-----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, VPpTpEQtl5kNiLaqyTmNFswjtyfki9qtCPJH7A31RsW36Ks3/yD1clJODSPz1BEY HjRP1PwPZZ7WLqwMcB/fWA== 0000950162-03-000801.txt : 20030515 0000950162-03-000801.hdr.sgml : 20030515 20030515113755 ACCESSION NUMBER: 0000950162-03-000801 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHIRE PHARMACEUTICALS GROUP PLC CENTRAL INDEX KEY: 0000936402 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29630 FILM NUMBER: 03702106 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 shire10q051503.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended March 31, 2003 Commission file number: 0-29630 SHIRE PHARMACEUTICALS GROUP PLC (Exact name of registrant as specified in its charter) England and Wales 98-0359573 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) Hampshire International Business Park, Chineham, RG24 8EP Basingstoke, Hampshire, England (Zip Code) (Address of principal executive offices) 44 1256 894 000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered American Depository Shares, each representing 3 NASDAQ National Market Common Shares 5 pence par value per share Securities registered pursuant to Section 12(g) of the Act: None (Title of class) 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 [ ] 1 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of May 15, 2003, the number of outstanding common shares of the Registrant was 484,692,576. THE "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements included herein that are not historical facts, are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire's results could be materially affected. The risks and uncertainties include, but are not limited to, risks associated with the inherent uncertainty of pharmaceutical research, product development, manufacturing and commercialization, the impact of competitive products, including, but not limited to, the impact on Shire's Attention Deficit Hyperactivity Disorder (ADHD) franchise, patents, including but not limited to, legal challenges relating to Shire's ADHD franchise, government regulation and approval, including but not limited to the expected product approval date of lanthanum carbonate (FOSRENOL(R)) and METHYPATCH(R), and other risks and uncertainties detailed from time to time in our filings, including the Annual Report filed on Form 10-K by Shire with the Securities and Exchange Commission. The following are trademarks of Shire or companies within the Shire Group, which are the subject of trademark registrations in certain territories. ADDERALL XR(R) (mixed amphetamine salts) ADDERALL(R) (mixed amphetamine salts) ADEPT(R) (4% icodextrin solution) AGRYLIN(R) (anagrelide hydrochloride) AMATINE(R) (midodrine hydrochloride) CALCICHEW(R) (calcium carbonate) CARBATROL(R) (carbamazepine) FOSRENOL(R) (lanthanum carbonate) FLUVIRAL(R) S/F (split virion influenza vaccine) METHYPATCH(R) (methylphenidate) PROAMATINE(R) (midodrine hydrochloride) SOLARAZE(R) (diclofenac sodium 4%) TROXATYL(R) (troxacitabine) XAGRID(R) (anagrelide hydrochloride) The following are trademarks of third parties. 3TC (trademark of GlaxoSmithKline (GSK)) COMBIVIR (trademark of GSK) EPIVIR (trademark of GSK) EPIVIR-HBV (trademark of GSK) HEPTOVIR (trademark of GSK) PENTASA (trademark of Ferring AS) REMINYL (trademark of Johnson & Johnson) TRIZIVIR (trademark of GSK) ZEFFIX (trademark of GSK) 2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements
SHIRE PHARMACEUTICALS GROUP PLC CONSOLIDATED BALANCE SHEETS (In thousands of US dollars, except share and per share data) (Unaudited) March 31, December 31, 2003 2002 Notes $'000 $'000 ----- ----------- ------------ ASSETS Current assets: Cash and cash equivalents 1,041,468 897,718 Marketable securities 248,503 316,126 Accounts receivable, net 139,209 138,397 Inventories, net (5) 51,761 49,216 Deferred tax asset 38,135 34,849 Prepaid expenses and other current assets 31,297 30,790 ----------- ------------ Total current assets 1,550,373 1,467,096 Investments 71,370 71,962 Property, plant and equipment, net 149,237 135,234 Goodwill, net 200,604 203,767 Other intangible assets, net (6) 293,311 301,084 Deferred tax asset 14,100 6,216 Other non-current assets 21,945 23,264 ----------- ------------ Total assets 2,300,940 2,208,623 ----------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current instalments of long-term debt 975 888 Accounts payable and accrued expenses 190,810 184,107 Other current liabilities 58,329 15,492 ----------- ------------ Total current liabilities from continuing operations 250,114 200,487 Current liabilities from discontinued operations - 12,784 ----------- ------------ Total current liabilities 250,114 213,271 ----------- ------------ Long-term debt, excluding current instalments 393,291 407,302 Other non-current liabilities 10,479 14,884 ----------- ------------ Total liabilities 653,884 635,457 ----------- ------------ Shareholders' equity: Common stock, 5p par value: 800,000,000 shares authorized; 484,523,036 (2002: 484,344,412) shares issued and outstanding 40,065 40,051 Exchangeable shares: 5,874,112 shares issued and outstanding 272,523 272,523 Additional paid-in capital 1,028,372 1,027,499 Accumulated other comprehensive losses (31,494) (41,431) Retained earnings 337,590 274,524 ----------- ------------ Total shareholders' equity (8) 1,647,056 1,573,166 __________ __________ Total liabilities and shareholders' equity 2,300,940 2,208,623 ----------- ------------
The accompanying notes are an integral part of these consolidated financial statements. 3
SHIRE PHARMACEUTICALS GROUP PLC CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of US dollars, except share and per share data) (Unaudited) 3 months ended March 31, 2003 2002 Notes $'000 $'000 ----- ----------- ------------ Revenues: Product sales 256,353 196,507 Licensing and development 394 682 Royalties 47,763 39,576 Other revenues 7 217 ----------- ------------ Total revenues (2) 304,517 236,982 Costs and expenses: Cost of product sales (2) 38,645 25,020 Research and development (2) 54,598 49,729 Selling, general and administrative (inclusive of stock option compensation credit of $24,349 and $302,249 for 2003 and 2002 respectively) 122,082 91,940 ----------- ------------ Total operating expenses (2) 215,325 166,689 ----------- ------------ Operating income (2) 89,192 70,293 Interest income 5,113 4,731 Interest expense (2,648) (1,977) Other (expense)/income, net (3,616) 1,141 ----------- ------------ Total other (expense)/income, net (1,151) 3,895 ----------- ------------ Income from continuing operations before income taxes and equity in (losses)/earnings of equity method investees 88,041 74,188 Income taxes (24,526) (19,757) Equity in (losses)/earnings of equity method investees (449) 744 ----------- ------------ Income from continuing operations 63,066 55,175 Income from discontinued operations (net of income tax expenses of $nil and $956,000 respectively) - 1,627 ----------- ------------ Net income 63,066 56,802 ----------- ------------ Earnings per share - basic Income from continuing operations 12.6c 11.1c Income from discontinued operations - 0.3c ----------- ------------ (3) 12.6c 11.4c ----------- ------------ Earnings per share - diluted Income from continuing operations 12.3c 10.8c Income from discontinued operations - 0.3c ----------- ------------ (3) 12.3c 11.1c ----------- ------------ Weighted average number of shares: Basic 501,989,884 499,926,390 Diluted 522,547,153 524,865,259
The results for the 3 months ended March 31, 2002 have been restated to reflect the disposal of the "Over-The-Counter" (OTC) business, which has been accounted for as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 4
SHIRE PHARMACEUTICALS GROUP PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME/(LOSSES) (In thousands of US dollars) (Unaudited) 3 months ended March 31, 2003 2002 $'000 $'000 ---------- ---------- Net income 63,066 56,802 Other comprehensive income/(loss): Foreign currency translation adjustments 15,723 (5,964) Unrealised holding loss on available for sale securities (5,786) - ---------- ---------- Comprehensive income 73,003 50,838 ---------- ---------- The components of accumulated other comprehensive losses as at March 31, 2003 and December 31, 2002 are as follows: March 31, December 31, 2003 2002 $'000 $'000 ---------- ---------- Foreign currency translation adjustments (26,972) (42,695) Unrealized holding (loss)/gain on available for sale securities (4,522) 1,264 ---------- ---------- Accumulated other comprehensive losses (31,494) (41,431) ---------- ----------
There are no material tax effects related to the items included above. The accompanying notes are an integral part of these consolidated financial statements. 5
SHIRE PHARMACEUTICALS GROUP PLC CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of US dollars) (Unaudited) 3 months ended March 31, 2003 2002 $'000 $'000 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations 63,066 55,175 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,661 10,173 Stock option compensation (24) (302) Tax benefit of stock option compensation, credited directly to equity - 590 Increase in deferred tax asset (11,170) (2,904) Non-cash exchange gains and losses 1,794 (793) Equity in losses/(profits) of equity method investees 449 (744) Write-down of intangible assets - 2,500 Write-down of long-term investments 3,973 - Unrealised holding loss on available for sale securities 5,786 - Changes in operating assets and liabilities: (Increase)/decrease in accounts receivable (812) 53,513 Increase in inventory (2,545) (9,162) (Increase)/decrease in prepayments and other current assets (507) 12,377 Decrease/(increase) in other assets 1,318 (1,266) Increase in accounts and notes payable and other liabilities 18,352 1,711 Decrease in unearned income - (17,409) ---------- ---------- Net cash provided by operating activities 91,341 103,459 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Redemption of marketable securities, net 58,913 - Decrease in short-term deposits - 486,798 Purchase of long-term investments (1,475) (1,017) Purchase of property, plant and equipment (13,613) (3,130) ---------- ---------- Net cash provided by investing activities 43,825 482,651 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt, capital leases and notes (63) - Proceeds from exercise of options 911 778 ---------- ---------- Net cash provided by financing activities 848 778 ---------- ---------- Effect of foreign exchange rate changes on cash and cash equivalents 7,736 (98) ---------- ---------- Net increase in cash and cash equivalents 143,750 586,790 Cash flows provided by discontinued operations - 1,627 ---------- ---------- Net increase in cash and cash equivalents 143,750 588,417 Cash and cash equivalents at beginning of period 897,718 118,040 ---------- ---------- Cash and cash equivalents at end of period 1,041,468 706,457 ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 6 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 (Shire), and subsidiaries (collectively, the Company) is an emerging global pharmaceutical company with a strategic focus on four therapeutic areas: central nervous system disorders, gastrointestinal, oncology and anti-infectives. The Company's strategy is further supported by three technology platforms: advanced drug delivery, lead optimization for small molecules and biologics. Shire has sales and marketing subsidiaries with a portfolio of products targeting the US, Canada, the UK, the Republic of Ireland, France, Germany, Italy and Spain. Shire also covers other significant pharmaceutical markets indirectly through distributors. The business is operated and managed within five individual operating segments: US, International, Biologics, Corporate and Global Research and Development. Within these segments, revenues are derived primarily from three sources: sales of products by Shire's own sales and marketing operations, royalties (where Shire has out-licensed to third parties) and licensing and development fees. The Company has a particular interest in innovative therapies that are prescribed by specialist doctors as opposed to primary care physicians. The Company follows two main approaches: firstly to start projects in-house through research and advanced drug delivery, and secondly to in-license projects and products on reasonable commercial terms, and then to develop them and launch them. The Company's principal products include: o in the US, ADDERALL XR and ADDERALL for the treatment of ADHD; AGRYLIN for the treatment of elevated blood platelets; PENTASA for the treatment of ulcerative colitis; CARBATROL for the treatment of epilepsy; and PROAMATINE for the treatment of 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 GSK: o in the UK and the Republic of Ireland, 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 (all marketed in partnership with GSK); AMATINE and FLUVIRAL S/F, a vaccine for the prevention of influenza, and o in the Rest of the World, royalties on the sales of ZEFFIX for the treatment of hepatitis B, marketed by GSK, and royalties on sales of REMINYL marketed by Johnson & Johnson. In addition, the Company has a number of products in late stage development including FOSRENOL for the treatment of high blood phosphate levels associated with kidney failure, TROXATYL for the treatment of leukemia and pancreatic cancer and METHYPATCH, a transdermal delivery system for the once daily treatment of ADHD. The Company submitted the first regulatory submission for FOSRENOL under the European Mutual Recognition procedure on March 13, 2001 and a New Drug Application with the US FDA on April 30, 2002. 7 1. Summary of Significant Accounting Policies (continued) 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, 2002 and notes thereto. The results for the period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. c) New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires that 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 adopted SFAS No. 143 on January 1, 2003 and there was no impact. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of APB No. 51" (FIN 46). This interpretation requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003, of which there are none. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating the effect the adoption of FIN 46 will have on its existing operations. In April 2003, the FASB issued Statement No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities" (SFAS No. 149). The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, it (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing component and (3) amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 should be applied prospectively. The Company does not expect that the adoption of this Statement will have a material impact on its results of operations and financial position. 8 2. 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. The Company evaluates performance based on operating income or loss. During the three months ended March 31, 2003 reporting by segment has been expanded as set out below to provide more information on the International segment. Previously, Biologics and Corporate were included within the International segment. This change in reporting reflects growth in the International business together with the increased likelihood of marketing products on a global basis. As a consequence of these changes, the Company's management are increasingly viewing the International sales and marketing operation as distinct from the Biologics and Corporate functions. As the International business has expanded, management and administrative functions previously performed at the corporate centre have been implemented at an operational level, hence the requirement to show Corporate, which oversees and supports all areas of the Company, as a separate reportable segment. The 2002 reportable segments have been restated on this basis.
3 months ended March 31, 2003 US International Biologics Corporate R&D Total $'000 $'000 $'000 $'000 $'000 $'000 ------- --------- --------- --------- -------- -------- Product sales 219,963 35,691 699 - - 256,353 Licensing and development 394 - - - - 394 Royalties - 2,199 - 45,564 - 47,763 Other revenues 7 - - - - 7 Intersegment revenues 5,852 - - - 19,128 24,980 ------- --------- --------- --------- -------- -------- 226,216 37,890 699 45,564 19,128 329,497 Elimination of intersegment revenues (5,852) - - - (19,128) (24,980) ------- --------- --------- --------- -------- -------- Total revenues 220,364 37,890 699 45,564 - 304,517 Cost of product sales 26,372 11,646 627 - - 38,645 Research and development - - - - 54,598 54,598 Selling, general and admini- strative 69,685 19,157 2,252 19,327 - 110,421 Depreciation and amortisation 7,325 2,365 1,149 822 - 11,661 ------- --------- --------- --------- -------- -------- Total operating expenses 103,382 33,168 4,028 20,149 54,598 215,325 ------- --------- --------- --------- -------- -------- Operating income/(loss) 116,982 4,722 (3,329) 25,415 (54,598) 89,192 ------- --------- --------- --------- -------- -------- 3 months ended March 31, 2002 US International Biologics Corporate R&D Total $'000 $'000 $'000 $'000 $'000 $'000 ------- --------- --------- --------- -------- -------- Product sales 167,313 29,052 142 - - 196,507 Licensing and development 541 141 - - - 682 Royalties 214 1,760 - 37,602 - 39,576 Other revenues - 36 181 - - 217 Intersegment revenues 5,203 - - - 10,593 15,796 ------- --------- --------- --------- -------- -------- 173,271 30,989 323 37,602 10,593 252,778 Elimination of intersegment revenues (5,203) - - - (10,593) (15,796) ------- --------- --------- --------- -------- -------- Total revenues 168,068 30,989 323 37,602 - 236,982 Cost of product sales 14,689 9,919 412 - - 25,020 Research and development - - - - 49,729 49,729 Selling, general and admini- strative 54,314 14,399 1,763 11,291 - 81,767 Depreciation and amortisation 5,945 2,283 1,046 899 - 10,173 ------- --------- --------- --------- -------- -------- Total operating expenses 74,948 26,601 3,221 12,190 49,729 166,689 ------- --------- --------- --------- -------- -------- Operating income/(loss) 93,120 4,388 (2,898) 25,412 (49,729) 70,293 ------- --------- --------- --------- -------- --------
9 2. Analysis of revenue, operating income and reportable segments (continued) Included within the selling, general and administrative costs for the Corporate segment for the three months ended March 31, 2003 is $7.2 million in respect of the former Chief Executive's departure. 3. Earnings per share Basic earnings per share is based upon the net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is based upon net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period and adjusted for the effect of all dilutive potential common shares that were outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share:
3 months ended March 31, 2003 2002 $'000 $'000 ---------- ---------- Numerator for basic earnings per share 63,066 56,802 Interest charged on convertible debt, net of tax 1,381 1,397 ---------- ---------- Numerator for diluted earnings per share 64,447 58,199 ---------- ---------- Weighted average number of shares: No. of shares No. of shares ------------- ------------- Basic 501,989,884 499,926,390 Effect of dilutive shares: Stock options 709,269 3,582,567 Warrants - 1,213,297 Convertible debt 19,848,000 20,143,005 ------------- ------------- Diluted 522,547,153 524,865,259 ------------- ------------- Basic earnings per share 12.6c 11.4c ------------- ------------- Diluted earnings per share 12.3c 11.1c ------------- -------------
Warrants to purchase approximately 1.4 million common shares for the 3 months ended 31 March 2003 were not dilutive and were therefore not included in the computation of diluted earnings per share. Stock options to purchase approximately 18.6 million common shares for the 3 months ended 31 March 2003 were not dilutive and were therefore not included in the computation of diluted earnings per share. 4. Employee stock plans SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123) prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options. As allowed by SFAS No. 123, Shire has chosen to continue to account for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations. 10 4. Employee stock plans (continued) Accordingly, compensation cost of stock options is measured as the excess, if any, of the quoted market price of Shire's stock at the measurement date over the option exercise price and is charged to operations over the vesting period. For fixed plans, the measurement date is the grant date. For plans where the measurement date occurs after the grant date, referred to as variable plans, the compensation cost is re-measured on the basis of the current market value of the Company's stock at the end of each reporting period. Shire recognizes compensation expense for variable plans with performance conditions if achievement of those conditions becomes probable. The Company's basis for electing accounting treatment under APB No. 25 is principally due to the satisfactory incorporation of the dilutive effect of these shares in the reported earnings per share calculation and the presence of pro forma supplemental disclosure of the estimated fair value methodology prescribed by SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". At March 31, 2003, the Company had nine stock-based employee compensation plans, which are described more fully in the annual consolidated financial statements. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
3 months ended March 31, 2003 2002 $'000 $'000 ---------- ---------- Net income, as reported 63,066 56,802 Add: Stock-based employee compensation credit included in reported net income, net of related tax effects (24) (302) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (7,772) (6,378) ---------- ---------- Pro forma net income 55,270 50,122 ---------- ---------- Earnings per share Basic - as reported 12.6c 11.4c Basic - pro forma 11.0c 10.0c Diluted - as reported 12.3c 11.1c Diluted - pro forma 10.9c 9.9c ---------- ---------- 5. Inventories, net March 31, December 31, 2003 2002 $'000 $'000 ---------- ---------- Finished goods 23,496 27,672 Work-in-process 18,114 13,716 Raw materials 10,151 7,828 ---------- ---------- 51,761 49,216 ---------- ----------
11 6. Other intangible assets, net March 31, December 31, 2003 2002 $'000 $'000 ---------- ---------- Intellectual property rights acquired 398,995 397,807 Less: Accumulated amortization (105,684) (96,723) ---------- ---------- 293,311 301,084 ---------- ---------- Management estimates that the annual amortization charge in respect of intangible fixed assets held at March 31, 2003 will be approximately $35.0 million for each of the five years to March 31, 2008. Estimated amortization expense can be affected by various factors including future acquisitions and disposals of product rights. 7. Long-term debt During the three months ended March 31, 2003 the Company repurchased $14.0 million of the $400.0 million 2% guaranteed convertible notes due 2011, recording a gain of $0.5 million. During the three months ended March 31, 2002 the Company did not issue debt or make any debt repayments. 8. Consolidated statement of changes in shareholders' equity
Accumu- Exchange- lated Common Exchange- able other Total Common Stock able shares Additional compre- share- Stock No. shares No. paid-in Retained hensive holders' Amount Shares Amount shares capital earnings losses equity $'000 000's $'000 000's $'000 $'000 $'000 $'000 ------- -------- --------- --------- ----------- -------- --------- ---------- As at January 1, 2003 40,051 484,344 272,523 5,874 1,027,499 274,524 (41,431) 1,573,166 Net income - - - - - 63,066 - 63,066 Foreign currency translation - - - - - - 15,723 15,723 Options exercised 14 179 - - 897 - - 911 Stock option compensation - - - - (24) - - (24) Unrealised loss on investments - - - - - - (5,786) (5,786) ------- -------- --------- --------- ----------- -------- --------- ---------- As at March 31, 2003 40,065 484,523 272,523 5,874 1,028,372 337,590 (31,494) 1,647,056 ------- -------- --------- --------- ----------- -------- --------- ----------
Each exchangeable share is exchangeable into 3 common shares. 12 9. Contingent liabilities (a) Commitments The Company has undertaken to subscribe to interests in companies and partnerships for amounts totalling $40.9 million (December 31, 2002: $38.1 million). As at March 31, 2003 an amount of $29.9 million (December 31, 2002: $26.4 million) has been subscribed. (b) FLUVIRAL The Company signed a ten-year contract with the Government of Canada in 2001 to assure a state of readiness in the case of an influenza pandemic (worldwide epidemic) and to provide influenza vaccine for all Canadian citizens in such an event. Under the contract, Shire Biologics will also supply the Government of Canada with a substantial proportion of its annual influenza vaccine requirements over the ten-year period. Subject to mutual agreement, the contract can be renewed for a further period of between one and ten years from 2011. The concept of a state of readiness against an influenza pandemic requires the development of sufficient infrastructure and capacity in Canada to provide 100% of domestic vaccine needs in the event of an influenza pandemic. Canada would require 32 million doses of single-strain (monovalent) flu vaccine within a production period of 16 weeks. Shire Biologics has therefore begun to expand its production capacity in order to meet this objective within a five-year period. Shire Biologics is committed to CAN$18 million (approximately $11.3 million) of capital expenditure on immoveables for the purpose of achieving the level of pandemic readiness required. In addition, a performance bond equal to 10% of the minimum estimated contract value in any year, which for 2002/2003 will be CAN$19.2 million (approximately $12 million), would become payable to the Government of Canada if contracted penalty clauses were triggered. (c) Legal proceedings (i) General Shire accounts for litigation losses in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." Under SFAS No. 5, loss contingency provisions are recorded for probable losses when management is able reasonably to estimate the loss. Where the estimated loss lies within a range and no particular amount within that range is a better estimate than any other amount the minimum amount is recorded. In other cases management's best estimate of the loss is recorded. These estimates are developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period, in light of additional information being known. In instances where Shire is unable to develop a best estimate of loss, no litigation loss is recorded at that time. As information becomes known a loss provision is set up when a best estimate can be made. The best estimates are reviewed quarterly and the estimates are changed when expectations are revised. (ii) Specific There are various legal proceedings against the Company. Please see the Company's Form 10-K for 2002, where these have been fully explained or referred to. There are no material updates to these proceedings since the filing of the 10-K. There is no assurance that the Company will be successful in these proceedings and if it is not there may be a material impact on the Company's results and financial position. 13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. Results of operations for the three months ended March 31, 2003 and 2002 Overview The results for the three months ended March 31, 2002 have been restated to reflect the disposal of our OTC business, which has been accounted for as a discontinued operation. Total revenues for the three months ended March 31, 2003 increased by 28 per cent to $304.5 million as compared to the three months ended March 31, 2002. The Company recorded a first quarter net income of $63.1 million (2002: $56.8 million), an increase of 11 per cent. This result was after charging a cost of $7.2 million in respect of the former Chief Executive's departure. Total revenues Our revenues are primarily derived from sales of our pharmaceutical products and royalties earned on products we have out-licensed to third parties to market on our behalf. The following table provides an analysis of our total revenues by source: 3 months ended March 31, 2003 2002 change $'000 $'000 % ---------- ---------- ---------- Product sales 256,353 196,507 +30 Licensing and development 394 682 -42 Royalties 47,763 39,576 +21 Other 7 217 -97 ---------- ---------- ---------- Total 304,517 236,982 +28 ---------- ---------- ---------- Product sales Product sales of $256.4 million, which represented 84 per cent of total revenues, increased by 30 per cent compared to the three months ended March 31, 2002. Management estimate that approximately $15 million of these revenues are attributable to wholesaler buying patterns in anticipation of price increases, leaving an underlying product sales growth rate of 23%. As a matter of policy the Company does not disclose price increases prior to the effective date of the price increase. The Company recorded sales allowances of $8.5 million in the quarter ended March 31, 2003 related to a promotional ADDERALL XR coupon program. Under this promotional program, coupons are distributed to both physicians and prospective patients. Each coupon entitles a new patient to fulfillment of an initial prescription of ADDERALL XR at no cost to the patient. The Company reimburses pharmacies through a third-party program administrator for coupons redeemed. The following table provides an analysis of our key product sales: 3 months ended March 31, 2003 2002 change $'000 $'000 % ---------- ---------- ---------- ADDERALL XR 115,163 61,875 +86% ADDERALL 18,899 46,170 -59% AGRYLIN 39,674 23,436 +69% PENTASA 29,719 17,547 +69% PROAMATINE 13,835 9,573 +45% CARBATROL 9,421 11,572 -19% CALCICHEW range 6,108 4,699 +30% Others 23,534 21,635 +9% ---------- ---------- ---------- 256,353 196,507 +30% ---------- ---------- ---------- 14 Product sales (continued) The following discussion includes references to prescription and market share data for our key products. The source of this data is IMS March 2003. ADDERALL franchise For the three months ended March 31, 2003 combined sales of ADDERALL XR and ADDERALL, marketed in the US for the treatment of ADHD, were $134.1 million, representing growth of 24 per cent over the three months ended March 31, 2002. ADDERALL XR and ADDERALL had a 27 per cent share of the prescription market for ADHD in the US in March 2003 compared to 31 per cent in March 2002. Over the same period, total ADDERALL franchise prescriptions fell by approximately 7 per cent, reflecting the entry of generic versions of ADDERALL during 2002, as well as increased competition within the ADHD market overall. An estimated two-thirds of the difference between prescription growth and sales growth is due to inventory movements between comparative periods. During the three months ended March 31, 2002, the Company experienced significant wholesaler de-stocking of ADDERALL as wholesalers adjusted inventory levels downwards following product launches by a generic competitor. In addition, wholesalers adjusted down inventory levels of ADDERALL XR as initial launch orders were satisfied over the first three months of 2002. In comparison, wholesaler stocking levels of ADDERALL XR have normalized during the three months ended March 31, 2003. Both ADDERALL XR and ADDERALL continued to benefit from price increases implemented during 2002. An improved pricing structure for ADDERALL XR versus ADDERALL and lower Medicaid rebate payments for ADDERALL XR in the three months ended March 31, 2003 were offset, in part, by allowances recorded in respect of an ADDERALL XR promotional program implemented during the three months ended March 31, 2003. The recent introduction of a competitive product in January 2003 has had a negligible impact on ADDERALL XR market share to date. Although the efforts of competitors have significantly reduced our share of voice in the US ADHD market, our focused marketing approach and efficient physician targeting have enabled ADDERALL XR to extend its leading market share position among high volume prescribing ADHD physicians to 27.8 per cent in February 2003. As importantly, ADDERALL XR's proven safety and efficacy profile has contributed to the minimal erosion in total market share from 23.7 per cent (December 27, 2002) to a current 23.1 per cent (April 18, 2003). Growth of the overall ADHD market has continued, with first quarter 2003 prescription growth at 14 per cent, up from 10 per cent for the three months ended March 31, 2002. AGRYLIN Sales of AGRYLIN, the only US product licensed for the treatment of essential thrombocythemia were $39.7 million, a 69 per cent increase over sales of $23.4 million in the three months ended March 31, 2002. This was supported by 12 per cent US prescription growth, with 41 per cent of growth coming from sales outside the US. The remaining difference between prescription and sales growth (estimated to be $5 million) is attributed to wholesaler advance buying in anticipation of a price increase. We achieved a prescription share of 27 per cent of the total US AGRYLIN market, including Hydrea and generic hydroxyurea, in March 2003 compared to 26 per cent in March 2002. AGRYLIN remains the only product specifically approved for essential thrombocythemia in the US. The anticipated paediatric extension for AGRYLIN could extend its orphan drug exclusivity from March 2004 to September 2004, after which time it is expected to face generic competition. The anticipated approval of XAGRID (trade name of AGRYLIN in the EU) will be a source of growth in markets outside the US. PENTASA Sales of PENTASA, at $29.7 million, were 69 per cent higher than in the three months ended March 31, 2002. Although its formal indication is for mild to moderately active ulcerative colitis, PENTASA continues to see the majority of its use in Crohn's disease. PENTASA had a 17 per cent share of the oral mesalamine/obsalazine market in March 2003 (March 2002: 18 per cent). The 69% sales revenue growth in PENTASA, compared to the three months ended March 31, 2002, versus a 2 per cent fall in prescription demand for the same period is largely related to wholesaler anticipation of an early 2003 price increase which led to significant wholesaler stocking during the three months ended March 31, 2003, accounting for an estimated $8 million of our reported sales. The decrease in prescription demand is primarily the result of the reallocation of sales force promotion to other products. In the three months ended March 31, 2003, the Company also continued to benefit from pricing increases implemented during 2002 that contributed approximately 12 per cent of the total growth. 15 Product sales (continued) PROAMATINE Sales of PROAMATINE, for the treatment of postural hypotension, were $13.8 million, 45 per cent higher than in the three months ended March 31, 2002. The US prescription market for PROAMATINE and Florinef prescriptions indicates that PROAMATINE had a 26 per cent share in March 2003, an increase from 24 per cent in March 2002. However, the Orphan Drug Status of PROAMATINE will expire in September 2003 and it is expected to face generic competition from that date. Supported by 14 per cent prescription growth and an estimated 8 per cent pricing benefit, the remainder of PROAMATINE's total 45 per cent growth during the three months ended March 31, 2003 is attributable to wholesaler stock movements. Some of the increased wholesaler buying related to the launch of a new 10mg strength, while the remainder was in anticipation of a price increase (estimated to be $2 million). CARBATROL CARBATROL containing carbamazapine for the treatment of epilepsy, recorded a decline in sales of 19 per cent from sales of $11.6 million in the three months ended March 31, 2002 to $9.4 million in the three months ended March 31, 2003. CARBATROL also experienced a 1 per cent decline in prescriptions over the same period. The difference between prescription and sales growth is due to a reduction in wholesaler buying in the first quarter of 2003, as wholesalers adjusted to lower prescription trends for carbamazepine in the epilepsy market. In the three months ended March 31, 2003, we recommenced promotional efforts for CARBATROL following the resolution of supply constraints that negatively impacted product availability throughout 2002. Although the use of carbamazepine in epilepsy has slowed in favour of more heavily promoted products, CARBATROL's share of the US extended release carbamazepine market has increased from 36.2 per cent in March 2002 to 36.9 per cent in March 2003. The following table presents our product sales by operating segment. 3 months ended March 31, 2003 2002 change $'000 $'000 % ---------- ---------- ---------- US 219,963 167,312 +31 International 35,691 29,053 +23 Biologics 699 142 +392 ---------- ---------- ---------- Total product sales 256,353 196,507 +30 ---------- ---------- ---------- Of our five reportable operating segments, only three generate revenues from the sale of products. Product sales in the US continue to represent a significant percentage of our worldwide sales, 86 per cent in the three months ended March 31, 2003 (2002: 85 per cent). Growth in International markets has been supported by the launch of two specialty pharmaceutical products during 2002 in Europe, SOLARAZE and ADEPT. Royalties Royalties were $47.8 million in the three months ended March 31, 2003, an increase of 21 per cent from the three months ended March 31, 2002. The following table provides an analysis of our royalty income: 3 months ended March 31, 2003 2002 change $'000 $'000 % ---------- ---------- ---------- 3TC 34,139 30,636 +11% ZEFFIX 6,399 5,293 +21% Others 7,225 3,647 +98% ---------- ---------- ---------- Total 47,763 39,576 +21% ---------- ---------- ---------- For the products 3TC and ZEFFIX, we receive royalties from GlaxoSmithKline (GSK), with the exception of Canada, where a partnership with GSK has been established. 16 Royalties (continued) Other royalties are received in respect of REMINYL from Johnson & Johnson, and in addition a number of hormone replacement therapy (HRT) products from various licensees. The 98 per cent growth rate shown above is largely due to the growth in REMINYL royalties. Cost of product sales Gross margin on product sales decreased from 87 per cent for the three months ended March 31, 2002 to 85 per cent for the three months ended March 31, 2003. A slightly more favourable mix of the higher margin products was offset by costs associated with enhancing internal and external production facility capabilities. Research and development expenses Research and development expenditure increased 10 per cent to $54.6 million for the three months ended March 31, 2003 (2002: $49.7 million). R&D expenditure in the three months ended March 31, 2003 represented 18 per cent of revenues, compared to 21 per cent in the three months ended March 31, 2002. We aim to invest between 18 and 20 per cent of total revenues in R&D, although the actual level of expenditure required each quarter is driven by the development phase of existing and new projects. In addition, whilst we use this benchmark for our level of R&D investment, it is not always possible to track revenue growth with R&D expenditure growth as it often takes several months to plan R&D activities and many variables, such as regulatory factors, affect the level of spend from one quarter to the next. Selling, general and administrative expenses Selling, general and administrative expenses increased by 35 per cent to $110.4 million for the three months ended March 31, 2003 (2002: $81.8 million). Expenditure in the three months ended March 31, 2003 included increased promotional spend for ADDERALL XR, given increased competitor activity in the quarter, as well as for CARBATROL, for which promotion recommenced in the quarter following the resolution of supply constraints. As the benefit of this promotional spend is realized, this high level of spend is expected to moderate over the year. In addition, some costs associated with the expected launch of METHYPATCH were incurred during the three months ended March 31, 2003. Selling, general and administrative expenditure in the three months ended March 31, 2003 also included pension top-up contributions and contractual termination costs for our former Chief Executive totalling $7.2 million. The total amount paid was $9.3 million; $2.1 million of which was included in the year ended December 31, 2002 financial results. As a percentage of product sales, selling, general and administrative costs represented 43 per cent for the three months ended March 31, 2003 (2002: 42 per cent). The Company increased the allowance for uncollectible accounts from $0.5 million at December 31, 2002 to $3.6 million at March 31, 2003. Management regularly assesses the overall credit risk in our customer base. Criteria assessed include: (a) changes in the macroeconomic environment of the countries in which we operate, (b) the related impact of these economic changes on the financial position of our key customers, (c) changes in the concentration of credit risk (i.e. consolidation of key customers), and (d) changes in our outstanding receivables balance. The adjustment to the allowance for uncollectible accounts recorded in the quarter ended March 31, 2003 represents management's best estimate of the incremental credit risk impacting our business in 2003. In addition, management has secured credit insurance, as available in the market, for certain key customer balances. The Company also regularly assesses specific customer credit risk and we record an allowance in the period when a loss is deemed probable. Depreciation and amortization The depreciation charge for the three months ended March 31, 2003 was $3.7 million, an increase of $0.6 million compared to the first quarter of 2002. Amortization charges were $8.0 million, an increase of $0.9 million compared to the three months ended March 31, 2002. Interest income and expense For the three months ended March 31, 2003, we received interest income of $5.1 million (2002: $4.7 million). Interest expense increased from $2.0 million to $2.6 million. The increase in interest expense reflects the release of $0.3 million capitalised issue costs associated with a $14 million proportion of convertible 2% debt redeemed during the three months ended March 31, 2003. 17 Other (expense)/income, net For the three months ended March 31, 2003, other expense totalled $3.6 million (2002: income of $1.1 million). The cost is primarily attributable to the write-down of certain long-term investments due to other than temporary impairment. Income taxes for continuing operations For the three months ended March 31, 2003 income taxes increased $4.7 million to $24.5 million from $19.8 million for the three months ended March 31, 2002. Our effective tax rate was 28 per cent for the three months ended March 31, 2003 (2002: 27 per cent). We have net deferred tax assets of $52.2 million at March 31, 2003. Realization is dependent upon generating sufficient taxable income to utilize such assets. Although realization of these assets is not assured, management believes it is more likely than not that the deferred tax assets will be realized. Equity method investees We received $0.7 million, representing our 50 per cent share of earnings from an antiviral commercialization partnership with GSK in Canada (2002: $0.7 million), and incurred a loss of $1.1 million representing Shire's 50 per cent share of the losses from a commercialization partnership with Qualia Computing Inc (which includes Shire's prior investment in CADx) (2002: nil). Discontinued operations We completed the divestment of our OTC portfolio on December 27, 2002. These products were originally acquired in 1999 as a result of a merger with Roberts Pharmaceutical Corporation. The OTC business contributed net income of $1.6 million for the three months ended March 31, 2002. Liquidity and financial condition Our funding requirements depend on a number of factors, including 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 our key products. At March 31, 2003 and December 31, 2002, net cash funds were as follows: March 31, December 31, 2003 2002 $'000 $'000 ---------- ------------ Cash and cash equivalents 1,041,468 897,718 Marketable securities 248,503 316,126 Debt (394,266) (408,190) ---------- ------------ Net cash 895,705 805,654 ---------- ------------ Cash As of March 31, 2003 we had cash, cash equivalents and marketable securities of $1,290.0 million, an increase of $76.2 from $1,213.8 million at December 31, 2002. Our marketable securities consist of money market fund balances and investment grade securities. Operating cashflow funds Net cash provided by operating activities for the three months ended March 31, 2003 was $91.3 million compared to $103.5 million for the three months ended March 31, 2002. Investing activities provided $43.8 million for the three months ended March 31, 2003. This was due to an inflow of $58.9 million by reducing cash placed on short-term deposit, and outflows in respect of net capital expenditure on long-term investments and fixed assets of $15.1 million. Investing activities provided $482.7 million for the three months ended March 31, 2002. This was due to an inflow of $486.8 million by reducing cash placed on short-term deposit, and outflows in respect of net capital expenditure on long-term investments and fixed assets of $4.1 million. Financing activities for the three months ended March 31, 2003, which totalled a $0.8 million inflow, included $0.9 million received from exercises of employee stock options and repayments of long-term debt of 0.1 million. 18 Liquidity and financial condition (continued) Financing activities provided $0.8 million from exercises of employee stock options for the three months ended March 31, 2002. Debt Our total borrowings as of March 31, 2003 were $394.3 million (December 31, 2002: $408.2 million). The main component of our borrowings is $386.0 million (December 31, 2002: $400.0 million) in guaranteed convertible loan notes due 2011. During the three months ended March 31, 2003 the Company repurchased $14.0 million of the convertible loan notes. Capital expenditure Capital expenditure on tangible fixed assets for the three months ended March 31, 2003 was $13.6 million, which primarily related to the purchase of additional office accommodation at the Group headquarters in Basingstoke, UK. Other capital expenditure related to the purchase of long-term investments ($1.5 million). Capital expenditure on tangible fixed assets for the three months ended March 31, 2002 was $3.1 million, which primarily related to laboratory and computer equipment purchased across the Group. Other capital expenditure related to the purchase of long-term investments ($1.0 million). Critical accounting policies The preparation of consolidated financial statements under generally accepted accounting principles requires us to make certain estimates and judgments that affect reported amounts of assets, liabilities, revenues, expenses and disclosures in our financial statements. Critical accounting policies are those that require the most significant, complex or subjective judgments, which are often as a result of the need to make estimates on matters that are inherently uncertain. Our critical accounting policies are those in relation to litigation, valuation of intangible assets, valuation of fixed asset investments, sales rebates and income taxes. Please refer to the Company's Form 10-K for further details on these policies. In addition, this quarter, management has determined the accounting policy relating to sales coupons is also a critical accounting policy. Coupons Sales allowances related to a promotion are recorded in the period in which the Company distributes the coupon. 1.7 million coupons were distributed in the three months ended March 31, 2003. Sales allowances are calculated at estimated redemption rates. Redemption rates vary based upon the responsiveness of the different target audiences, method of distribution, and currently range from 1.5 per cent to 12 per cent. The Company's current reimbursement for each prescription averages $70 and each coupon has a twelve month expiration from date of issuance. The actual redemption rates may deviate from the estimate made. Shire revises its estimates every period and may be required to adjust the estimate in a subsequent period. ITEM 3. Qualitative and Quantitative Disclosures about Market Risk There have been no material changes in the Group's market risk exposure since December 31, 2002. Item 7A of the Group's Annual Report on Form 10-K for the year ended December 31, 2002 contains a detailed discussion of the Group's market risk exposure in relation to interest rate market risk and foreign exchange market risk. ITEM 4. Controls and procedures Within the 90-day period prior to the date of this report, an evaluation was carried out, under the supervision and with the participation of our management, including our Chief Executive and our Group Finance Director, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive and the Group Finance Director concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no significant changes to the Company's internal controls, since such evaluation, or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (i) General The risk of product liability claims, product recalls, litigation and associated adverse publicity is inherent in the testing, manufacturing, marketing and selling of pharmaceutical products. The cost of defending against such claims is expensive even when the claims are not merited. A successful product liability claim against us could require us to pay a substantial monetary award. If, in the absence of insurance, we do not have sufficient financial resources to satisfy a liability resulting from such a claim or to fund the legal defense of such a claim, we could become insolvent. Product liability insurance coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms. Although we carry product liability insurance, this coverage may not be adequate. In addition, we cannot be certain that insurance coverage for present or future products will continue to be available. Moreover, an adverse judgment in a products liability suit, even if insured or eventually overturned on appeal, could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other products. An important part of our business strategy is to protect our products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. Our success will depend, in part, upon our ability to obtain and enforce strong patents, to maintain trade secret protection and to operate without infringing the proprietary rights of others. We cannot however assure you that our patents or patent applications or those of our third party manufacturers will provide valid patent protection sufficiently broad to protect our products and technology and will not be challenged, revoked, invalidated, infringed or circumvented by third parties. In the regular course of business, we are a party to litigation or other proceedings relating to intellectual property rights. (ii) Specific There are various legal proceedings against the Company. Please see the Company's Form 10-K for 2002, where these have been fully explained or referred to. There are no material updates to these proceedings since the filing of the 10-K. There is no assurance that the Company will be successful in these proceedings and if it is not there may be a material impact on the Company's results and financial position. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION The Chairman of the Audit Committee of Shire pre-approves all non-audit services, including tax advisory and compliance services, provided by the Company's independent auditors, Deloitte and Touche. A process for pre-approval has been in place since July 1, 2002 and has continued through to the end of the period covered by this Quarterly Report. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Matthew Emmens pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. 99.2 Certification of Angus Russell pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (b) Reports on Form 8-K During the first quarter ended March 31, 2003, 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, and Item 7 - Financial Statements and exhibits), date of earliest event reported December 31, 2002, with respect to the issue of a press release announcing holdings by FMR Corp, Fidelity International Limited and their subsidiaries in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported January 7, 2003, with respect to block listings six month review. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported January 9, 2003, with respect to a notice to certain directors and officers informing them of a blackout with respect to trading of Shire's equity securities. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported January 9, 2003, with respect to the issue of a press release announcing the Company's response to ANDA application on FDA website for a generic copy of ADDERALL XR(R). Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported January 20, 2003, with respect to the issue of a press release announcing holdings by FMR Corp, Fidelity International Limited and their subsidiaries in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported January 29, 2003, with respect to the issue of a press release announcing holdings by Legal & General Group in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported January 31, 2003, with respect to the issue of a press release announcing holdings by FMR Corp, Fidelity International Limited and their subsidiaries in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported February 10, 2003, with respect to the issue of a press release announcing holdings by The Capital Group Companies Inc. and its affiliates in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported February 12, 2003, with respect to the issue of a press release announcing invitation to full year 2002 results presentation. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported February 24, 2003, with respect to the issue of a press release announcing holdings by The Capital Group Companies Inc. and its affiliates in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported February 25, 2003, with respect to the issue of a press release announcing that the Company had filed suit against Barr Laboratories Inc. for patent infringement relating to Barr's ANDA for a generic version of ADDERALL XR(R). 21 (b) Reports on Form 8-K (continued) Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported February 27, 2003, with respect to the issue of a press release announcing that the Company had agreed to acquire from Noven Pharmaceuticals, Inc. the worldwide sales and marketing rights to METHYPATCH (registered trademark of Noven). Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported February 27, 2003, with respect to the issue of a press release announcing the Company's results for the twelve months ended December 31, 2002. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 3, 2003, with respect to the issue of a press release announcing that the Company had received an approvable letter from the US Food & Drug Administration for FOSRENOL(R) (lanthanum carbonate). Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 5, 2003, with respect to the issue of a press release announcing director stock option grants to Mr. Russell and Dr. Totten. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 10, 2003, with respect to the issue of a press release announcing holdings by FMR Corp, Fidelity International Limited and their subsidiaries in the ordinary share capital of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 12, 2003, with respect to the issue of a press release announcing the appointment of Matthew Emmens to the board and as Chief Executive of Shire. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 19, 2003, with respect to the issue of two press releases announcing (i) holdings by FMR Corp, Fidelity International Limited and their subsidiaries in the ordinary share capital of Shire and (ii) the exercise by Rolf Stahel of a stock option. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 20, 2003, with respect to the issue of a press release announcing the granting of a share option to Chief Executive Matthew Emmens. Form 8-K (Item 5 - Other Events, and Item 7 - Financial Statements and exhibits), date of earliest event reported March 21, 2003, with respect to the issue of a press release announcing the granting of director Long Term Incentive Plan awards to Mr. Emmens, Mr. Russell and Dr. Totten. 22 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHIRE PHARMACEUTICALS GROUP PLC ------------------------------- (Registrant) Date: May 15, 2003 By: /s/ Matthew Emmens ----------------------- Matthew Emmens, Chief Executive Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - --------- ----- ---- /s/ Matthew Emmens Chief Executive May 15, 2003 - --------------------------- MATTHEW EMMENS /s/ Angus Charles Russell Group Finance Director May 15, 2003 - --------------------------- ANGUS CHARLES RUSSELL 23 CERTIFICATION OF MATTHEW EMMENS PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 OF Shire Pharmaceuticals Group PLC I, Matthew Emmens, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Shire Pharmaceuticals Group PLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Matthew Emmens -------------------------- Matthew Emmens Chief Executive 24 CERTIFICATION OF ANGUS RUSSELL PURSUANT TO RULE 13a-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 OF Shire Pharmaceuticals Group PLC I, Angus Russell certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Shire Pharmaceuticals Group PLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Angus Russell --------------------------- Angus Russell Group Finance Director 25 EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.ss. 1350(a) and (b)) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.ss.1350(a) and (b)), the undersigned hereby individually certifies in his capacity as an officer of Shire Pharmaceuticals Group plc (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2003 /s/ Matthew Emmens -------------------------- Matthew Emmens Chief Executive The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.ss. 1350(a) and (b)), is not a part of the Form 10-Q to which it refers and is, to the extent permitted by law, provided by the above signatory to the extent of his respective knowledge. A signed original of this written statement required by ss. 906 has been provided to Shire Pharmaceuticals Group plc and will be retained by Shire Pharmaceuticals Group plc and furnished to the Securities and Exchange Commission or its staff upon request. 26 EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.ss. 1350(a) and (b)) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.ss. 1350(a) and (b)), the undersigned hereby individually certifies in his capacity as an officer of Shire Pharmaceuticals Group plc (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarter ended March 31, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2003 /s/ Angus Russell ---------------------------- Angus Russell Group Finance Director The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18 U.S.C. ss.ss. 1350(a) and (b)), is not a part of the Form 10-Q to which it refers and is, to the extent permitted by law, provided by the above signatory to the extent of his respective knowledge. A signed original of this written statement required by ss. 906 has been provided to Shire Pharmaceuticals Group plc and will be retained by Shire Pharmaceuticals Group plc and furnished to the Securities and Exchange Commission or its staff upon request. 27 -----END PRIVACY-ENHANCED MESSAGE-----