-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ms9spBi/zKsHlD0nJiXMDXG/lfRw9vPPXX/UCPFtGvYgE9Y3AoCfe0n19DREObEF gU8j2QOXD8VWO4UI9i9ZDA== 0000950162-01-500945.txt : 20020410 0000950162-01-500945.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950162-01-500945 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHIRE PHARMACEUTICALS GROUP PLC CENTRAL INDEX KEY: 0000936402 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29630 FILM NUMBER: 1787327 BUSINESS ADDRESS: STREET 1: HAMPSHIRE INTL BUSINESS PARK STREET 2: CHINEHAM BASINGSTOKE CITY: HAMPSHIRE ENGLAND RG STATE: X0 BUSINESS PHONE: 1264333455 MAIL ADDRESS: STREET 1: HAMPSHIRE INTL BUSINESS PARK STREET 2: CHINEHAM BASINGSTOKE CITY: HAMPSHIRE ENGLAND RG STATE: X0 10-Q 1 shire10q1114.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 September 30, 2001 Commission File Number: 0-29630 SHIRE PHARMACEUTICALS GROUP PLC (Exact name of registrant as specified in its charter) England and Wales Applied for (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 November 13, 2001 Common Stock: Ordinary Shares 479,403,984 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) September 30, December 31, 2001 2000 (Unaudited) ASSETS ----------- ----------- Current assets: Cash and cash equivalents 514,998 93,266 Marketable securities and other current asset investments 260,964 370,425 Accounts receivable, net 142,650 144,175 Inventories, net 50,032 49,612 Deferred tax asset 8,288 26,990 Prepaid expenses and other current assets 24,389 11,385 ------------ ------------ Total current assets 1,001,321 695,853 Investments 61,276 74,314 Property, plant and equipment, net 112,577 131,224 Intangible assets, net 560,010 578,436 Net assets of business transferred under contractual arrangements 3,831 35,850 Deferred tax asset 15,108 6,543 Other assets 18,983 26,275 ------------ ------------ Total assets 1,773,106 1,548,495 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current instalments of long-term debt 4,393 81,811 Accounts and notes payable 158,145 113,446 Other current liabilities 15,016 32,593 ------------ ------------ Total current liabilities 177,554 227,850 Long-term debt, excluding current instalments 393,491 132,063 Other long-term liabilities 11,188 14,196 ------------ ------------ Total liabilities 582,233 374,109 ------------ ------------ Shareholders' equity: Common stock, 5p par value: 800,000,000 shares authorized; and 477,927,959 shares issued and outstanding (2000: 488,015,304) 36,702 40,292 Exchangeable shares: 6,117,944 shares issued and outstanding (2000: nil) 277,328 - Additional paid-in capital 993,460 1,209,448 Accumulated other comprehensive losses (77,197) (60,550) Accumulated deficit (39,420) (14,804) ------------ ------------ Total shareholders' equity 1,190,873 1,174,386 ------------ ------------ Total liabilities and shareholders' equity 1,773,106 1,548,495 ------------ ------------
The balance sheet as at December 31, 2000 has been restated to include the results of BioChem Pharma Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB 16, Accounting for Business Combinations. 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 9 months 9 months September 30, September 30, to to 2001 2000 September 30, September 30, 2001 2000 ------------ ------------ ------------ ------------ Product sales 180,254 142,113 506,125 379,353 Licensing and development 943 5,063 4,229 14,344 Royalties 37,103 31,890 107,793 95,553 Other revenues 784 257 1,530 731 ------------ ------------ ------------ ------------ Total revenues 219,084 179,323 619,677 489,981 Costs and expenses: Cost of revenues (28,036) (32,134) (85,021) (77,231) Research and development (41,327) (44,487) (120,838) (121,969) Selling, general and administrative (inclusive of stock option compensation charge of $51,000, $206,000, $2,403,000 and $23,688,000 respectively) (72,585) (53,616) (218,376) (182,912) Asset impairments and restructuring charges - - (85,447) - Merger transaction expenses - - (83,470) - (Losses)/gains on dispositions of assets (2,028) 214 (10,126) 479 ------------ ------------ ------------ ------------ Total operating expenses 143,976 130,023 603,278 381,633 ------------ ------------ ------------ ------------ Operating income 75,108 49,300 16,399 108,348 Interest income 4,651 5,064 14,286 13,259 Interest expense (989) (3,275) (5,671) (11,663) Other (expense)/income, net (844) 4,050 1,809 106,503 ------------ ------------ ------------ ------------ Total other income, net 2,818 5,839 10,424 108,099 ----------- ----------- ------------ ------------ Income before income taxes 77,926 55,139 26,823 216,447 Income taxes (19,815) (11,963) (51,439) (32,045) ------------ ------------ ------------ ------------ Net income/(loss) 58,111 43,176 (24,616) 184,402 ------------ ------------ ------------ ------------ Net income/(loss) per share: Basic 11.8c 8.9c (5.0c) 38.3c Diluted 11.5c 8.7c (5.0c) 37.3c Weighted average number of shares: Basic 493,790,267 485,406,226 490,750,414 481,488,865 Diluted 503,914,740 497,036,041 490,750,414 493,737,179
The results for the three and nine months ended September 30, 2000 have been restated to include the results of BioChem Pharma Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB 16, Accounting for Business Combinations.
SHIRE PHARMACEUTICALS GROUP PLC CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of U.S. dollars) (Unaudited) 9 months to 9 months to September 30, September 30, 2001 2000 --------------- --------------- Cash flows from operating activities: Net (loss)/income (24,616) 184,402 Adjustments to reconcile net (loss)/income to net cash provided by operating activities: Depreciation and amortization 33,753 28,045 Stock option compensation 2,403 23,688 Tax benefit of stock option compensation charged directly to equity 3,307 10,972 Non cash exchange gains and losses (15,167) (2,996) Write-down of long term investments 24,937 - Write-down of intangible assets 20,890 7,061 Write-down of net assets of business transferred under contractual arrangements 30,811 - Gain on sale of long term investments - (104,984) Loss/(gain) on sale of fixed assets 8,112 (479) Loss on sale of intangible assets 2,014 - Share of loss in company subject to significant influence - 1,464 Changes in assets and liabilities: Decrease/(increase) in accounts receivable 1,551 (42,064) Decrease/(increase) in inventory (420) 278 Decrease in deferred tax asset 10,137 7,604 (Increase)/decrease in prepayments and other current asset investments (13,004) 1,429 Decrease/(increase) in other assets 8,500 (18) Increase/(decrease) in accounts and notes payable 44,699 (60,542) Decrease in other current liabilities (17,577) - Decrease in other long term liabilities (3,008) (4) --------------- --------------- Net cash provided by operating activities 117,322 53,856 --------------- --------------- Cash flows from investing activities: (Investment in)/redemption of marketable securities (18,450) 75,205 Decrease in cash placed on short-term deposit 127,911 - Purchase of temporary investments - (232,743) Purchase of long term investments (13,216) (15,606) Maturity of long term investments - 113,793 Expenses of acquisition of subsidiaries - (657) Purchase of intangible assets (33,519) (21,894) Purchase of fixed assets (6,305) (21,173) Purchase of other assets - (606) Proceeds from sale of long term investments - 124,145 Proceeds from sale of fixed assets 7,043 12,093 Proceeds from sale of intangible assets 4,556 - Collection on notes receivable - 766 --------------- --------------- Net cash provided by investing activities 68,020 33,323 --------------- --------------- Cash flows from financing activities: Proceeds from issue of long-term debt 391,000 - Repayment of long-term debt and capital leases (206,990) (8,505) Proceeds from issue of common stock, net of expenses 1,526 7,190 Proceeds from exercise of options 50,514 43,047 --------------- -------------- Net cash provided by financing activities 236,050 41,732 --------------- -------------- Effect of foreign exchange rate changes on cash and cash equivalents 340 (5,303) Cash flows used in discontinued operations - (1,722) --------------- -------------- Net increase in cash and cash equivalents 421,732 121,886 Cash and cash equivalents at beginning of period 93,266 102,503 --------------- -------------- Cash and cash equivalents at end of period 514,998 224,389 --------------- --------------
The cash flows for the nine months ended September 30, 2000 have been restated to include the cash flows of BioChem Pharma Inc., the merger with whom was accounted for as a pooling of interests in accordance with APB 16, Accounting for Business Combinations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSS) (In thousands of U.S. dollars) (Unaudited) 3 months to 3 months to 9 months to 9 months to September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net income/(loss) 58,111 43,176 (24,616) 184,402 Foreign currency translation adjustments 13,424 (16,098) (16,139) (41,886) Unrealized holding (losses)/gains on marketable securities and non-current investments (312) (2,691) (508) 1,356 ------------ ------------ ------------ ------------ Comprehensive income/(loss) 71,223 24,387 (41,263) 143,872 ------------ ------------ ------------ ------------
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 is an international specialty pharmaceutical company with a strategic focus on three therapeutic areas: central nervous system disorders, oncology and anti-infectives. Shire's strategy is further supported by two technology platforms, drug delivery and biologics. The Company has a global sales and marketing infrastructure with a broad portfolio of products and its own direct marketing capability in the U.S., Canada, U.K., Republic of Ireland, France, Germany, Italy and Spain. Shire also covers other significant pharmaceutical markets indirectly through distributors. The business is managed within three individual operating segments: U.S., International and global research and development. Within these segments, revenues are derived from three sources: sales of products by the Company's own sales and marketing operations, royalties and licensing and development fees. The Company is referred to as "specialty" because it's principal products tend to be prescribed by specialists as opposed to primary care physicians. The Company's comparatively small sales force can promote specialty products effectively while it could not be expected to achieve the necessary coverage of primary care physicians. Shire's main approach is to in-license projects, to develop them and launch them using it's own sales force in the eight key world markets. The Company seeks to protect the intellectual property upon which it relies through a range of patents and patent applications (both its own and those of its licensors). The Company's principal products include: o in the U.S., Adderall for the treatment of Attention Deficit Hyperactivity Disorder; Agrylin for the treatment of elevated blood platelets; Pentasa for the treatment of ulcerative colitis; Carbatrol for the treatment of epilepsy; and ProAmatine for the treatment of orthostatic hypotension. In addition, the Company receives royalties on sales of Reminyl for the treatment of Alzheimer's disease, marketed by Johnson & Johnson, and on Epivir, Combivir and Trizivir for the treatment of HIV/AIDS and Epivir-HBV for the treatment of hepatitis B, each marketed by GlaxoSmithKline; o in the U.K., the Calcichew range, used primarily as adjuncts in the treatment of osteoporosis, and Reminyl, which was launched in September 2000 and is co-promoted by Janssen-Cilag; o in Canada, 3TC for the treatment of HIV/Aids, Combivir and Heptovir (marketed in partnership with GlaxoSmithKline); Amatine; Second Look, a breast cancer diagnostics product for which the Company hopes to receive FDA approval in 2001; and Fluviral S/F, a vaccine for the prevention of influenza; and o in the rest of the world, the Company receives royalties on the sales of Zeffix for the treatment of hepatitis B, marketed by GlaxoSmithKline, and will receive royalties on sales of Reminyl from Janssen Pharmaceutica. In addition, the Company has a number of products in late stage development including Dirame for the treatment of moderate to severe pain, Foznol for the treatment of high blood phosphate levels associated with kidney failure and Troxatyl for the treatment of leukemia and solid tumors. The Company submitted the first regulatory submission for Foznol under the European Mutual Recognition procedure on March 13, 2001. The accompanying consolidated financial statements include the accounts of Shire Pharmaceuticals Group plc and all its subsidiary undertakings after elimination of intercompany accounts and transactions. b) 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 September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. c) New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. Had the BioChem transaction been initiated after this date, it would have been required to be accounted for under the purchase method rather than the pooling of interests method. SFAS No. 141 requires intangible assets to be recognized if they arise from contractual or legal rights or are "separable", i.e., it is feasible that they may be sold, transferred, licensed, rented, exchanged or pledged. As a result, it is likely that more intangibles will be recognized under SFAS No. 141 than its predecessor, APB Opinion No. 16, although in some instances previously recognized intangibles will be subsumed into goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 although goodwill on business combinations consummated after July 1, 2001 will not be amortized. On adoption the Company may need to record a cumulative effect adjustment to reflect the impairment of previously recognized intangible assets. In addition, goodwill recognized on prior business combinations will cease to be amortized. Had the Company adopted SFAS No. 142 at January 1, 2001 the Company would not have recorded a goodwill amortization charge of $8,089,000 for the nine months ended September 30, 2001. The Company has not determined the impact that these statements will have on intangible assets or whether a cumulative effect adjustment will be required upon adoption. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the fair value of a liability for asset retirement obligations be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not yet assessed the potential impact of the adoption of SFAS No. 143. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 44 establishes a single accounting model for long-lived assets to be disposed of by sale consistent with the fundamental provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". While it supersedes APB Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" it retains the presentation of discontinued operations but broadens that presentation to include a component of an entity (rather than a segment of a business). However, discontinued operations are no longer recorded at net realizable value and future operating losses are no longer recognized before they occur. Under SFAS No. 144 there is no longer a requirement to allocate goodwill to long-lived assets to be tested for impairment. It also establishes a probability weighted cash flow estimation approach to deal with situations in which there are a range of cash flows that may be generated by the asset being tested for impairment. SFAS No. 144 also establishes criteria for determining when an asset should be treated as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with early application encouraged. The provisions of the Statement are generally to be applied prospectively. The Company is currently assessing whether the adoption of SFAS No. 144 will have any impact on its results of operations or financial position. 2. Inventory September 30, December 31, 2001 2000 $'000 $'000 -------------- -------------- Finished goods 27,487 24,118 Work-in-process 17,311 12,544 Raw materials 5,234 12,950 -------------- -------------- 50,032 49,612 -------------- -------------- 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 U.S., International and Global Research and Development, each being managed and monitored separately. The Company evaluates performance based on operating income.
Three months ended September 30, 2001 U.S. International R&D Total $'000 $'000 $'000 $'000 ---------- ---------- ---------- ---------- Product sales 149,853 30,401 - 180,254 Licensing and development 943 - - 943 Royalties 44 37,059 - 37,103 Other revenues - 784 - 784 ---------- ---------- ---------- ---------- Total revenues 150,840 68,244 - 219,084 ---------- ---------- ---------- ---------- Cost of revenues 13,264 14,772 - 28,036 Research and development - - 41,327 41,327 Selling, general and administrative 37,968 34,617 - 72,585 Losses on dispositions of assets 2,014 14 - 2,028 ---------- ---------- ---------- ---------- Total operating expenses (53,246) (49,403) (41,327) (143,976) ---------- ---------- ---------- ---------- Operating income/(loss) 97,594 18,841 (41,327) 75,108 ---------- ---------- ---------- ---------- Three months ended September 30, 2000 U.S. International R&D Total $'000 $'000 $'000 $'000 ---------- ---------- ---------- ---------- Product sales 111,069 31,044 - 142,113 Licensing and development 884 4,179 - 5,063 Royalties 92 31,798 - 31,890 Other revenues 3 254 - 257 ---------- ---------- ---------- ---------- Total revenues 112,048 67,275 - 179,323 ---------- ---------- ---------- ---------- Cost of revenues 17,357 14,777 - 32,134 Research and development - - 44,487 44,487 Selling, general and administrative 28,943 24,673 - 53,616 Losses on dispositions of assets 219 (433) - (214) ---------- ---------- ---------- ---------- Total operating expenses (46,519) (39,017) (44,487) (130,023) ---------- ---------- ---------- ---------- Operating income/(loss) 65,529 28,258 (44,487) 49,300 ---------- ---------- ---------- ---------- Nine months ended September 30, 2001 U.S. International R&D Total $'000 $'000 $'000 $'000 ---------- ---------- ---------- ---------- Product sales 418,305 87,820 - 506,125 Licensing and development 3,272 957 - 4,229 Royalties 224 107,569 - 107,793 Other revenues - 1,530 - 1,530 ---------- ---------- ---------- ---------- Total revenues 421,801 197,876 - 619,677 ---------- ---------- ---------- ---------- Cost of revenues 48,756 36,265 - 85,021 Research and development - - 120,838 120,838 Selling, general and administrative 129,821 88,555 - 218,376 Asset impairments and restructuring charges - 85,447 - 85,447 Merger transaction expenses - 83,470 - 83,470 Losses on dispositions of assets 2,014 8,112 - 10,126 ---------- ---------- ---------- ---------- Total operating expenses (180,591) (301,849) (120,838) (603,278) ---------- ---------- ---------- ---------- Operating income/(loss) 241,210 (103,973) (120,838) 16,399 ---------- ---------- ---------- ---------- Nine months ended September 30, 2000 U.S. International R&D Total $'000 $'000 $'000 $'000 ---------- ---------- ---------- ---------- Product sales 300,619 78,734 - 379,353 Licensing and development 2,874 11,470 - 14,344 Royalties 221 95,332 - 95,553 Other revenues 16 715 - 731 ---------- ---------- ---------- ---------- Total revenues 303,730 186,251 - 489,981 ---------- ---------- ---------- ---------- Cost of revenues 42,794 34,437 - 77,231 Research and development - - 121,969 121,969 Selling, general and administrative 88,083 94,829 - 182,912 Gains on dispositions of assets (63) (416) - (479) ---------- ---------- ---------- ---------- Total operating expenses (130,814) (128,850) (121,969) (381,633) ---------- ---------- ---------- ---------- Operating income/(loss) 172,916 57,401 (121,969) 108,348 ---------- ---------- ---------- ----------
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 9 months to 9 months to September 30, September 30, September 30, September 30, 2001 2000 2001 2000 $'000 $'000 $'000 $'000 -------------------------------- ---------------- ---------------- Numerator for basic net income/(loss) per share 58,111 43,176 (24,616) 184,402 Interest charged on convertible debt 29 96 - - Tax on interest charged (7) (23) - - -------------------------------- ---------------- ---------------- Numerator for diluted net income/(loss) per share 58,133 43,249 (24,616) 184,402 -------------------------------- ---------------- ---------------- Weighted average number of shares: No. of shares No. of shares No. of shares No. of shares -------------------------------- ---------------- ---------------- Basic - weighted average number of shares 493,790,267 485,406,226 490,750,414 481,488,865 Effect of dilutive stock options 9,842,029 10,529,424 - 12,248,314 Convertible debt 282,444 1,100,391 - - -------------------------------- ---------------- ---------------- Diluted - weighted average number of shares 503,914,740 497,036,041 490,750,414 493,737,179 -------------------------------- ---------------- ---------------- Basic net income/(loss) per share 11.8c 8.9c (5.0c) 38.3c -------------------------------- ---------------- ---------------- Diluted net income/(loss) per share 11.5c 8.7c (5.0c) 37.3c -------------------------------- ---------------- ----------------
The calculation of the diluted weighted average number of shares for the nine months ended September 30, 2001 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. The calculation of the diluted weighted average number of shares for the nine months ended September 30, 2000 excludes the effects of convertible debt because it has an antidilutive effect. 5. Restructuring In May 2001, the Company completed a merger with BioChem Pharma Inc. ("BioChem"), an international specialty pharmaceutical company based in Montreal, Canada. As a result of the merger, the Company recorded pre tax charges in the second quarter of 2001 totalling $177.0 million, comprising asset impairment and restructuring costs ($85.4 million), merger related transaction expenses ($83.5 million) and a loss from the sale of a manufacturing facility in Toronto, Canada ($8.1 million). The restructuring costs included an impairment charge of $20.9 million to adjust intangible asset values, primarily trademark and patent costs but also an element of product rights, to their estimated fair value. These charges are consistent with the Company's accounting policy to review periodically the carrying value of intangible assets and evaluate whether there has been any impairment in the carrying value of those intangibles as compared with estimated undiscounted future cash flows relating to those intangibles. Other asset impairment charges included the write down of long term unquoted investments ($24.9 million) and a write down of $30.8 million to a debenture held by BioChem, which was received on divestiture of its diagnostics subsidiary. These charges are consistent with the Company's policy to provide for other than temporary impairments in investment by reference to the fair value of the investment using established financial methodologies. There was also a total of $8.8 million recorded in respect of employee related costs. The employee terminations related to the closure of the Toronto facility and the elimination of duplicate positions across the combined organization. Shire's existing Canadian based sales and marketing operations in Toronto have been combined with those of BioChem in Laval. A total of 57 employees were identified to be terminated. As of September 30, 2001 all of the planned terminations were completed. 6. Long-term debt (a) During the first nine months of 2001, the Company made repayments of debt totalling $207 million. (b) During the first nine months of 2001, Shire Finance Limited, a wholly owned subsidiary of the Company, issued $400 million in senior guaranteed convertible notes due 2011, guaranteed by the Company, with an interest rate of 2%. The Company incurred issuance costs of approximately $9 million in respect of these convertible notes. 7. Consolidated statement of changes in shareholders' equity
Accumu- Exchange- lated Common Exchange- able other Total Common Stock able shares Additional Accumu- compre- sharehold- Stock No. shares No. paid-in late hensive ers' Amount 000's Amount shares capital deficit losses equity $'000 Shares $'000 000's $'000 $'000 $'000 $'000 ----------- ----------- ----------- ---------- ----------- ---------- ---------- ------------ As at January 1, 2001 40,292 488,015 - - 1,209,448 (14,804) (60,550) 1,174,386 Net loss - - - - - (24,616) - (24,616) Foreign currency translation - - - - - - (16,139) (16,139) Unrealized holding loss on non-current investments - - - - - - (508) (508) Issue of shares for acquisitions (6,522) (51,478) 792,220 17,292 (785,698) - - - Issue of shares for conversion of loan note 22 295 - - 1,522 - - 1,544 Exchange of exchangeable shares 2,368 33,522 (514,892) (11,174) 512,524 - - - Options exercised 542 7,574 - - 49,972 - - 50,514 Issuance costs - - - - (18) - - (18) Stock option compensation - - - - 2,403 - - 2,403 Tax benefit associated with exercise of stock options - - - - 3,307 - - 3,307 ----------- ----------- ----------- ---------- ----------- ---------- ---------- ------------ As at September 30, 2001 36,702 477,928 277,328 6,118 993,460 (39,420) (77,197) 1,190,873 ----------- ----------- ----------- ---------- ----------- ---------- ---------- ------------
Each exchangeable share is exchangeable into 3 ordinary shares. 8. Contingent liabilities (i) Phentermine 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 October 31, 2001, SRI was named as a defendant in approximately 3,784 lawsuits and had been dismissed from 3,538 of these cases. There were approximately 150 additional cases pending dismissal as of October 31, 2001. In only 25 cases in which SRI remains 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. (ii) Emory Emory University filed oppositions to two of BioChem's granted patent applications in Europe which cover oxathiolane nucleosides, including lamivudine, and dioxolane nucleosides, including troxacitabine, related nucleoside analogues and use of these analogues for treating viral infections. In oral hearings held in 1999, both of these oppositions were dismissed by the Opposition Division of the European Patent Office. Emory University has filed an appeal against the dioxolane-related decision of the Opposition Division. Emory University is not pursuing its appeal of the decision relating to oxathiolanes. Emory University has not to date filed revocation actions with respect to any BioChem patents in issue in individual European countries. In Japan, Emory University filed an opposition to BioChem's granted patent which covers lamivudine, related analogues and use of the analogues for treating viral infections. The Trial Board of the Japanese Patent Office dismissed Emory University's opposition to BioChem's patent covering lamivudine. Emory University has not to date filed a revocation action against this patent. Emory University has filed revocation actions in Australia and South Korea against BioChem's granted patents covering lamivudine. The Company is aggressively defending these patents. On July 23, 1996, Emory University filed a complaint in the U.S. alleging infringement from the commercialisation of Epivir by BioChem and GlaxoSmithKline, BioChem's exclusive licensee in the U.S., of an Emory University U.S. patent granted that same day. The Company considers this patent infringement suit to be without merit and has successfully challenged the validity of Emory University's patent. On May 19, 1998, the United States Patent and Trademark Office (the "USPTO") declared an interference between the Emory University patent that is the subject of a lawsuit and a pending patent application of BioChem. The USPTO accorded BioChem the earlier priority date and then accorded BioChem senior party status in the interference. BioChem has vigorously challenged the Emory University patent in the interference, through to a final hearing on November 10, 1999. The Board of Patent Appeals and Interferences issued a decision on December 21, 2000 invalidating Emory's patent. Emory University has appealed the decision. There can be no assurance that Emory's patent will not be reinstated. Emory University has obtained a granted patent application in Europe relating to oxathiolane nucleosides, including lamivudine. BioChem and GlaxoSmithKline filed an opposition to this grant and are vigorously opposing the grant. An examined patent application, filed by Emory University claiming lamivudine, was successfully opposed by BioChem in Australia and Norway. Emory University has filed an appeal from that decision in the Federal Court of Australia. BioChem also filed an appeal from certain portions of the decision. An examined patent application filed by Emory University claiming lamivudine was also opposed by BioChem in Japan. The opposition was dismissed in April 1999 because it was improperly filed by a representative who had previously represented Emory. Notwithstanding the dismissal, the Japanese Patent Office issued an ex-officio action rejecting all of Emory University's claims. There can be no reassurance that Emory will not be able to overcome this rejection. An examined patent application filed by Emory claiming lamivudine was opposed by BioChem and GlaxoSmithKline in South Korea and such Emory claims to lamivudine were cancelled by the South Korean Patent Office. The Company is aware that Emory University has filed patent applications in other countries, which it believes may claim similar subject matter. The Company intends to challenge vigorously such patent applications. (iii) Yale On November 23, 1999, the USPTO declared an interference between BioChem's hepatitis B patent for lamivudine and a patent application filed by Yale University ("Yale") claiming methods of treating hepatitis B using lamivudine. The Company believes that this application is licensed to Vion Pharmaceuticals, Inc. ("Vion"), formerly known as OncoRx, Inc., a New Haven, Connecticut-based company. The Company believes that its patent is valid and intends to vigorously defend the patent. The Company is not aware of corresponding patent applications by Yale University or Vion in countries other than the U.S. On April 14, 2000, the USPTO declared a further interference between BioChem's hepatitis B patent for lamivudine and a patent application by GlaxoSmithKline claiming methods of treating hepatitis B using lamivudine. (iv) Adderall On September 22, 2000, a lawsuit was filed against Shire in the United States District Court for the District of North Dakota. The suit involves an incident in 1999 in which a young North Dakota man, Ryan Ehlis, shot and killed his infant daughter and wounded himself, allegedly as a result of a psychotic reaction to Adderall. Mr Ehlis' physician had prescribed Adderall for the treatment of ADHD. Shire filed its answer to the complaint on November 24, 2000 and discovery related to the litigation is ongoing. On October 3, 2001, a lawsuit was filed against Shire in Boone County Kentucky Circuit Court. The suit involves an automobile accident that is alleged to have been the result of a psychotic episode experienced by the driver of the auto following an ingestion of Adderall. As a result of the accident, the driver's young son was killed. Shire is evaluating this suit and has not yet filed an answer with the Court. (v) Interests in companies and partnerships BioChem has undertaken to subscribe to an interest in companies and partnerships for amounts totaling $50,269,000. As at September 30, 2001 an amount of $33,501,000 (December 31, 2000: $25,709,000) has been subscribed. In addition, BioChem has undertaken to subscribe to additional amounts and pay royalties on certain future sales upon realization of certain conditions. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The results for the three months and nine months ended September 30, 2000 have been restated from prior periods to reflect the merger of Shire and BioChem, which became effective on May 11, 2001, as if the merger had occurred at the beginning of the periods described. Results of operations for the three months ended September 30, 2001, as compared with those for the three months ended September 30, 2000 Overview of financial results Total revenues for the three months ended September 30, 2001 increased by 22 per cent to $219.1 million as compared to the three months ended September 30, 2000. The Company recorded a third quarter net income of $58.1 million (2000: net income $43.2 million), an increase of 35 per cent. Sales and marketing Product sales of $180.3 million, which represented 82 per cent of total revenues, increased by 27 per cent over third quarter 2000 product sales of $142.1 million. Product sales in the U.S. continue to represent a significant percentage of our worldwide sales, 83 per cent in the three months ended September 30, 2001 (2000: 78 per cent). The Company manages and controls the sales and marketing operations on geographic lines. The following table presents the Company's net product sales by individual operating segment: 3 months to 3 months to Product sales by segment September 30, September 30, 2001 2000 $'000 $'000 % change United States 149,853 111,069 +34.9 International 30,401 31,044 -2.1 ------------ ------------ ------------ Total product sales 180,254 142,113 +26.8 ------------ ------------ ------------ Third quarter sales of ADDERALL, marketed in the U.S. for the treatment of Attention Deficit Hyperactivity Disorder (ADHD), were $86.7 million, representing growth of 45 per cent over the third quarter of 2000. ADDERALL had a 32.4 per cent share of the prescription market for ADHD in the U.S. in September 2001 compared to 33.0 per cent in September 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 $19.8 million, a 44 per cent increase over third quarter 2000 sales of $13.7 million. Shire achieved a prescription share of 23.8 per cent of the total U.S. AGRYLIN market, including Hydrea and generic hydroxyurea, in September 2001 compared to 17.4 per cent in September 2000. Sales of PENTASA, licensed for the treatment of ulcerative colitis, at $20.0 million, were 39 per cent higher than the comparable period last year. PENTASA had a 18.2 per cent share of the oral mesalamine/obsalazine market in September 2001 compared to 17.9 per cent in September 2000. CARBATROL containing carbamazapine for the treatment of epilepsy, recorded sales growth of 14 per cent from sales of $6.9 million in the three months ended September 30, 2000 to $7.9 million in the three months ended September 30, 2001. This translates to 35.2 per cent of the U.S. extended release carbamazepine prescription market in September 2001, compared to 29.7 per cent in September 2000. Licensing As expected, following the launch by Janssen (J&J) of REMINYL, Shire's Alzheimer's drug, reimbursement of associated R&D costs by J&J has now come to an end. Consequently, licensing and development fees decreased by 82% to $0.9 million in the three months ended September 30,2001 compared to the same period last year . Royalties Royalties increased by $5.2 million in the three months ended September 30, 2001, up 16 per cent from the three months ended September 30, 2000, to $37.1 million. Royalty income has slightly decreased compared to the second quarter of the year due to wholesalers de-stocking following the REMINYL U.S. launch in May 2001. The Company also receives royalties from GlaxoSmithKline on the worldwide sales of 3TC, for the treatment of HIV infection / AIDS, and Zeffix, an oral treatment for chronic hepatitis B. Cost of sales and operating expenses Gross margin on product sales increased from 77 per cent for the three months ended September 30, 2000 to 84 per cent for the three months ended September 30, 2001. This is a reflection of the product mix as the higher margin products, ADDERALL and AGRYLIN, represented approximately 59 per cent of total product sales in the three months ended September 30, 2001 compared to 52 per cent in the three months ended September 30, 2000. Improved pricing in respect of ADDERALL has also benefited the gross margin in three months ended September 30, 2001. R&D expenditure decreased 7 per cent to $41.3 million for the three months ended September 30, 2001 (2000: $44.5 million). R&D expenditure in third quarter 2001 represented 19 per cent of revenues compared to 25 per cent in third quarter 2000 and 23 per cent for full year 2000. Selling, general and administrative expenses, excluding the effects of a stock option compensation charge of $0.05 million (2000: $0.2 million) and depreciation and amortization of $11.7 million (2000: $9.4 million), increased by 38 per cent to $60.8 million for the three months ended September 30, 2001 (2000: $44.0 million). This reflects the high promotional spend associated with the ADDERALL XR launch. As a percentage of product sales, selling, general and administrative costs represented 34 per cent for the third quarter 2001 (2000: 31%). The 25 per cent increase in depreciation and amortization for the three months ended September 30, 2001 is attributable to the purchase of several new products in Europe since September last year. Income taxes For the three months ended September 30, 2001 income taxes increased $7.8 million to $19.8 million from $12.0 million for the three months ended September 30, 2000. The Company's effective tax rate before the stock compensation charge and exceptional items was 25 per cent for the three months ended September 30, 2001 (Q3 2000: 24 per cent). The Company has recorded net deferred tax assets of $23.4 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. Results of operations for the nine months ended September 30, 2001, as compared with those for the nine months ended September 30, 2000 Overview of financial results Total revenues for the nine months ended September 30, 2001 were $619.7 million, an increase of $129.7 million or 26 per cent over the nine months ended September 30, 2000. After one time merger related expenses and restructuring charges of $177.0 million, the Company recorded a net loss of $24.6 million (2000: $184.4 million net income). Net loss for the nine months to September 30, 2001 includes an APB 25 charge of $2.4 million compared to $23.7 million for the nine months ended September 30, 2000. Sales and marketing Product sales were $506.1 million in the nine months ended September 30, 2001 (2000: $379.4 million), representing an increase of 33 per cent. Of particular note, ADDERALL sales at $226.2 million were 42 per cent higher than in the nine months ended September 30, 2000. Other products contributing to the overall 33 per cent increase were AGRYLIN (increase of $19.5 million or 45 per cent), CARBATROL (increase of $9.6 million or 54 per cent) and PROAMATINE (increase of $10.6 million or 65 per cent). U.S. product sales for the nine months ended September 30, 2001 represented 83 per cent of the Company's total sales revenues (2000: 79 per cent). Product sales by segment 9 months to 9 months to September 30, September 30, % change 2001 2000 $'000 $'000 United States 418,305 300,619 +39.1 International 87,820 78,734 +11.5 ------------ ------------ ------------ Total product sales 506,125 379,353 +33.4 ------------ ------------ ------------ Licensing Licensing and development fees for the nine months ended September 30, 2001 decreased by 71 per cent to $4.2 million compared to $14.3 million for the nine months ended September 30, 2000. Royalties increased by $12.2 million to $107.8 million for the nine months ended September 30, 2001. Cost of sales and operating expenses Gross margin on product sales increased to 83 per cent for the nine months ended September 30, 2001 compared to 80 per cent for the nine months ended September 30, 2000. R&D expenditure decreased by 1 per cent to $120.8 million for the nine months ended September 30, 2001 (2000: $122.0 million). R&D expenditure for the nine months ended September 30, 2001 represents 20 per cent of revenues compared to 25 per cent for the nine months ended September 30, 2000. Excluding the effects of a stock option compensation charge, depreciation and amortization charges, the underlying selling, general and administrative expenses increased by 39 per cent to $182.2 million for the nine months ended September 30, 2001 (2000: $131.2 million) in line with the expansion of the business. Depreciation and amortization increased by 21 per cent to $33.8 million (2000: $28.0 million). As noted above, this increase reflects the amortization charge on those intangible assets acquired since the third quarter of 2000. Income taxes For the nine months ended September 30, 2001 income taxes were $51.4 million, representing an effective rate of tax on income pre APB 25 charge of 25 per cent (2000: 24 per cent). 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 September 30, 2001, the Company had net cash funds available as follows: September 30, December 31, 2001 2000 $'000 $'000 -------------- -------------- Cash and cash equivalents 514,998 93,266 Marketable securities and other current asset investments 260,964 370,425 Debt (397,884) (213,874) -------------- -------------- Net cash 378,078 249,817 -------------- -------------- Net cash provided by operating activities for the nine months ended September 30, 2001 was $117.3 million compared to $52.4 million for the nine months ended September 30, 2000. Investing activities provided $68.0 million for the nine months ended September 30, 2001 (2000: $33.3 million). This was due to an inflow of cash by reducing cash placed on short-term deposit and by the redemption of marketable securities of $109.5 million, and outflows in respect of net capital expenditure on long-term investments, intangible assets and fixed assets of $41.4 million. Investing activities for the nine months ended September 30, 2000 included $75.2 million from the redemption of marketable securities, $136.2 million of proceeds from the sale of long-term investments and fixed assets, purchases of intangible assets and fixed assets of $43.1 million, a net $134.6 million outflow for investment in temporary and long-term investments and a $0.4 million outflow for other investing activities. Financing activities provided $236.1 million for the nine months ended September 30, 2001 (2000: $41.7 million). The $236.1 million inflow included $50.5 million received from exercises of employee stock options and $391.0 million received from the issue of convertible notes, and repayments of long-term debt totalling $207.0 million. The repayments of debt were in respect of a $125.0 million term loan owing to Credit Suisse First Boston and $76.9 million repaid to Glaxo SmithKline. In part, cash funds released from short term investments, as noted above, were used to settle the long-term debts outstanding. Financing activities for the nine months ended September 30, 2000 included $43.0 million received from exercises of employee stock options, $7.2 million of proceeds from the issue of common stock and repayments of long-term debt of $8.5 million. Capital expenditure Capital expenditure on tangible fixed assets for the nine months ended September 30, 2001 was $6.3 million, which included $1.7 million of equipment related to the Company's new head office facility occupied from March 2001. Expenditure was offset by approximately $7 million in proceeds received on the sale of the Toronto facility. Other capital expenditure related to the purchase of long term investments ($13.2 million) and $33.5 million for new products, including Monocid and Indurgan marketed by the Company's Spanish and Italian operations. Capital expenditure on tangible fixed assets for the nine months ended September 30, 2000 was $21.2 million. This included the purchase of research and development equipment, and investment in computer equipment across all operational areas. Capital expenditure on new products of $21.9 million included the acquisition of certain European and Nordic rights to Balsalazide; a treatment for ulcerative colitis, for $15.9 million. ITEM 3. Qualitative and Quantitative Disclosures about Market Risk Shire's principal treasury operations are managed by the Company's treasury function based in the U.K. in accordance with the Company's treasury policies and procedures which are approved by Shire's Board of Directors. As a matter of policy, Shire does not undertake speculative transactions that would increase its currency or interest rate exposure. The Company is subject to market risk exposure in the following areas: Interest rate market risk The Company has cash and cash equivalents on which interest is earned at variable rates. Since December 31, 2000 the Company has repaid in full a long-term loan outstanding to Credit Suisse First Boston and amounts due to Glaxo SmithKline under a promissory note. Thus, as at September 30, 2001 the Company's exposure to variable interest rate market risk on debts outstanding compared to the position at December 31, 2000 is much reduced. On August 15, 2001 Shire Finance Limited, a wholly owned subsidiary of the Company, placed an offering of $350 million principal amount of Guaranteed Convertible Notes due 2011 with international institutional investors at an issue price of 100%. In connection with the issue, the initial purchasers exercised in full the option to subscribe or precure subscribers for an additional $50 million principal amount of notes. The total principal amount of the issue was therefore $400 million. These Notes are guaranteed by the Company and are convertible into redeemable preference shares of the issuer which upon issuance will be immediately exchanged for either (i) ordinary shares or (ii) American Depository Shares (ADS's) of Shire or, at the Issuer's option, cash. The Notes will bear interest of 2% per annum, paid semi-annually. The effective initial exchange price is $20.154 per ordinary share and $60.4625 per ADS. This exchange price represents a premium of 25% over the closing price of Shire ADS's on August 14, 2001. Investors have the right to require the Issuer to redeem the notes at par on August 21, 2004, 2006 or 2008. Subject to certain conditions, the Notes will be callable after August 21, 2004. The Company has short term and long term debt liabilities denominated in foreign currencies. As at September 30, 2001, a total of $5.6 million was outstanding (December 31, 2000: $6.0 million). The underlying currency was Canadian dollars. Foreign exchange market risk The Company and a number of subsidiary operations are located outside the U.S. As such, the consolidated financial results are subject to fluctuations in exchange rates, particularly between the British pound, Canadian dollar and the U.S. dollar. The financial statements of foreign entities are translated using the accounting policies described in Note 1 of the Notes to the consolidated financial statements filed on Form 10K. The exposure to foreign exchange market risk is managed by the Company's treasury function, using forecasts provided by the operating units. General economic market risk The terrorist attacks of September 11, 2001 resulted in interruption to business activities of many entities, business losses and overall disruption of the U.S. economy at many levels. The magnitude and far reaching global impact of the events of September 11 are unprecedented in terms of the wide array of losses incurred and the number of businesses impacted. Shire has experienced no quantifiable losses, damage to property or loss of life as a direct result of September 11. However, consequential increases to operational costs such as insurance premiums, international air travel and incremental supplier costs would impact future profitability levels. The directors do not believe at this time that any additional market risk specific to the Company has resulted from the recent acts of terrorism. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (i) Phentermine 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 October 31, 2001, SRI was named as a defendant in approximately 3,784 lawsuits and had been dismissed from approximately 3,538 of these cases. There were approximately 150 additional cases pending dismissal as of October 31, 2001. In only 25 cases in which SRI remains 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. (ii) Emory Emory University filed oppositions to two of BioChem's granted patent applications in Europe which cover oxathiolane nucleosides, including lamivudine, and dioxolane nucleosides, including troxacitabine, related nucleoside analogues and use of these analogues for treating viral infections. In oral hearings held in 1999, both of these oppositions were dismissed by the Opposition Division of the European Patent Office. Emory University has filed an appeal against the dioxolane-related decision of the Opposition Division. Emory University is not pursuing its appeal of the decision relating to oxathiolanes. Emory University has not to date filed revocation actions with respect to any BioChem patents in issue in individual European countries. In Japan, Emory University filed an opposition to BioChem's granted patent which covers lamivudine, related analogues and use of the analogues for treating viral infections. The Trial Board of the Japanese Patent Office dismissed Emory University's opposition to BioChem's patent covering lamivudine. Emory University has not to date filed a revocation action against this patent. Emory University has filed revocation actions in Australia and South Korea against BioChem's granted patents covering lamivudine. The Company is aggressively defending these patents. On July 23, 1996, Emory University filed a complaint in the U.S. alleging infringement from the commercialisation of Epivir by BioChem and GlaxoSmithKline, BioChem's exclusive licensee in the U.S., of an Emory University U.S. patent granted that same day. The Company considers this patent infringement suit to be without merit and has successfully challenged the validity of Emory University's patent. On May 19, 1998, the United States Patent and Trademark Office (the "USPTO") declared an interference between the Emory University patent that is the subject of a lawsuit and a pending patent application of BioChem. The USPTO accorded BioChem the earlier priority date and then accorded BioChem senior party status in the interference. BioChem has vigorously challenged the Emory University patent in the interference, through to a final hearing on November 10, 1999. The Board of Patent Appeals and Interferences issued a decision on December 21, 2000 invalidating Emory's patent. Emory University has appealed the decision. There can be no assurance that Emory's patent will not be reinstated. Emory University has obtained a granted patent application in Europe relating to oxathiolane nucleosides, including lamivudine. BioChem and GlaxoSmithKline filed an opposition to this grant and are vigorously opposing the grant. An examined patent application, filed by Emory University claiming lamivudine, was successfully opposed by BioChem in Australia and Norway. Emory University has filed an appeal from that decision in the Federal Court of Australia. BioChem also filed an appeal from certain portions of the decision. An examined patent application filed by Emory University claiming lamivudine was also opposed by BioChem in Japan. The opposition was dismissed in April 1999 because it was improperly filed by a representative who had previously represented Emory. Notwithstanding the dismissal, the Japanese Patent Office issued an ex-officio action rejecting all of Emory University's claims. There can be no reassurance that Emory will not be able to overcome this rejection. An examined patent application filed by Emory claiming lamivudine was opposed by BioChem and GlaxoSmithKline in South Korea and such Emory claims to lamivudine were cancelled by the South Korean Patent Office. The Company is aware that Emory University has filed patent applications in other countries, which it believes may claim similar subject matter. The Company intends to challenge vigorously such patent applications. (iii) Yale On November 23, 1999, the USPTO declared an interference between BioChem's hepatitis B patent for lamivudine and a patent application filed by Yale University ("Yale") claiming methods of treating hepatitis B using lamivudine. The Company believes that this application is licensed to Vion Pharmaceuticals, Inc. ("Vion"), formerly known as OncoRx, Inc., a New Haven, Connecticut-based company. The Company believes that its patent is valid and intends to vigorously defend the patent. The Company is not aware of corresponding patent applications by Yale University or Vion in countries other than the U.S. On April 14, 2000, the USPTO declared a further interference between BioChem's hepatitis B patent for lamivudine and a patent application by GlaxoSmithKline claiming methods of treating hepatitis B using lamivudine. (iv) Adderall On September 22, 2000, a lawsuit was filed against Shire in the United States District Court for the District of North Dakota. The suit involves an incident in 1999 in which a young North Dakota man, Ryan Ehlis, shot and killed his infant daughter and wounded himself, allegedly as a result of a psychotic reaction to Adderall. Mr Ehlis' physician had prescribed Adderall for the treatment of ADHD. Shire filed its answer to the complaint on November 24, 2000 and discovery related to the litigation is ongoing. On October 3, 2001, a lawsuit was filed against Shire in Boone County Kentucky Circuit Court. The suit involves an automobile accident that is alleged to have been the result of a psychotic episode experienced by the driver of the auto following an ingestion of Adderall. As a result of the accident, the driver's young son was killed. Shire is evaluating this suit and has not yet filed an answer with the Court. ITEM 2. CHANGES IN SECURITIES On August 21, 2001, Shire Finance Limited ("Finance"), a wholly-owned subsidiary of the Company, issued $400 million principal amount of 2% Senior Guaranteed Convertible Notes due 2011(the "Notes"), which Notes were fully and unconditionally guaranteed by the Company (the "Guarantee" and, together with the Notes, the "Securities"). The Securities were offered and sold in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Act") and outside the United States to institutional investors in reliance on Regulation S under the Act. The initial purchasers of the Securities agreed to issue and sell the Securities only to qualified institutional buyers under Rule 144A or to institutional investors pursuant to Regulation S. The Notes are convertible, at any time prior to August 14, 2001 or their redemption or repurchase, into preference shares of Finance. Each $1,000 principal amount of Notes may be converted into one preference share. Upon issuance, the preference shares will be immediately exchanged for (i) the Company's ordinary shares, (ii) American Depository Shares ("ADSs") representing ordinary shares of the Company or (iii) at Finance's option, cash. The initial exchange ratio is equal to 49.6175 ordinary shares per preference share or 16.5392 ADSs per preference share, is based on an effective exchange price of approximately $20.154 per ordinary share and $60.4625 per ADS, representing a premium of 25% over the closing price of the Company's ADSs on August 14, 2001, and is subject to adjustment upon the occurrence of certain events. The net proceeds to Finance from the offering of the Notes was approximately $391 million. On November 6, 2001, the Company filed a registration statement with the Securities and Exchange Commission for the resale by holders of their Notes and the ordinary shares issuable upon exercise of the preference shares. The registration statement has not yet been declared effective. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1* Amended and Restated Memorandum and Articles of Association of Shire Finance Limited. 4.1* Indenture dated August 21, 2001 by and among Shire Finance Limited, Shire Pharmaceuticals Group plc and The Bank of New York, as Trustee 4.2* Form of 2% Senior Guaranteed Note due 2011 (included in Exhibit 4.1) 4.3* Registration Rights Agreement dated August 21, 2001, between Shire Finance Limited, Shire Pharmaceuticals Group plc and Bear, Stearns International Limited and Goldman Sachs International, as representatives of the Initial Purchasers 4.4* Preference Share Guarantee Agreement dated August 21, 2001 among Shire Finance Limited, Shire Pharmaceuticals Group plc and The Bank of New York, as Guarantee Trustee 4.5* Form of Shire Pharmaceuticals Group plc Guarantee * Incorporated by reference to the exhibits to Shire's Registration Statement on Form S-3 (No. 333-75862), filed November 6, 2001. (b) Reports on Form 8-K During the third quarter ended September 30, 2001, the following reports on Form 8-K were filed by the Company with the Securities and Exchange Commission: Form 8-K (Item 5 - Other Events), date of earliest event reported July 17, 2001, with respect to press release of historical financial data in US GAAP format. Form 8-K as amended (Item 5 - Other Events, and Item 7 - Financial Statements and Exhibits), date of earliest event reported July 23, 2001, with respect to press release announcement of second quarter results. Form 8-K (Item 7 - Financial Statements and Exhibits), date of earliest event reported July 23, 2001, with respect to presentation relating to second quarter results. Form 8-K (Item 5 - Other Events), and Item 7 - Financial Statements and Exhibits), date of earliest event reported August 15, 2001, with respect to restated financial statements and management's discussion and analysis of financial conditions and results of operations. During the period between September 30, 2001 and the filing of this Form 10-Q, the following report on Form 8-K was filed by the Company with the Securities and Exchange Commission: Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and Exhibits), date of earliest event reported October 12, 2001, with respect to press release announcement of US Food and Drug Administration (FDA) approval of Adderall XR(TM). 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: November 14, 2001 By: /s/ Angus C. Russell ---------------------------- Angus C. Russell Group Finance Director Date: November 14, 2001 By: /s/ Rolf Stahel ---------------------------- Rolf Stahel Chief Executive -----END PRIVACY-ENHANCED MESSAGE-----