OPEB
U.S. International (U.S U.S. International OPEB
(In millions) pensions pensions .) pensions pensions (U.S.)
Net periodic
benefit cost
Service cost $ 7.4 $ 18.8 $0.8 $ 1.9 $ 2.6 $0.1
Interest cost 7.8 2.4 0.6 1.6 0.4 0.1
Expected
return on
plan assets (8.0) (3.6) - (1.3) (0.5) -
Amortization
of actuarial
losses - 0.9 - - - -
Net periodic
benefit cost $ 7.2 $ 18.5 $1.4 $ 2.2 $ 2.5 $0.2
The majority of the Group's pension and OPEB plans were assumed with the
acquisition of Baxalta on June 3, 2016.
15. Accumulated Other Comprehensive Income/(Loss)
The changes in accumulated other comprehensive income/(loss) ("AOCI"),
net of their related tax effects, for the six months ended June 30, 2017
and 2016 are included below:
Foreign Pension and Accumulated
currency other other
translation employee Unrealized holding gain/(loss) on available-for-sale Hedging comprehensive
(In millions) adjustment benefits securities activities (loss)/income
As of January 1,
2017 $(1,505.4) $(5.2) $ 6.6 $ 6.4 $ (1,497.6 )
Other
comprehensive
income/(loss)
before
reclassifications 1,696.5 9.7 (2.3) (0.5 ) 1,703.4
Amounts
reclassified from
AOCI - 0.9 (1.2) (5.4 ) (5.7 )
Net current period
other
comprehensive
income / (loss) 1,696.5 10.6 (3.5) (5.9 ) 1,697.7
As of June 30,
2017 $ 191.1 $ 5.4 $ 3.1 $ 0.5 $ 200.1
Foreign Pension Accumulated
currency and other Unrealized holding loss other
translation employee on available-for-sale Hedging comprehensive
(In millions) adjustment benefits securities activities loss
As of January
1, 2016 $(182.1) $ - $ (1.7) $ - $ (183.8)
Net current
period other
comprehensive
loss (195.5) - (4.7) (1.8) (202.0)
As of June 30,
2016 $(377.6) $ - $ (6.4) $ (1.8) $ (385.8)
Reclassifications from AOCI to net income/loss during the three and six
months ended June 30, 2017 and 2016 were not material.
16. Taxation
For the three and six months ended June 30, 2017, the effective tax rate
on income from continuing operations was 9% (2016: -427%) and 5% (2016:
2%), respectively.
The effective tax rate for the three and six months ended June 30, 2017
was affected by the combined impact of the relative quantum of the
profit before tax for the period by jurisdiction as well as significant
acquisition and integration costs.
The effective tax rate for the three and six months ended June 30, 2016
was affected by the combined impact of the relative quantum of the
profit before tax for the period by jurisdiction and of the reversal of
deferred tax liabilities from the acquisition of Baxalta (including in
higher tax territories such as the U.S.) of inventory and intangible
assets amortization as well as significant acquisition and integration
costs.
17. Earnings Per Share
The following table reconciles net income and loss and the weighted
average ordinary shares outstanding for basic and diluted earnings per
share ("EPS") for the periods presented:
Three months ended June Six months ended June
30, 30,
(In millions) 2017 2016 2017 2016
Income from
continuing
operations,
net of taxes $ 241.5 $ 86.6 $ 596.3 $ 496.1
(Loss)/gain
from
discontinued
operations,
net of taxes (1.2) (248.7) 19.0 (239.2)
Numerator for
basic and
diluted
earnings per
share $ 240.3 $ (162.1) $ 615.3 $ 256.9
Weighted
average number
of shares:
Basic 906.4 682.8 905.3 637.3
Effect of
dilutive
shares:
Share-based
awards to
employees 6.3 - 7.0 2.8
Diluted 912.7 682.8 912.3 640.1
Weighted average number of basic shares excludes shares purchased by the
Employee Benefit Trust and those under the shares buy-back program,
which are both presented by Shire as treasury stock. Share-based awards
to employees are calculated using the treasury method.
The share equivalents not included in the calculation of the diluted
weighted average number of shares are shown below:
Three months ended Six months ended June
June 30, 30,
(Number of shares
in millions) 2017 2016 2017 2016
Share-based awards
to employees 13.2 8.3 10.3 4.4
Certain stock options have been excluded from the calculation of diluted
EPS for the three and six months ended June 30, 2017 and 2016 because
either their exercise prices exceeded Shire's average share price during
the calculation period, the required performance conditions were not
satisfied as of the balance sheet date or their inclusion would have
been antidilutive.
18. Share-based Compensation Plans
Total share-based compensation recorded by the Group during the three
and six months ended June 30, 2017 and 2016 by line item is as follows:
Three months ended June 30, Six months ended June 30,
(In millions) 2017 2016 2017 2016
Cost of sales $ 6.1 $ 4.5 $ 12.7 $ 7.6
Research and
development 9.7 13.6 19.7 25.2
Selling,
general and
administrative 31.9 14.4 63.2 23.6
Integration and
acquisition
costs 6.0 144.0 10.8 138.4
Total 53.7 176.5 106.4 194.8
Less tax (29.6) (41.5) (42.7) (46.3)
$ 24.1 $ 135.0 $ 63.7 $ 148.5
The table above includes pre-tax expense related to replacement and
other awards held by Baxalta employees. This includes integration
related expense during the three and six months ended June 30, 2017 from
the acceleration of unrecognized expense associated with certain
employee terminations.
For further details on existing share-based compensation plans, refer to
Note 27, Share-based Compensation Plans, of Shire's Annual Report and
Accounts for the year ended December 31, 2016.
The Group made immaterial equity compensation grants to employees during
the three months ended June 30, 2017. During the six months ended June
30, 2017, the Group made equity compensation grants to employees
consisting of 8.9 million of stock-settled share appreciation rights
("SARs"), 2.1 million of restricted stock units ("RSUs") and 0.5 million
of performance share units ("PSUs") equivalent in ordinary shares.
19. Commitments and Contingencies
Leases
The Group leases land, facilities, motor vehicles and certain equipment
under operating leases expiring through 2039. For the three and six
months ended June 30, 2017, lease and rental expense totaled $42.4
million and $85.0 million (2016: $22.8 million and $30.3 million,
respectively), which is predominantly included in Cost of sales and
Selling, general and administrative expenses in the Group's Unaudited
Consolidated Statements of Operations.
Letters of credit and guarantees
As of June 30, 2017 and December 31, 2016, the Group had irrevocable
standby letters of credit and guarantees with various banks and
insurance companies totaling $190.1 million and $139.7 million (being
the contractual amounts), respectively, providing security for the
Group's performance of various obligations. These obligations are
primarily in respect of the recoverability of insurance claims, lease
obligations and supply commitments.
Commitments
Clinical testing
As of June 30, 2017, the Group had committed to pay approximately
$1,108.3 million (December 31, 2016: $1,037.4 million) to contract
vendors for administering and executing clinical trials. The timing of
these payments is dependent upon actual services performed by the
organizations as determined by patient enrollment levels and related
activities.
Contract manufacturing
As of June 30, 2017, the Group had committed to pay approximately $458.3
million (December 31, 2016: $528.9 million) in respect of contract
manufacturing. The Group expects to pay $190.3 million of these
commitments in 2017.
Other purchasing commitments
As of June 30, 2017, the Group had committed to pay approximately
$1,774.4 million (December 31, 2016: $1,745.4 million) for future
purchases of goods and services, predominantly relating to active
pharmaceutical ingredients sourcing. The Group expects to pay $876.8
million of these commitments in 2017.
Investment commitments
As of June 30, 2017, the Group had outstanding commitments to purchase
common stock and interests in companies and partnerships, respectively,
for amounts totaling $58.5 million (December 31, 2016: $76.4 million)
which may all be payable in 2017, depending on the timing of capital
calls. The investment commitments include additional funding to certain
variable interest entities ("VIEs") for which Shire is not the primary
beneficiary.
Capital commitments
As of June 30, 2017, the Group had committed to spend $136.4 million
(December 31, 2016: $100.5 million) on capital projects.
Baxter related tax indemnification
Baxter International Inc. ("Baxter") and Baxalta entered into a tax
matters agreement, effective on the date of Baxalta's separation from
Baxter, which employs a direct tracing approach, or where direct tracing
approach is not feasible, an allocation methodology, to determine which
company is liable for pre-separation income tax items for U.S. federal,
state and foreign jurisdictions. With respect to tax liabilities that
are directly traceable or allocated to Baxalta but for which Baxalta was
not the primary obligor, Baxalta recorded a tax indemnification amount
that would be due to Baxter upon Baxter discharging the associated tax
liability to the taxing authority. As of June 30, 2017, the amount of
the net tax indemnification amount was $25.5 million.
20. Legal and Other Proceedings
The Group expenses legal costs when incurred.
The Group recognizes loss contingency provisions for probable losses
when management is able to reasonably estimate the loss. When the
estimated loss lies within a range, the Group records a loss contingency
provision based on its best estimate of the probable loss. If no
particular amount within that range is a better estimate than any other
amount, the minimum amount is recorded. Estimates of losses may be
developed before the ultimate loss is known, and are therefore refined
each accounting period as additional information becomes known. An
outcome that deviates from the Group's estimate may result in an
additional expense or release in a future accounting period. As of June
30, 2017, provision for litigation losses, insurance claims and other
disputes totaled $64.0 million (December 31, 2016: $415.0 million).
The Group's principal pending legal and other proceedings are disclosed
below. The outcomes of these proceedings are not always predictable and
can be affected by various factors. For those legal and other
proceedings for which it is considered at least reasonably possible that
a loss has been incurred, the Group discloses the possible loss or range
of possible loss in excess of the recorded loss contingency provision,
if any, where such excess is both material and estimable.
LIALDA
In May 2010, Shire was notified that Zydus Pharmaceuticals USA, Inc.
("Zydus") had submitted an ANDA under the Hatch-Waxman Act seeking
permission to market a generic version of LIALDA. Within the requisite
45-day period, Shire filed a lawsuit in the U.S. District Court for the
District of Delaware against Zydus and Cadila Healthcare Limited, doing
business as Zydus Cadila. A Markman hearing took place on January 29,
2015 and a Markman ruling was issued on July 28, 2015. A trial took
place between March 28, 2016 and April 1, 2016. On September 16, 2016
the court issued its ruling finding that the proposed generic product
would not infringe the asserted claims. Shire appealed the ruling to the
Court of Appeals for the Federal Circuit ("CAFC"). On May 9, 2017, the
CAFC affirmed the ruling of the district court.
In February 2012, Shire was notified that Osmotica Pharmaceutical
Corporation ("Osmotica") had submitted an ANDA under the Hatch-Waxman
Act seeking permission to market a generic version of LIALDA. Within the
requisite 45-day period, Shire filed a lawsuit in the U.S. District
Court for the Northern District of Georgia against Osmotica. A Markman
hearing took place on August 22, 2013 and a Markman ruling was issued on
September 25, 2014. The court issued an Order on February 27, 2015 in
which all dates in the scheduling order have been stayed.
In March 2012, Shire was notified that Watson Laboratories Inc.-Florida
had submitted an ANDA under the Hatch-Waxman Act seeking permission to
market a generic version of LIALDA. Within the requisite 45-day period,
Shire filed a lawsuit in the U.S. District Court for the Southern
District of Florida against Watson Laboratories Inc.-Florida and Watson
Pharmaceuticals, Inc., Watson Pharma, Inc. and Watson Laboratories, Inc.
(collectively, "Watson") were subsequently added as defendants. A trial
took place in April 2013 and on May 9, 2013 the trial court issued a
decision finding that the proposed generic product infringes the
patent-in-suit and that the patent is not invalid. Watson appealed the
trial court's ruling to the CAFC and a hearing took place on December 2,
2013. The ruling of the CAFC was issued on March 28, 2014 overruling the
trial court on the interpretation of two claim terms and remanding the
case for further proceedings. Shire petitioned the Supreme Court for a
writ of certiorari which was granted on January 26, 2015. The Supreme
Court also vacated the CAFC decision and remanded the case to the CAFC
for further consideration in light of the Supreme Court's recent
decision in Teva v. Sandoz. On June 3, 2015, the CAFC reaffirmed their
previous decision to reverse the District Court's claims construction
and remanded the case to the U.S. District Court for the Southern
District of Florida. A trial was held on January 25-27, 2016. A ruling
was issued on March 28, 2016 upholding the validity of the patent and
finding that Watson's proposed ANDA product infringes the
patent-in-suit. Watson appealed the ruling to the CAFC and oral argument
took place on October 5, 2016. The CAFC issued a ruling on February 10,
2017 reversing the trial court's ruling of infringement and remanding
the case to the lower court for entry of a ruling of non-infringement.
On May 18, 2017, the lower court entered judgment of non-infringement.
In April 2012, Shire was notified that Mylan had submitted an ANDA under
the Hatch-Waxman Act seeking permission to market a generic version of
LIALDA. Within the requisite 45-day period, Shire filed a lawsuit in the
U.S. District Court for the Middle District of Florida against Mylan. A
Markman hearing took place on December 22, 2014. A Markman ruling was
issued on March 23, 2015. Following a four-day bench trial in September
2016 in the U.S. District Court for the Middle District of Florida, the
court handed down a ruling that Mylan's proposed generic version of
LIALDA infringes claims 1 and 3 of the Orange Book listed patent for
LIALDA. In connection with this finding of infringement, the court also
entered an injunction prohibiting Mylan from making, using, selling,
offering for sale and/or importing their proposed ANDA product before
the expiration of the patent (June 8, 2020) and requiring that the
approval date for their ANDA be on or after the expiration of the
patent. On June 14, 2017, the U.S. District Court for the Middle
District of Florida granted Mylan's Motion for Reconsideration and
entered judgment of non-infringement. Shire filed an appeal on July 7,
2017.
In March 2015, Shire was notified that Amneal had submitted an ANDA
under the Hatch-Waxman Act seeking permission to market a generic
version of LIALDA. Within the requisite 45 day period, Shire filed a
lawsuit in the U.S. District Court for the District of New Jersey
against Amneal, Amneal Pharmaceuticals of New York, LLC and Amneal
Pharmaceuticals Co. India Pvt. Ltd. A Markman hearing took place on July
25, 2016. A Markman ruling was issued on August 2, 2016. No trial date
has been set.
In September 2015, Shire was notified that Lupin Ltd. had submitted an
ANDA under the Hatch-Waxman Act seeking permission to market a generic
version of LIALDA. Within the requisite 45 day period, Shire filed a
lawsuit in the U.S. District Court for the District of Maryland against
Lupin Ltd., Lupin Pharmaceuticals Inc., Lupin Inc. and Lupin Atlantis
Holdings SA. A Markman hearing originally scheduled to take place on
November 10, 2016, was cancelled and has not yet been rescheduled. No
trial date has been set.
VANCOCIN
On April 6, 2012, ViroPharma Incorporated ("ViroPharma") received a
notification that the United States Federal Trade Commission ("FTC") was
conducting an investigation into whether ViroPharma had engaged in
unfair methods of competition with respect to VANCOCIN which Shire
acquired in January 2014. Following the divestiture of VANCOCIN in
August 2014, Shire retained certain liabilities including any potential
liabilities related to the VANCOCIN citizen petition.
On August 3, 2012, and September 8, 2014, ViroPharma and Shire
respectively received Civil Investigative Demands from the FTC
requesting additional information related to this matter. Shire has
fully cooperated with the FTC's investigation.
On February 7, 2017, the FTC filed a Complaint against Shire alleging
that ViroPharma engaged in conduct in violation of U.S. antitrust laws
arising from a citizen petition ViroPharma filed in 2006 related to Food
& Drug Administration's policy for evaluating bioequivalence for generic
versions of VANCOCIN. The complaint seeks equitable relief, including an
injunction and disgorgement. The Group filed a motion to dismiss on
April 10, 2017.
At this time, Shire is unable to predict the outcome or duration of this
case.
ELAPRASE
On September 24, 2014, Shire's Brazilian affiliate, Shire Farmaceutica
Brasil Ltda, was served with a lawsuit brought by the State of Sao Paulo
and in which the Brazilian Public Attorney's office has intervened
alleging that Shire is obligated to provide certain medical care
including ELAPRASE for an indefinite period at no cost to patients who
participated in ELAPRASE clinical trials in Brazil, and seeking
recoupment to the Brazilian government for amounts paid on behalf of
these patients to date, and moral damages associated with these claims.
On May 6, 2016, the trial court judge ruled on the case and dismissed
all the claims under the class action, which was appealed. On February
20, 2017, the Court of Appeals in Sao Paulo issued the final decision on
merit in favor of Shire and dismissed all the claims under the class
action. The final decision can be appealed through the Superior Court of
Justice or through the Supreme Court; however, the likelihood of one of
those courts accepting the appeal is remote.
21. Agreements and Transactions with Baxter
In connection with Baxalta's separation from Baxter on July 1, 2015,
Baxalta and Baxter entered into several separation-related agreements
that provided a framework for Baxalta's relationship with Baxter after
the separation. These agreements, among others, included a manufacturing
and supply agreement, a transition services agreement and a tax matters
agreement. For further details on existing agreements with Baxter, refer
to Note 28, Agreements and Transactions with Baxter, of Shire's Annual
Report and Accounts for the year ended December 31, 2016.
The Group reported revenues associated with the manufacturing and supply
agreement with Baxter during the three and six months ended June 30,
2017 of approximately $30.4 million and $70.7 million, respectively, and
approximately $16.0 million during both the three and six months ended
June 30, 2016. The Group reported Selling, general and administrative
expenses associated with the transition services agreement with Baxter
during the three and six months ended June 30, 2017 of approximately
$14.8 million and $33.7 million, respectively, and approximately $8.4
million during both the three and six months ended June 30, 2016. Net
tax-related indemnification liabilities as of June 30, 2017 associated
with the tax matters agreement with Baxter are discussed in Note 19,
Commitments and Contingencies, of these Unaudited Consolidated Financial
Statements.
As of June 30, 2017, the Group had total amounts due from or to Baxter
of $72.5 million reported in Prepaid expenses and other current assets,
$33.6 million reported in Other non-current assets, $59.2 million
reported in Other current liabilities and $59.6 million reported in
Other non-current liabilities.
22. Segment Reporting
Shire operates as one operating and reportable segment engaged in the
research, development, licensing, manufacturing, marketing, distribution
and sale of innovative specialist medicines to meet significant unmet
patient needs.
In the periods set out below, revenues by major product were as follows:
Three months ended Six months ended
June 30, June 30,
(In millions) 2017 2016 2017 2016
Product sales:
HEMOPHILIA $ 743.9 $ 275.6 $1,394.3 $ 275.6
INHIBITOR
THERAPIES 220.7 74.0 441.2 74.0
Hematology total 964.6 349.6 1,835.5 349.6
CINRYZE 175.9 173.0 401.8 337.2
ELAPRASE 161.0 154.0 301.6 277.6
FIRAZYR 137.4 136.7 265.9 265.0
REPLAGAL 122.1 118.4 231.8 221.6
VPRIV 87.9 88.0 167.7 171.6
KALBITOR 20.6 17.7 32.3 28.1
Genetic Diseases
total 704.9 687.8 1,401.1 1,301.1
IMMUNOGLOBULIN
THERAPIES 510.5 138.2 1,008.8 138.2
BIO THERAPEUTICS 172.2 51.3 350.1 51.3
Immunology total 682.7 189.5 1,358.9 189.5
VYVANSE 518.2 517.7 1,081.9 1,026.9
ADDERALL XR 71.4 101.8 136.3 200.6
MYDAYIS 15.7 - 15.7 -
Other
Neuroscience 30.1 35.7 54.8 57.8
Neuroscience
total 635.4 655.2 1,288.7 1,285.3
LIALDA/MEZAVANT 207.8 193.7 382.9 361.7
PENTASA 83.3 72.9 152.4 136.9
GATTEX/REVESTIVE 75.3 44.5 144.3 96.2
NATPARA 34.5 19.9 64.2 35.5
Other Internal
Medicine 83.4 88.7 159.3 173.3
Internal Medicine
total 484.3 419.7 903.1 803.6
Oncology total 62.5 20.3 120.8 20.3
Ophthalmology
total 57.4 - 96.0 -
Total Product
sales 3,591.8 2,322.1 7,004.1 3,949.4
Royalties and
other revenues:
SENSIPAR
royalties 46.4 35.6 85.3 73.5
ADDERALL XR
royalties 13.4 5.2 25.9 11.0
FOSRENOL
royalties 12.1 11.4 20.7 20.6
3TC and ZEFFIX
royalties 8.2 12.1 22.7 27.1
Other royalties
and revenues 73.9 42.7 159.4 56.8
Total Royalties
and other
revenues 154.0 107.0 314.0 189.0
Total Revenues $3,745.8 $2,429.1 $7,318.1 $4,138.4
23. Subsequent Events
As part of the Board's ongoing commitment to optimize Shire's portfolio
and strategic focus, Shire is assessing strategic options for its
Neuroscience franchise. These options may include the independent public
listing of the Neuroscience franchise. Shire intends to complete this
strategic review by year end.
On July 18, 2017, Shire entered into a licensing agreement with
Novimmune S.A. ("Novimmune"). The license grants Shire exclusive
worldwide rights to develop and commercialize a bi-specific antibody in
pre-clinical development for the treatment of hemophilia A and
hemophilia A patients with inhibitors. Under the terms of the agreement,
Shire will develop, and if approved, commercialize the product. Shire
made an initial $5.0 million upfront license payment. Novimmune will be
entitled to receive additional potential milestone payments up to $335.0
million based on clinical, regulatory and commercial milestones and
single-digit royalties.
Independent Review Report to Shire plc
We have been engaged by Shire plc to review the condensed set of
financial statements for Shire plc and its subsidiaries (the "Group") in
the half-yearly financial report for the six months ended June 30, 2017
which comprises the consolidated balance sheets, consolidated statements
of operations, consolidated statements of comprehensive income,
consolidated statement of changes in equity, consolidated statements of
cash flows and related notes 1 to 23. We have read the other information
contained in the half-yearly financial report and considered whether it
contains any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
This report is made solely to the group in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Auditing Practices Board. Our work has been
undertaken so that we might state to the group those matters we are
required to state to it in an independent review report and for no other
purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the group, for our review
work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been
approved by, the directors. The directors are responsible for preparing
the half-yearly financial report in accordance with the Disclosure
Guidance and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 1, the annual financial statements of the Group are
prepared in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP"). The condensed set of
financial statements included in this half-yearly financial report has
been prepared in accordance with the accounting policies the Group
intends to use in preparing its next financial statements.
Our responsibility
Our responsibility is to express to the Group a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
Scope of review
We conducted our review in accordance with International Standard on
Review Engagements (UK and Ireland) 2410 "Review of Interim Financial
Information Performed by the Independent Auditor of the Entity" issued
by the Auditing Practices Board for use in the United Kingdom. A review
of interim financial information consists of making inquiries, primarily
of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK and Ireland) and consequently
does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the
half-yearly financial report for the six months ended June 30, 2017 is
not prepared, in all material respects, in accordance with U.S. GAAP and
the Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
Deloitte LLP
London, United Kingdom
August 3, 2017
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: Shire plc via Globenewswire
(END) Dow Jones Newswires
August 04, 2017 03:05 ET (07:05 GMT)