10-Q 1 shire10q0513.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2001 Commission File Number: 0-29630 SHIRE PHARMACEUTICALS GROUP PLC (Exact name of registrant as specified in its charter) England and Wales N.A. (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Hampshire International Business Park, Chineham, Basingstoke, Hampshire, England RG24 8EP (Address of principal executive offices) (Zip Code) 44 1256 894 000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practical date. Class Outstanding at April 24, 20001 Common Stock: Ordinary Shares 258,031,902 THE "SAFE HARBOR" STATEMENT UNDER SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDED) AND SECTION 27A OF THE SECURITIES ACT OF 1933 (AMENDED). The statements in this form 10-Q that are not historical facts are forward-looking statements that involve risks and uncertainties, including but not limited to, risks associated with the inherent uncertainty of pharmaceutical research, product development and commercialization, the impact of competitive products, patents, and other risks and uncertainties, including those detailed from time to time in periodic reports, including the Annual Report filed on Form 10-K by Shire with the Securities and Exchange Commission. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements SHIRE PHARMACEUTICALS GROUP PLC CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars, except share and per share data) March 31, December 31,
2001 2000 (Unaudited) ASSETS ----------- ----------- Current assets: Cash and cash equivalents 82,835 46,598 Marketable securities and other current asset investments 142,553 139,745 Accounts receivable, net 70,993 93,830 Inventories, net 43,773 47,109 Deferred tax asset 18,722 26,971 Prepaid expenses and other current assets 14,373 9,736 ------------ ------------ Total current assets 373,249 363,989 Investments 5,756 6,139 Property, plant and equipment, net 47,867 49,685 Intangible assets, net 561,458 556,013 Deferred tax asset 8,047 6,298 Other assets 21,850 22,608 ------------ ------------ Total assets 1,018,227 1,004,732 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt 1,470 1,448 Accounts and notes payable 97,313 99,437 Other current liabilities 19,765 10,528 ------------ ------------ Total current liabilities 118,548 111,413 Long-term debt, excluding current instalments 126,436 126,364 Other long-term liabilities 11,532 14,196 ------------ ------------ Total liabilities 256,516 251,973 ------------ ------------ Shareholders' equity: Common stock, 5p par value; 400,000,000 shares authorized; and 257,950,135 shares issued and outstanding (2000: 257,088,451) 21,097 21,035 Additional paid-in capital 945,735 938,493 Accumulated other comprehensive losses (52,121) (27,814) Accumulated deficit (153,000) (178,955) ------------ ------------ Total shareholders' equity 761,711 752,759 ------------ ------------ Total liabilities and shareholders' equity 1,018,227 1,004,732 ------------ ------------
The accompanying notes are an integral part of these financial statements SHIRE PHARMACEUTICALS GROUP PLC CONSOLIDATED STATEMENTS OF INCOME (In thousands of U.S. dollars, except share and per share data) (Unaudited)
3 months to 3 months to March 31, 2001 March 31, 2000 ------------ ------------ Product sales 151,404 113,165 Licensing and development 3,041 4,910 Royalties 921 605 Other revenues 275 298 ------------ ------------ Total revenues 155,641 118,978 Costs and expenses: Cost of revenues 27,713 20,905 Research and development 27,165 26,072 Selling, general and administrative (inclusive of stock option compensation charge of $2,121 and $23,246 respectively) 60,238 66,046 Losses on disposal of assets 607 - ------------ ------------ Total operating expenses 115,723 113,023 ------------ ------------ Operating income 39,918 5,955 Interest income 2,536 1,371 Interest expense (2,801) (3,405) Other expense (1,668) (431) ------------ ------------ Total other expenses, net (1,933) (2,465) ----------- ----------- Income before income taxes 37,985 3,490 Income taxes (12,030) (7,756) ------------ ------------ Net income/(loss) 25,955 (4,266) ------------ ------------ Net income/(loss) per share: Basic $0.10 ($0.02) Diluted $0.10 ($0.02) Weighted average number of shares: Basic 257,390,769 246,672,276 Diluted 262,649,651 246,672,276
SHIRE PHARMACEUTICALS GROUP PLC CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of U.S. dollars) (Unaudited)
3 months to 3 months March 31, to March 2001 31, 2000 ---------- ---------- Cash flows from operating activities: Net income/(loss) 25,955 (4,266) Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Depreciation and amortization 8,600 7,592 Stock option compensation 2,121 23,246 Tax benefit of stock option compensation charged directly to equity 3,090 1,072 Non cash exchange gains and losses (10,311) (151) Loss on disposal of fixed assets 607 - Decrease/(increase) in accounts receivable 22,837 (16,671) Decrease/(increase) in inventory 3,336 (290) Decrease in deferred tax asset 6,500 - (Increase)/decrease in prepayments and other current asset investments (4,779) 683 Decrease in other assets 758 1,578 Decrease in accounts and notes payable (2,105) (7,814) Increase/(decrease) in other current liabilities 2,601 (39,938) Decrease in other long term liabilities (1,164) (804) ---------- ---------- Net cash provided by/(used in) operating activities 58,046 (35,763) ---------- ---------- Cash flows from investing activities: Redemption of marketable securities, net 46,000 31,687 Increase in cash placed on short-term deposit (48,808) (5,363) Expenses of acquisition of subsidiaries - (212) Purchase of intangible assets (18,335) - Purchase of fixed assets (1,544) (1,935) Collection on notes receivable - 520 ---------- ---------- Net cash (used in)/provided by investing activities (22,687) 24,697 ---------- ---------- Cash flows from financing activities: Movements on long term debt 94 (2,549) Proceeds from issue of common stock - 3,033 Payment of stock issuance costs (16) (3,385) Proceeds from exercise of options 2,109 27,192 ---------- ---------- Net cash provided by financing activities 2,187 24,291 ---------- ---------- Effect of foreign exchange rate changes on cash and cash equivalents (1,309) - ---------- ---------- Net increase in cash and cash equivalents 36,237 13,225 Cash and cash equivalents at beginning of period 46,598 54,082 ---------- ---------- Cash and cash equivalents at end of period 82,835 67,307 ---------- ----------
SHIRE PHARMACEUTICALS GROUP PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS) (In thousands of U.S. dollars) (Unaudited)
3 months to 3 months to March 31, 2001 March 31, 2000 ------------ ------------ Net income/(loss) 25,955 (4,266) Foreign currency translation adjustments (24,097) (2,819) Unrealized holding loss on non-current investments (210) - ------------ ------------ Comprehensive income/(loss) 1,648 (7,085) ------------ ------------ There are no tax effects related to the items included above.
SHIRE PHARMACEUTICALS GROUP PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies a) Description of Operations and Principles of Consolidation Shire Pharmaceuticals Group plc is an international specialty pharmaceutical company with a strategic focus on four therapeutic areas: central nervous system disorders, metabolic diseases, oncology and gastroenterology. The Company's principal products include Adderall, for the treatment of Attention Deficit Hyperactivity Disorder, Agrylin, for the treatment of thrombocythemia, and Pentasa, for the treatment of ulcerative colitis. The Group has operations in the United States, Europe and the rest of the world. Within these geographic operating segments, revenues are derived from three sources: sales of products by the Company's own sales and marketing operations, licensing and development fees, and royalties. The accompanying consolidated financial statements include the accounts of Shire Pharmaceuticals Group plc and all its subsidiary undertakings after elimination of intercompany accounts and transactions. b) New Accounting Pronouncements In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". This Statement defers for one year the effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133". SFAS 138 amends SFAS 133 to (a) exclude from the scope of SFAS No. 133 nonfinancial assets that will be delivered in quantities expected to be used or sold by the company over a reasonable period in the normal course of business and for which physical delivery is probable, (b) permit hedging of a benchmark interest rate, (c) allow hedging of foreign-currency-denominated assets and liabilities and (d) allow for limited hedging of net foreign currency exposures. The Company has not entered into any derivative contracts during the three months ended March 31, 2001 nor were any open as of December 31, 2000. Accordingly, there is no impact on results of operations for the three months ended March 31, 2001 or on the financial position as at March 31, 2001 following the adoption of this statement. c) Basis of Presentation The accompanying consolidated financial statements, which include the operations of the Company and its wholly owned subsidiaries and the financial information included herein, are unaudited. They have been prepared in accordance with generally accepted accounting principles in the United States and Securities and Exchange Commission regulations for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. However, such information includes all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to fairly state the results of the interim periods. Interim results are not necessarily indicative of results to be expected for the full year. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the three years ended December 31, 2000 and notes thereto. The results for the period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 2. Inventory March 31, March 31, 2001 2000 $'000 $'000 -------------- -------------- Finished goods 20,970 27,720 Work-in-process 12,520 6,008 Raw materials 10,283 6,100 -------------- -------------- 43,773 39,828 -------------- -------------- 3. Analysis of revenue, operating income and reportable segments The Company has disclosed segment information for the individual operating areas of the business, based on the way in which the business is managed and controlled. Shire's principal reporting segments are geographic, each being managed and monitored separately and serving different markets. The Company evaluates performance based on operating income.
Three months ended March 31, 2001 Rest of U.S. Europe World Total $'000 $'000 $'000 $'000 ---------- ---------- ---------- ---------- Product sales 126,804 18,330 6,270 151,404 Licensing and development 2,085 956 - 3,041 Royalties 60 358 503 921 Other revenues - - 275 275 ---------- ---------- ---------- ---------- Total revenues 128,949 19,644 7,048 155,641 ---------- ---------- ---------- ---------- Cost of revenues 17,877 6,529 3,307 27,713 Research and development 19,916 7,188 61 27,165 Selling, general and administrative 40,275 18,162 1,801 60,238 Losses on disposal of assets 591 14 2 607 ---------- ---------- ---------- ---------- Total operating expenses 78,659 31,893 5,171 115,723 ---------- ---------- ---------- ---------- Operating income/(loss) 50,290 (12,249) 1,877 39,918 ---------- ---------- ---------- ---------- Three months ended March 31, 2000 Rest of U.S. Europe World Total $'000 $'000 $'000 $'000 ---------- ---------- ---------- ---------- Product sales 93,102 15,243 4,820 113,165 Licensing and development 1,376 3,534 - 4,910 Royalties 44 561 - 605 Other revenues 3 - 295 298 ---------- ---------- ---------- ---------- Total revenues 94,525 19,338 5,115 118,978 ---------- ---------- ---------- ---------- Cost of revenues 12,955 5,730 2,220 20,905 Research and development 17,247 8,808 17 26,072 Selling, general and administrative 26,138 37,795 2,113 66,046 ---------- ---------- ---------- ---------- Total operating expenses 56,340 52,333 4,350 113,023 ---------- ---------- ---------- ---------- Operating income/(loss) 38,185 (32,995) 765 5,955 ---------- ---------- ---------- ----------
4. Net income/(loss) per share Basic net income/(loss) per share is based upon the net income/(loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income/(loss) per share is based upon net income/(loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period and adjusted for the effect of all dilutive potential common shares that were outstanding during the period. The following table sets forth the computation of basic and diluted net income/(loss) per share:
3 months to 3 months to March 31, 2001 March 31, 2000 $'000 $'000 ---------------- ---------------- Numerator for basic net income/(loss) per share 25,955 (4,266) Interest charged on convertible debt, net of tax 44 - ---------------- ---------------- Numerator for diluted net income/(loss) per share 25,999 (4,266) ---------------- ---------------- Weighted average number of shares: No. of shares No. of shares ---------------- ---------------- Basic - weighted average number of shares 257,390,769 246,672,276 Effect of dilutive stock options 4,666,975 - Convertible debt 591,907 - ---------------- ---------------- Diluted - weighted average number of shares 262,649,651 246,672,276 ---------------- ---------------- Basic net income/(loss) per share $0.10 $(0.02) ---------------- ---------------- Diluted net income/(loss) per share $0.10 $(0.02) ---------------- ----------------
The calculation of the diluted weighted average number of shares for the three months ended March 31, 2000 excludes the effects of dilutive stock options and convertible debt securities issued by the Company because these have an antidilutive effect on the calculation in a loss making period. 5. Consolidated statement of changes in shareholders' equity
Accumulated Common Common Additional other comp- Total Stock Stock paid-in Accumulat-ed prehensive shareholders' Amount No. Shares capital deficit losses Equity $'000 000's $'000 $'000 $'000 $'000 ------------- ------------- ------------- ------------- ------------- ------------- As at January 1, 2001 21,035 257,088 938,493 (178,955) (27,814) 752,759 Net income - - - 25,955 - 25,955 Foreign currency translation - - - - (24,097) (24,097) Unrealized holding loss on non-current investments - - - - (210) (210) Options exercised 62 862 2,047 - - 2,109 Issuance costs - - (16) - - (16) Stock option compensation - - 2,121 - - 2,121 Tax benefit associated with exercise of stock options - - 3,090 - - 3,090 ------------- ------------- ------------- ------------- ------------- ------------- As at March 31, 2001 21,097 257,950 945,735 (153,000) (52,121) 761,711 ------------- ------------- ------------- ------------- ------------- -------------
6. Contingent liabilities Until April 1998, Shire Richwood Inc. ("SRI") distributed products containing phentermine, a prescription drug approved in the U.S. as a single agent for short term use in obesity. Contrary to the approved labeling of these products, physicians in the U.S. co-prescribed phentermine with fenfluramine or dexfenfluramine for management of obesity. This combination was popularly known as the "fen/phen" diet. In mid 1997, following concerns raised about cardiac valvular side effects alleged to be associated with this diet regime, the fenfluramine and dexfenfluramine elements of the "fen/phen" diet were withdrawn from the U.S. market. Although SRI has ceased to distribute phentermine, the drug remains both approved and available in the U.S. SRI and a number of other pharmaceutical companies are being sued for damages for personal injury and medical monitoring arising from phentermine used either alone or in combination. As of March 31, 2001, SRI was named as a defendant in approximately 3,781 lawsuits and had been dismissed from approximately 3,439 of these cases. There were approximately 158 additional cases pending dismissal as of March 31, 2001. In only 42 cases in which SRI has been named as a defendant, has it been alleged in the complaint or subsequent discovery that the plaintiff had used SRI's particular product. Although there have been reports of substantial jury awards and settlements in respect of fenfluramine and/or dexfenfluramine, to date Shire is not aware of any jury awards made against, or any settlements made by, any phentermine defendant. Shire denies liability on a number of grounds including lack of scientific evidence that phentermine, properly prescribed, causes the alleged side effects and that SRI did not promote phentermine for long term combined use as the "fen/phen" diet. Accordingly, Shire intends to defend vigorously any and all claims made against the Company in respect of phentermine and believes that a liability is neither probable nor quantifiable at this stage of litigation. On August 31, 2000 Shire entered into an agreement (the "Termination Agreement") with the former shareholders of SRI, pursuant to which the ordinary shares placed in escrow at the time of the purchase of SRI by Shire were released and the escrow agreement and the escrow fund were terminated. The escrow agreement with the SRI shareholders was initially established by Shire in 1997 in anticipation of possible phentermine related claims against the Company. Under the terms of the termination Agreement, monies in the approximate amount of $7 million were received by Shire and the escrow fund was terminated. The remaining shares were distributed to the former SRI shareholders. Legal expenses have been paid by Eon Labs Manufacturing Inc. ("Eon"), the suppliers to SRI or Eon's insurance carriers but such insurance is now exhausted. Eon has agreed to defend and indemnify SRI in this litigation pursuant to an agreement dated November 30, 2000 between Eon and SRI. At the present stage of litigation, Shire is unable to estimate the level of future legal costs after taking into account any available product liability insurance and enforceable indemnities. To the extent that any legal costs are not covered by insurance or available indemnities, these will be expensed as incurred. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of operations for the three months ended March 31, 2001, as compared with those for the three months ended March 31, 2000 Overview of financial results Total revenues for the three months ended March 31, 2001 increased by 31 per cent to $155.6 million as compared to the three months ended March 31, 2000, primarily the result of a $38.2 million increase in product sales. The Company recorded first quarter net income of $26.0 million (Q1 2000: $4.3 million net loss). Sales and marketing Product sales of $151.4 million represented 97 per cent of total revenues, an increase of 34 per cent over first quarter 2000 product sales of $113.2 million. Product sales in the U.S. continue to represent a significant percentage of our worldwide sales, 84 per cent in the three months ended March 31, 2001, compared to 82 per cent in the equivalent period last year. The Company manages and controls the business on geographic lines. The following table presents the Company's net product sales by operating segment: Product sales by segment 3 months to 3 months to March 31, 2001 March 31, 2000 $'000 $'000 % change United States 126,804 93,102 36.2 Europe 18,330 15,243 20.3 Rest of World 6,270 4,820 30.1 ------------ ------------ ------------ Total product sales 151,404 113,165 33.8 ------------ ------------ ------------ First quarter sales of Adderall, marketed in the U.S. for the treatment of Attention Deficit Hyperactivity Disorder (ADHD), were $70.1million, representing growth of 29 per cent over the first quarter of 2000. Adderall had a 33.3 per cent share of the prescription market for ADHD in the U.S. in March 2001 compared to 29.7 per cent in March 2000. Adderall continues to be the brand leader in the U.S. market for ADHD. Sales of Agrylin, the only U.S. product licensed for the treatment of essential thrombocythemia were $17.1 million, a 56 per cent increase over quarter one 2000 sales of $11.0 million. Sales in quarter one 2000 were slightly below trend due to wholesaler de-stocking. Shire achieved a scrip share of 20.4 per cent of the total U.S. Agrylin market, including Hydrea and generic hydroxyurea, in March 2001 compared to 14.3 per cent in March 2000. Sales of Pentasa, licensed for the treatment of ulcerative colitis, at $14.4 million, were 39 per cent higher than the comparable period last year, when sales were below trend due to wholesaler de-stocking following a price increase in quarter four 1999. Pentasa had a 17.8 per cent share of the oral mesalamine/obsalazine market in March 2001 compared to 18.0 per cent in March 2000. Carbatrol, one of the most widely used first line treatments for epilepsy, recorded sales growth of 72 per cent from sales of $5.6 million in the three months ended March 31, 2000 to $9.6 million in the three months ended March 31, 2001. This translates to 32.5 per cent of the U.S. extended release carbamazepine prescription market in March 2001, compared to 26.0 per cent in March 2000. Licensing Licensing and development fees in the three months ended March 31, 2001 fell by 38 per cent to $3.0 million compared to $4.9 million in the three months ended March 31, 2000. The decrease is mainly due to the reduction in development stage activities for Reminyl and hence the ending of reimbursement revenues for actual costs incurred on raw materials. Royalties increased by $0.3 million to $0.9 million. Cost of sales and operating expenses Gross margin on product sales, at 82 per cent, was consistent with the same period last year. This is reflected in the product mix as the higher margin products, Adderall and Agrylin, represented approximately 57 per cent of total product sales in the three months ended March 31, 2001 and 2000. R&D expenditure increased 4 per cent to $27.2 million (Q1 2000: $26.1 million). R&D expenditure in first quarter 2001 represented 17 per cent of revenues compared to 22 per cent in first quarter 2000 when costs were particularly high due to an upfront payment for the in-licensing of SPD 421 from D-Pharm Ltd. The relatively low R&D to revenue ratio in first quarter 2001 is also affected by the phasing of project costs. Selling, general and administrative expenses, excluding the effects of a minor stock option compensation charge of $2.1 million (Q1 2000: $23.2 million), increased by 36 per cent to $58.1 million (Q1 2000: $42.8 million). This increase reflects the growth in the US sales force since first quarter 2000 and increased marketing activities in respect of the anticipated launch of Adderall XR. As a percentage of product sales, selling, general and administrative costs represented 38 per cent, consistent with first quarter 2000. A significant component of selling, general and administrative expenses are depreciation and amortization, which increased by 13 per cent to $8.6 million (Q1 2000: $7.6 million). This increase is attributable to the purchase of several new products since March last year. Income taxes For the three months ended March 31, 2001 income taxes increased $4.2 million from $7.8 million to $12.0 million. The Company's effective tax rate before the stock compensation charge was 30 per cent for the three months ended March 31, 2001 (Q1 2000: 29 per cent). The Company has recorded net deferred tax assets of $26.8 million. Realization is dependent upon generating sufficient taxable income to utilize such assets. Although realization on these assets is not assured, management believes it is more likely than not that the deferred tax assets will be realized. Liquidity and Financial Condition The Company's funding requirements depend on a number of factors, including the Company's product development programs, business and product acquisitions, the level of resources required for the expansion of marketing capabilities as the product base expands, increased investment in accounts receivable and inventory which may arise as sales levels increase, competitive and technological developments, the timing and cost of obtaining required regulatory approvals for new products, and the continuing revenues generated from sales of its key products. At March 31, 2001, the Company had net cash funds available as follows:
March 31, December 31, 2001 2000 $'000 $'000 -------------- -------------- Cash and cash equivalents 82,835 46,598 Marketable securities and other current asset investments 142,553 139,745 Debt (127,906) (127,812) -------------- -------------- Net cash 97,482 58,531 -------------- --------------
Net cash provided by operating activities in the three months ended March 31, 2001 was $58.0 million compared to a cash outflow of $35.8 million in the three months to March 31, 2000. Cash payments in respect of restructuring and merger related expenses following the acquisition of Roberts Pharmaceutical Corporation in December 1999 were a major contributor to the outflow in first quarter 2000. Investing activities utilized $22.7 million, which mainly comprised acquisitions of new products ($18.3 million) and tangible fixed assets ($1.5 million), and a net $2.8 million increase in cash placed on deposit. Financing activities provided $2.2 million, which mainly comprised proceeds from the exercise of stock options. Capital expenditure Capital expenditure in the three months to March 31, 2001 included $1.5 million for tangible fixed assets, mainly related to the Company's new head office facility purchased in quarter four 2000, and $18.4 million for new products to be marketed by the Group's Spanish and Italian operations. Other matters On December 11, 2000 the Company announced that it had entered into an agreement to merge with BioChem Pharma Inc., the merger to be achieved through an exchange of shares. Each of the resolutions considered at the Company's Extraordinary Meeting of Shareholders on March 29, 2001 were duly passed and gave the Board approval to complete the merger upon satisfaction of all conditions. The Company received notification on May 8, 2001 from the Minister of Industry, the minister responsible for the Investment Canada Act, that the merger has been approved. The merger became effective on May 11, 2001. ITEM 3. Qualitative and Quantitative Disclosures about Market Risk There have been no material changes in the Company's market risk exposure since December 31, 2000. Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2000 contains a detailed discussion of the Company's market risk exposure in relation to interest rate market risk and foreign exchange market risk. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are currently a defendant in both federal and state courts involved in cases that seek damages for, among other things, personal injury arising from phentermine products supplied for the treatment of obesity by us and several other pharmaceutical companies. We have been sued as a manufacturer and distributor of phentermine, an anorectic used in the short-term treatment of obesity and one of the products addressed by the lawsuits. The suits relate to phentermine either alone or together with fenfluramine or dexfenfluramine. There are 42 suits in which we have been named as a defendant, where the plaintiffs specifically alleged in the complaint or subsequent discovery that they used phentermine products manufactured or distributed by us. The lawsuits generally allege the following claims: o the defendants marketed phentermine and the other products for the treatment of obesity and misled users about the products and the dangers associated with them; o the defendants failed to adequately test phentermine individually and when taken in combination with the other drugs; and o the defendants knew or should have known about the negative effects of the drug and should have informed the public about such risks and/or failed to provide appropriate warning labels. We became involved with phentermine through the acquisition of certain assets of Rexar Pharmaceutical Corp. in January 1994. In addition to liability as a result of our own manufacturing and distributing of phentermine products, plaintiffs may seek to impose liability on us as a successor to Rexar. Class certification has been sought for certain of the claims made against us and the other defendants. In addition, pending federal lawsuits have been consolidated as a multidistrict litigation in the Eastern District of Pennysylvania. Over the last year, the extent of management time has reduced as we have been dismissed by the courts from a significant number of cases. Similarly, the number of cases where we are still incurring defense costs or where there is potential for compensation has been reduced. As of March 31, 2001, we had been named in approximately 3,781 cases. We have been dismissed from 3,439 of these cases with approximately 158 cases pending dismissal. If we are found liable in some or all of the outstanding lawsuits for damages in excess of our assets, we would be required to consider reorganizing and seeking protection in bankruptcy or initiating insolvency proceedings. On August 31, 2000, we entered into an agreement (the "Termination Agreement") with the former shareholders of Shire Richwood Inc. ("SRI"), pursuant to which the ordinary shares placed into escrow at the time of the purchase of SRI by Shire were released and the escrow agreement and the escrow fund were terminated . The escrow agreement with the SRI shareholders was initially established by Shire in 1997 in anticipation of possible phentermine related claims against the Company. Under the terms of the Termination Agreement, monies in the approximate amount of $7 million were received by Shire and the escrow fund was terminated. The remaining shares were distributed to the former SRI shareholders. Legal expenses have been paid by our supplier, Eon Labs Manufacturing Inc. ("Eon") or Eon's insurance carriers, but such insurance is now exhausted. Eon has agreed to defend and indemnify us in this litigation pursuant to an agreement dated November 30, 2000 between ourselves and Eon. We have our own insurance up to a maximum of $3 million for lawsuits filed in the period to April 28, 1998, an additional $85 million of coverage put in place during 2000, and an unlimited indemnity given by Eon for phentermine it manufactured for us. We have already spent a substantial amount of resources in managing these lawsuits and will continue to do so. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An Extraordinary General Meeting of Shareholders was held on March 29, 2001. The following resolutions were adopted by the margins indicated: Ordinary resolution to approve the Company's merger with BioChem Pharma Inc., to increase the authorized share capital of the Company, to grant authority to the Directors to allot such share capital and to create new Special Voting Shares which attach certain rights and restrictions to those shares. For Against Open Abstentions 115,010,174 412,946 261,602 3,641,875 Special resolution to increase the Director's powers to allot equity shares for cash, free of the pre-emption rights conferred by the Companies Act 1985. For Against Open Abstentions 116,835,752 497,137 171,978 1,821,730 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K During the first quarter ended March 31, 2001, the following reports on Form 8-K were filed by the Company with the Securities and Exchange Commission: Form 8-K (Item 7 - Financial Statements and Exhibits), date of earliest event reported February 15, 2001, with respect to Pro Forma Financial Data filed in relation to the Company's proposed merger with BioChem Pharma Inc. Form 8-K (Item 5 - Other Events), date of earliest event reported May 4, 2001, with respect to announcement of first quarter results. Form 8-K (Item 5 - Other Events), date of earliest event reported May 9, 2001, with respect to first quarter results and BioChem merger. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. SHIRE PHARMACEUTICALS GROUP PLC (Registrant) Date: 14, May 2001 By: /s/ Angus C Russell ------------------------------- Group Finance Director Date: 14, May 2001 By: /s/ Rolf Stahel ------------------------------- Chief Executive