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Results of operationsFor the year to December 31, 2005, the Company's total revenues increased by 17% to $1,599.3 million, compared to $1,363.2 million in 2004. Net loss for the year to December 31, 2005 was $410.8 million compared to net income of $269 million in 2004. The Company's net loss for 2005 was primarily attributable to the in-process R&D write-off of $673 million following the acquisition of TKT. Total revenuesThe following table provides an analysis of the Company's total revenues by source:
All product sales are reported in the Pharmaceutical Products segment, all royalties are reported in the Royalty segment. Product sales
(i) This represents REPLAGAL sales for the five-month period since the acquisition of TKT. The following discussion includes references to prescription and market share data for key products. The source of this data is IMS Health, December 2005. During 2005, the Company concluded new 'fee for service' agreements with two of its three significant wholesale customers. These agreements, which are commonplace in the pharmaceutical industry, change the way wholesalers are compensated. Under the agreements, the wholesalers receive a distribution fee from pharmaceutical suppliers. These 'fee for service' agreements eliminate wholesalers' incentives to acquire and hold excess inventories. The Company believes this will reduce the significant impact of wholesaler stocking and de-stocking on its product sales. Further, the wholesalers will provide data regarding their inventories of the Company's products it has on hand. The Company is negotiating a 'fees for service' agreement with its remaining significant wholesale customer. 'Fees for service' are treated as a sales deduction, thus affecting revenues rather than cost of sales. ADDERALL XRUS prescriptions for ADDERALL XR for the year to December 31, 2005, were up 12%. ADDERALL XR further strengthened its position as the leading brand in the US ADHD market with a 1% increase in market share to an all time high of 26% in December 2005 (December 2004: 25%). In addition, the US ADHD market grew 5% overall compared to the same period in 2004. Product sales growth was higher than prescription growth for the year due mainly to the impact of price increases in December 2004 and August 2005, partially offset by a decrease in pipeline inventory and higher sales deductions. FDA approval of the adolescent indication for ADDERALL XR was received on July 22, 2005. On February 12, 2005, Shire announced that it had suspended sales of ADDERALL XR in Canada at the request of Health Canada. On August 24, 2005, Shire announced that Health Canada would reinstate the marketing authorization of ADDERALL XR in Canada effective August 26, 2005. This reinstatement follows the acceptance by Health Canada of the recommendations from the New Drug Committee, which was appointed by Health Canada at Shire's request to review the suspension of ADDERALL XR in Canada. During October 2005, Shire filed a Citizen Petition with the FDA requesting that the FDA require more rigorous bioequivalence testing or additional clinical testing for generic or follow-on drug products that reference ADDERALL XR before they can be approved. Shire believes that these requested criteria will ensure that generic formulations of ADDERALL XR or follow-on drug products will be clinically effective and safe. In January 2006, Shire chose to file a supplemental amendment to its original Citizen Petition, which included additional clinical data in support of the original filing. The FDA has six months to respond to Shire's petition and while this petition is under review it will not grant final approval of generic or follow-on drug products referencing ADDERALL XR. On February 9, 2006, a FDA Advisory Committee recommended to the FDA that risk information about cardiovascular events be included in a 'black box warning' for all stimulant medicines used to treat ADHD. In making its recommendation, the Advisory Committee recognized that the reported incidence rates of the rare serious cardiovascular adverse events that were discussed by the Committee are generally within the rates that would be expected from the untreated general population. ADDERALL XR and ADDERALL already include a 'black box warning' in their labels for safety concerns related to amphetamine abuse or misuse and also warn of the risk of sudden death in patients with structural cardiac abnormalities. Shire stands behind the current labeling and believes that further action is unwarranted. In January 2006, Shire settled its ADDERALL XR patent infringement lawsuits with Impax. The litigations involved Shire US patents, Nos. 6,322,819 (the '819 Patent), 6,605,300 (the '300 Patent) and 6,913,768 (the '768 Patent). As part of the settlement, Impax has confirmed that its proposed generic ADDERALL XR product infringes Shire's '819, '300 and '768 Patents and that the three patents are valid and enforceable. Under the terms of the settlement, Impax will be permitted to market generic versions of ADDERALL XR in the US no later than January 1, 2010, and will pay Shire a royalty from those sales. In certain situations, such as the launch of another generic version of ADDERALL XR, Impax may be permitted to enter the market as Shire's authorized generic. Shire's ADDERALL XR patent infringement lawsuits with Barr continue. Shire is seeking a ruling that Barr's Abbreviated New Drug Application (ANDA) seeking permission to market its generic versions of ADDERALL XR infringes the '819, '300 and '768 Patents. Barr's 30-month stay under the Hatch-Waxman Act expired on February 18, 2006. Following the expiry of the 30-month stay, the FDA may approve Barr's ANDA. A final pre-trial conference in the '819 and '300 Patent cases took place on March 10, 2006 where the trial date was set for October 30, 2006. Shire is continuing its discussions with Barr in connection with these lawsuits and the discussions are progressing. If the Company does not prevail in the lawsuits, the Company's sales of ADDERALL XR will decrease. Any decrease in the sales of ADDERALL XR would significantly reduce revenues and earnings. CARBATROLUS prescriptions for the year to December 31, 2005, were down 8% compared to the previous year. This was due primarily to supply constraints, a 4% decrease in Shire's market share of the total US extended release carbamazepine prescription market to 42% in December 2005 (December 2004: 46%) and a 5% decrease in that market as a whole. The supply constraints have now been resolved. Product sales for the year to December 31, 2005 were up 33% compared to the previous year. The difference between sales growth and the lower level of prescriptions is due to price increases in August 2004 and October 2005 and to lower sales deductions than in 2004. Patent litigation proceedings with Nostrum and Corepharma relating to CARBATROL are in progress. For details, please see the Downloads section. PENTASAUS prescriptions for the year to December 31, 2005 were up 6% compared to the previous year. The increase was due to the success of the co-promotional agreement with Solvay Pharmaceuticals Inc., the impact of the 500mg dosage form launched in the third quarter of 2004 and a 2% increase in the total US oral mesalamine prescription market. Product sales for the year to December 31, 2005 were up 18%, compared to the previous year. The difference between sales growth and prescription growth is due to the impact of the September 2004 price increase and a normalization of pipeline inventories compared to lower levels in 2004. PENTASA had an 18% share of the total US oral mesalamine prescription market in December 2005 (December 2004: 18%). AGRYLIN/XAGRIDAGRYLIN/XAGRID sales worldwide for the year to December 31, 2005 were $92.8 million, down 39% compared to the previous year (2004: $152.5 million). North American sales were $46 million, down 61% compared to the previous year (2004: $119.1 million). This reduction was expected following the approval of generic versions of AGRYLIN in the US market in April 2005. Rest of the World sales (all sales outside North America) were $46.8 million, up 40%, compared to the previous year (2004: $33.4 million). This was primarily due to the successful launch of XAGRID in the UK, Germany and France in the first quarter of 2005 and Spain in the third quarter of 2005. In accordance with current orphan drug legislation in the EU, XAGRID will have up to ten years of marketing exclusivity in the EU. FOSRENOLFOSRENOL was launched in the US in January 2005. Product sales for the year to December 31, 2005 were $53.5 million, with US prescriptions for the year totalling 137,000. FOSRENOL had an 8% share of the total US phosphate binding market in December 2005. On November 28, 2005 the FDA approved new, higher-dose formulations of FOSRENOL. New, higher-dose strengths of 750mg and 1,000mg were shipped to wholesalers in the US in December 2005. Higher-dose strengths should help to reduce the number of pills that end-stage renal disease patients need to take to achieve target phosphorus levels. Product sales in Q4 2005 were $29 million compared with $9.7 million in Q3 2005. The variance relates primarily to increased pipeline inventory sales to wholesalers of the new higher-dose formulation during December. FOSRENOL was launched in Austria in December 2005. Shire continues its discussions relating to FOSRENOL with regulatory authorities and reimbursement agencies across Europe and other regions and further launches are expected in European markets over the next few months, subject to obtaining national approvals and concluding pricing and reimbursement negotiations. REPLAGALREPLAGAL was acquired by Shire as part of the TKT acquisition, which completed on July 27, 2005. Product sales for the period since acquisition were $41.3 million. The majority of REPLAGAL sales are in Europe. Total sales for the full year, including pre-acquisition sales, were $94.6 million (2004: $77.4 million). The increase in sales (including pre-acquisition sales) is primarily due to greater European coverage by an increased number of sales representatives. Foreign exchange effectAs many of the Company's sales revenues are earned in currencies other than US Dollars (primarily Canadian Dollars, Pounds Sterling, Swedish Krona and Euros), revenue growth reported in US Dollars includes the impact of translating the sales made in a local currency into US Dollars. With the US Dollar strengthening against these currencies over the last 12 months, the translation of sales made in these currencies into US Dollars has impacted on the reported growth rates. The table below shows the effect of foreign exchange translations on the revenue growth of the key affected products as well as the underlying performance of key products in their local currency:
Revenue growth analysis does not include sales of:
RoyaltiesRoyalty revenue increased 5% to $242.9 million for the year to December 31, 2005, (2004: $230.4 million) primarily as a result of strong sales growth.
3TCRoyalties from sales of 3TC for the year to December 31, 2005, were $159.8 million, an increase of 3% compared to 2004 ($155.8 million). This was due to the continued growth in the nucleoside analogue market for HIV and a small positive impact of foreign exchange movements. Shire receives royalties from GSK on worldwide 3TC sales. GSK's worldwide sales of 3TC for the year to December 31, 2005, were $1,211 million, an increase of 2% compared to prior year (2004: $1,184 million). ZEFFIXRoyalties from sales of ZEFFIX for the year to December 31, 2005, were $30.5 million, an increase of 11% compared to 2004 ($27.4 million), due to strong growth in the Japanese market and a small positive impact of foreign exchange movements. Shire receives royalties from GSK on worldwide ZEFFIX sales. GSK's worldwide sales of ZEFFIX for the year to December 31, 2005, were $266 million, an increase of 11% compared to prior year (2004: $240 million). OtherOther royalties are primarily in respect of REMINYL and REMINYL XL (now marketed as RAZADYNE and RAZADYNE ER in the US), a product marketed worldwide by Janssen Pharmaceutical N.V. (Janssen), an affiliate of Johnson & Johnson, with the exception of the UK and the Republic of Ireland where Shire acquired the exclusive marketing rights from May 2004. Sales of the REMINYL/RAZADYNE range, for the symptomatic treatment of mild to moderately severe dementia of the Alzheimer's type, are growing well in the Alzheimer's market. On April 11, 2005, Ortho-McNeil Neurologics Inc. (Janssen's US affiliate company) announced that REMINYL would be marketed in the US under the new product name of RAZADYNE. Subsequently, in the US, REMINYL XL was launched as RAZADYNE ER. Ortho-McNeil Neurologics Inc. worked closely with the FDA on a name change following dispensing errors in the US between REMINYL and the Type 2 diabetes mellitus drug known as AMARYL. Shire is only aware of one similar dispensing error outside the US. On March 1, 2005, NICE in England and Wales issued an Appraisal Consultation Document (ACD). This document included a recommendation that all existing approved products for the symptomatic treatment of mild-to-moderate Alzheimer's Disease in England and Wales should no longer be reimbursed by the National Health Service (NHS) when used in the treatment of new patients. The recommendation potentially affected sales of REMINYL and of REMINYL XL in England and Wales. An amended ACD was issued by NICE on January 23, 2006. The new ACD recommends that REMINYL and REMINYL XL, together with other drugs in the same class, be reimbursed by the NHS when used for the treatment of either (i) patients with existing Alzheimer's Disease already being treated with one of these drugs; or (ii) newly diagnosed patients once their disease has progressed to a moderate stage. Therefore the current recommendation excludes the reimbursement of treatment for patients presenting with mild symptoms of Alzheimer's Disease for which REMINYL and REMINYL XL are approved. A final appraisal document is expected from NICE in July 2006. Cost of product salesFor the year to December 31, 2005, the cost of product sales amounted to 16% of product sales (2004: 13%). The decrease in gross margin is primarily due to the addition of REPLAGAL to Shire's product portfolio following the acquisition of TKT. REPLAGAL's cost of product sales relates entirely to the acquired inventories, which in accordance with US Generally Accepted Accounting Principles (GAAP), have been accounted for at fair value, estimated to be 97% of the expected sales price of REPLAGAL. Accordingly, little or no margin will be reflected for REPLAGAL sales until all acquired finished goods have been sold (anticipated Q3 2006). For the year to December 31, 2005 the cost of product sales for REPLAGAL includes a $41.9 million adjustment in respect of the acquired inventory of which $39.8 million related to sales of acquired finished goods and $2.1 million was a write-off of damaged work-in-process. In 2005, this fair value adjustment increased Shire's cost of product sales by 3%. R&DR&D expenditure increased from $196.3 million in the year to December 31, 2004 to $336.2 million in 2005. Expressed as a percentage of total revenues, R&D expenditure was 21% for the year to December 31, 2005 (2004: 14%). The increase was primarily due to:
The New River payment and the R&D expenditure on ELAPRASE and GA-GCB represented 5% of R&D expenditure as a percentage of revenues. Shire's pipeline is now well advanced with seven projects in late-stage development or registration. Selling, general and administrative (SG&A) expensesTotal SG&A costs increased from $516.6 million in the year to December 31, 2004, to $705.6 million in the year to December 31, 2005, an increase of 37%. As a percentage of product sales, SG&A expenses were 53% (2004: 46%).
(i) Excludes depreciation from manufacturing plants of $3.5 million (2004: $2.7 million) which is included in cost of product sales. SG&A expenses increased from $458.1 million in the year to December 31, 2004, to $631.2 million in 2005, an increase of 38%. As a percentage of product sales, these expenses were 48% (2004: 41%). This increase was expected, with additional costs attributable to four product launches during 2005, together with incremental costs in 2005 associated with the new FOSRENOL and EQUETRO sales forces, patent litigation and infrastructure, $24.5 million of SG&A costs related to the acquired TKT business and $4.5 million related to the set up of the new listed holding company for the Shire Group. The depreciation charge for the year to December 31, 2005, was $29.2 million (2004: $19.8 million), which in 2005 included property, plant and equipment write-downs of $6.5 million (2004: $1.6 million). Amortization charges, including the amortization on acquired products, were $45.2 million for the year to December 31, 2005 (2004: $38.7 million). Intangible asset impairmentsThe charge for intangible asset impairments for the year to December 31, 2005 was $5.6 million (2004: $13.5 million). The approval of generic versions of AGRYLIN in April 2005 and the decision not to support and promote certain non-core products going forward resulted in changes to the estimate of the Company's future cash flows and, as a result, impairments were required in both 2005 and 2004. Reorganization costs
As previously disclosed, the Company began a consolidation of its North American sites in 2004, with the aim of decreasing the number of sites from 16 to four, including the opening of a new US headquarters office in Wayne, Pennsylvania. The Company recorded costs of $9.3 million in 2005 and $48.5 million in 2004 primarily associated with:
Following the closure of the Newport site in July 2005, the site consolidation is now complete and no further reorganization costs are expected. Integration costsFor the year to December 31, 2005, the Company incurred $9.7 million of costs associated with the integration of the TKT business into the Shire Group (2004: $nil). This included retention payments for key staff of $7 million, information technology costs of $1 million and other costs of $1.7 million. In-process R&D write-offDuring the year to December 31, 2005, as required by Financial Accounting Standards Board Interpretation No. 4, 'Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method' (FIN 4), the Company wrote-off the portion of the TKT purchase price allocated to in-process research and development of $673 million. This amount represents the value of those intangible assets acquired as part of the TKT acquisition, which at the time of acquisition had not been approved by the FDA or other regulatory authorities, including ELAPRASE and GA-GCB. For the determination of the fair value of in-process research and development see Note 4 of the Company's consolidated financial statements in the Downloads section. Interest incomeFor the year to December 31, 2005 the Company received interest income of $35.3 million (2004: $21.9 million). The increase compared to 2004 is due to higher interest rates on the Company's US cash deposits which were partially offset by the interest foregone by the Company on the net payments of $1.1 billion made to date in respect of the acquisition of TKT. Interest expenseFor the year to December 31, 2005 the Company incurred interest expense of $12 million (2004: $12.3 million). In 2005, this expense included a $7.7 million provision for interest, which may be awarded by the court in respect of amounts due to former holders of approximately 11.3 million shares of TKT common stock who have submitted written demands for appraisal of these shares. In addition, interest expense includes $1.2 million, relating to the costs of a bridging loan to finance the TKT acquisition and other interest related expenses of $3.1 million. In 2004, interest expense included the write-off of $7.4 million of deferred debt acquisition costs arising on the issue of convertible loan notes in August 2001. The write-off was required as a significant portion of the convertible loan notes were redeemed. The $7.4 million represented the balance of these fees at the date of redemption in August 2004. In addition, interest expense included a $4.2 million interest charge incurred prior to the redemption and $0.1 million of other interest-related expenses. Other income/(expense), net
For further details see Note 26 and Note 6 to the Company's consolidated financial statements in the Downloads section. The write-down in investments in 2005 and 2004 resulted from events and circumstances that indicated there was an other-than-temporary impairment of investments and, accordingly, management recorded an impairment based on its assessment of fair value. Further details are disclosed in Note 11 to the Company's consolidated financial statements in the Downloads section. Investment income for 2005 included a $3.9 million realized gain on the sale of a portfolio investment (2004: $14.8 million). Income taxesThe Company's effective tax rate for 2005 was negative 29% (a tax charge of $92.1 million on losses from continuing operations before income taxes and equity method investees of $320.9 million). The significant difference from the prior-year effective tax rate of 28% is due to the in-process research and development write-off of $673 million, which is not tax deductible. As at December 31, 2005, the Company had deferred tax assets net of valuation allowances of $116.2 million (2004: $78.1 million). The increase in deferred tax is primarily attributable to the acquisition of TKT that resulted in a net deferred tax asset of $60.4 million being recorded in the opening day balance sheet, although part of the asset was subsequently realized in the post acquisition period. Realization of deferred tax assets is dependent upon generating sufficient taxable income to utilize such assets. Although realization of these assets is not assured, it is more likely than not that the amount recognized will be realized. See Note 29 to the Company's consolidated financial statements in the Downloads section for expiry dates of these taxes losses. Equity in earnings/(losses) of equity method investeesNet losses of $1 million were recorded for the year to December 31, 2005 (2004: net earnings of $2.5 million). This comprised earnings of $5.3 million from the 50% share of the antiviral commercialization partnership with GSK in Canada (2004: $4.4 million), offset by the Company's share of losses in the GeneChem and EGS Healthcare Funds of $6.3 million (2004: $1.9 million). Discontinued operationsDuring the year to December 31, 2005 gains on disposition of the discontinued operations totaled $3.1 million. This resulted from the finalization of the working capital agreement with ID Biomedical Inc. (IDB), which was part of the sale of Shire's vaccines business to IDB in 2004. As a result, a disputed amount, which had previously been provided for, was received and the corresponding provision was released. Liquidity and capital resourcesGeneralThe Company's funding requirements depend on a number of factors, including its development programs; corporate, business and product acquisitions; the level of resources required for the expansion of manufacturing and marketing capabilities as the product base expands; increases 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; the timing and quantum of milestone payments on collaborative projects; the timing of and quantum of tax and dividend payments; the timing and quantum of purchases of Shire shares in the market to satisfy option exercises and the continuing cash generated from sales of Shire's key products. An important part of Shire's business strategy is to protect its products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The Company intends to defend its intellectual property and as a result may need cash for funding litigation expenses incurred. The Company ordinarily finances its activities through cash generated from operating activities, private and public offerings of equity and debt securities and the proceeds of asset or investment disposals. Multicurrency Revolving Facilities AgreementIn connection with the acquisition of TKT, Shire and certain members of the Shire Group entered into a Multicurrency Revolving Facilities Agreement ('the Facilities Agreement') with ABN AMRO Bank N.V., Barclays Capital, Citigroup Global Markets Limited, HSBC Bank plc and The Royal Bank of Scotland plc ('the Lenders') on June 15, 2005. The Facilities Agreement comprises two credit facilities: (i) a committed multicurrency three-year revolving loan facility in an aggregate amount of $500 million ('Facility A') and (ii) a committed 364 day revolving loan facility in an aggregate amount of $300 million ('Facility B' and together with Facility A, 'the Facilities'). Shire has agreed to act as guarantor for any of its subsidiaries that borrow under the Facilities Agreement. Facility A may be used for general corporate purposes, including financing the purchase price and other costs with respect to the acquisition of TKT (including refinancing TKT's existing indebtedness). Facility B may be used only for financing certain milestone payments due under the agreement between Shire, and inter alia, New River Pharmaceuticals Inc. (New River), dated January 31, 2005. Facility A terminates on June 15, 2008, and Facility B terminates on June 14, 2006. At Shire's request, the Lenders may agree to successive annual extensions of Facility B, but not beyond the maturity date of Facility A. Alternatively, Shire has the right to draw Facility B or convert existing loans under Facility B into a term loan with the same maturity date as Facility A. The availability of loans under each of the Facilities is subject to customary conditions, including the absence of any defaults thereunder and the accuracy (in all material respects) of Shire's representations and warranties contained therein. The Facilities include representations and warranties, covenants and events of default, including requirements that Shire's ratio of Net Debt to EBITDA (as defined in the Facilities Agreement) not exceed 3.0 to 1 and that the ratio of EBITDA to Net Interest be not less than 4.0 to 1, both in respect of the most recently ended fiscal year, and limitations on the creation of liens, disposal of assets, incurrence of indebtedness, making of loans and giving of guarantees. Interest on loans under the Facilities will be payable on the last day of each interest period, which period may be one, two, three or six months at the election of Shire (or as otherwise agreed with the Lenders). The interest rate on each loan for each interest period is the percentage rate per annum, which is the aggregate of the applicable margin (ranging from 0.35 to 0.65% per annum, depending on the ratio of Net Debt to EBITDA), LIBOR, and mandatory cost, if any (as calculated in accordance with Schedule 5 of the Facilities Agreement). Shire shall also pay fees equal to 35% per annum of the applicable margin on available commitments under Facility A for the availability period applicable to Facility A and 20 per cent per annum of the applicable margin on available commitments under Facility B for the availability period applicable to Facility B in respect of the period prior to January 1, 2007, and 30% per annum of the applicable margin thereafter. Interest on overdue amounts under the Facilities will accrue at a rate, which is one percent higher than the rates otherwise applicable to the loans under the Facilities. Upon a change of control of Shire or upon the occurrence of an event of default and the expiration of any applicable cure period, the total commitments under the Facilities may be cancelled, all or part of the loans, together with accrued interest and all other amounts accrued or outstanding may be immediately due and payable and all or part of the loans may become payable on demand. Events of default under the Facilities include: (i) non-payment of any amounts due under the Facilities, (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of the Group, (vii) certain ERISA breaches which would have a material adverse effect, (viii) change of control of a subsidiary of Shire that is a party to the Facilities Agreement, or (ix) if it becomes illegal for Shire or any of its subsidiaries that are parties to the Facility Agreement to perform their obligations or they repudiate the Facilities Agreement or any Finance Document (as defined in the Facilities Agreement). The Facilities Agreement is governed by English law. As at December 31, 2005, the Company had not drawn-down on these facilities. Shire anticipates that its operating cash flow together with available cash, cash equivalents and short-term investments and the above mentioned debt facility will be sufficient to meet its anticipated future operating expenses, outstanding costs related to the acquisition of TKT, capital expenditures, dividends, share repurchases and debt service and lease obligations as they become due over the next 12 months. If the Company decides to acquire other businesses, it expects to fund these acquisitions from existing cash resources, the debt facility discussed above and possibly through new borrowings and/or the issue of new equity if necessary. Sources and uses of cashThe following table provides an analysis of the Company's gross and net cash funds as at December 31, 2005 and 2004:
Cash flow activityNet cash provided by operating activities for the year to December 31, 2005 was $381.1 million, a decrease of $107.6 million compared to the previous year. The reduction in cash generation is primarily due to the operating losses of the acquired TKT business, the $50 million payment to New River and the timing of working capital payments. Net cash used in investing activities was $836.4 million in the year to December 31, 2005. Decreases in short-term investments of $366.7 million along with proceeds of $60 million from the redemption by IDB of its subscription receipts and the receipt from IDB of additional proceeds from the sale of the vaccines business of $32.2 million, offset cash paid on the purchase of TKT (net of cash and cash equivalents acquired) of $1,151.5million, loans made to IDB of $43.2 million, capital expenditure on property, plant and equipment of $86.2 million and intangible assets of $20.5 million. Capital expenditure on property, plant and equipment included $23.3 million leasehold building improvements, $16.3 million on computer equipment and $3.1 million on furniture and fittings for the new Shire US headquarters at Wayne, Pennsylvania, $10.6 million on IT projects, $5.4 million on the expansion and refurbishment at the Basingstoke Head Office, $3.2 million of plant equipment and $15.9 million on the expansion and modification at Shire US Manufacturing Inc. in the US. Capital expenditure on intangible assets included the final payment for the acquisition of the exclusive commercialization rights to REMINYL in the UK and Republic of Ireland. Net cash provided by financing activities was $9.6 million for the year to December 31, 2005. This was primarily due to inflows of $37.1 million from the exercise of employee stock options being offset by the dividend payments of $28.5 million in respect of the six months to December 31, 2004 and the six months to June 30, 2005. The total cash consideration for the acquisition of TKT is expected to be approximately $1.6 billion, subject to change as may be required by the appraisal rights process. As at December 31, 2005, shareholders owning approximately 24.8 million TKT shares had accepted the offer and $916.9 million had been paid to them, $83.9 million was paid in connection with TKT stock options and $170.1 million in connection with convertible notes, outstanding at the date of acquisition. Following the exercise of appraisal rights by former holders of approximately 11.3 million shares of TKT common stock, the remaining $419.9 million, together with any interest that the Court may award, will be paid to them subject to the appraisal process. For every $1 increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million. As a result of the acquisition of TKT, cash balances have been significantly reduced. Interest receivable has increased as increases in US interest rates have more than offset the impact of the reduced cash balances. The average cash balances pre-acquisition and post-acquisition of TKT for 2005 were $1.5 billion and $0.6 billion respectively. Outstanding letters of creditAs at December 31, 2005, the Company had irrevocable standby letters of credit with Barclays Bank plc in the amount of $15 million providing security on the recoverability of insurance claims and Bank of America in the amount of $7.9 million, providing security on the payment of lease obligations. Cash requirementsAggregate contractual obligationsAs at December 31, 2005 the Company's contractual obligations were as follows:
Notes(i) The Company leases certain properties, motor vehicles and equipment under operating leases expiring through 2025. During the year to December 31, 2005 the Company signed a 20-year operating lease on a property in the Republic of Ireland and acquired certain operating leases with its acquisition of TKT. (ii) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders. Shire expects to fund the following commitments with cash flows from operations: Clinical testingAs at December 31, 2005, the Company had committed to pay approximately $16.3 million to contract vendors for administering and executing clinical trials. The timing of payments is not reasonably certain as payments are dependent upon actual services performed by the organizations as determined by patient enrolment levels and related activities. However, the Company currently expects to pay $13.2 million for these commitments throughout 2006 as ongoing trials are completed and the remainder in 2007. Contract manufacturingAs at December 31, 2005 the Company had committed to pay approximately $23.1 million in respect of contract manufacturing over the next 12 months. Interests in companies and partnershipsAs at December 31, 2005, the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totalling $25.2 million (2004: $22 million) of which $9.9 million is committed in 2006 and a further $2.9 million could be payable in 2006, depending on the timing of capital calls. Manufacturing facilitiesAt December 31, 2005 the Company had committed a total of $6.1 million to the expansion and modification of its manufacturing facilities at Owings Mills, Maryland and Cambridge, Massachusetts. Of this total, $3.2 million is to facilitate the production and packaging of additional strategic products and $2.9 million is for the design and construction of a technology centre at Owings Mills. All costs are expected to be incurred in 2006. Basingstoke, UK expansionThe Company is in the process of expanding its UK headquarters at Basingstoke, UK. As at December 31, 2005, the Company had an outstanding commitment of $4.5 million, which is expected to be incurred in 2006. (iii) Other liabilities reflected on the balance sheet include: TKT shareholders asserting appraisal rightsAs at December 31, 2005, appraisal rights had been asserted in respect of approximately 11.3 million shares of TKT common stock. As at December 31, 2005, the Company recorded a liability of $419.9 million based on the merger consideration of $37 per share for the 11.3 million shares outstanding at that time plus a provision for interest of $7.7 million that may be awarded by the court. Until such time as the appraisal process is complete the Company is unable to determine the extent of its liability. For every $1 increase/decrease in the merger consideration applicable to those TKT shareholders who have asserted appraisal rights, the total estimated purchase price would increase/decrease by approximately $11.3 million. The contractual obligations table above does not include payments yet to fall due upon the occurrence of certain milestones and other contractual commitments. The most significant payments are as follows: DAYTRANAIn connection with the Company's acquisition in 2003 from Noven of the worldwide sales and marketing rights to DAYTRANA, Shire has an obligation to make certain payments on the achievement of the following milestones: $50 million upon FDA approval of the product, which will be capitalized and amortized over its useful economic life; and up to $75 million, linked to future sales performance. An approvable letter was received from the FDA on December 23, 2005. Final regulatory approval was received from the FDA on April 6, 2006. NRP104In connection with the Company's collaboration with New River to commercialize NRP104, the Company has an obligation to make certain payments on the achievement of the following milestones: $50 million upon the FDA's acceptance of filing of the NDA; up to $300 million following the first commercial sale of the product, depending on the characteristics of the approved product labeling; $100 million on achieving a significant sales target; and $5 million following the first commercial sale in certain specified EU markets. An upfront payment of $50 million was expensed as an R&D cost during the first quarter of 2005. The NDA for NRP104 was filed on December 6, 2005 and accepted for review by the FDA on January 26, 2006, triggering the $50 million milestone payment, which has now been paid. FOSRENOL patent rightsIn connection with the Company's purchase of the global patents for FOSRENOL from AnorMED Inc. in 2004, the Company has outstanding commitments to pay AnorMED Inc. $6 million when FOSRENOL is approved in certain European countries and $6 million upon receipt of regulatory approval in Japan. Other R&D commitmentsAs at December 31, 2005, the Company had commitments of $18 million on achievement of specified milestones from products under development in licensed from third parties of which $6.6 million is committed to be paid in 2006. Off-balance sheet arrangementsThere are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Foreign currency fluctuationsA number of operating units in the Group have functional currencies other than the US Dollar. As such, the consolidated financial results are subject to fluctuations in exchange rates, particularly those between the US Dollar, Canadian Dollar, Pound Sterling, Euro and Swedish Krona. The accumulated foreign currency translation differences of $62.2 million are reported within accumulated other comprehensive income in the consolidated balance sheet and $1.4 million expense is reported in other income on the consolidated income statement. As at December 31, 2005, the Company had five outstanding forward foreign exchange contracts with a total principal amount equivalent to $206 million to manage the currency risk associated with certain inter-company loans. Concentration of credit riskThe Company's revenues from product sales are mainly derived from agreements with major pharmaceutical companies and relationships with pharmaceutical wholesale distributors and retail pharmacy chains. Such clients typically have significant cash resources and as such the risk is considered minimal. The Company has taken positive steps to manage any credit risk associated with these transactions. Shire operates clearly defined credit evaluation procedures. For the year to December 31, 2005, there were three customers in the US who accounted for 69% of the Company's total revenues. Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments and trade accounts receivable. Excess cash is invested in short-term money market instruments, including bank and building society term deposits, commercial paper and other debt securities from a variety of companies with strong credit ratings. These investments typically bear minimal risk. InflationAlthough at reduced levels in recent years, inflation continues to apply upward pressure on the cost of goods and services which are used in the business. However, the Company believes that the net effect of inflation on its operations has been minimal during the past three years. Treasury policies and organizationThe Company's principal treasury operations are co-ordinated by its corporate treasury function, which is based in the UK. All treasury operations are conducted within a framework of policies and procedures approved by the Board. As a matter of policy, the Company does not undertake speculative transactions that would increase its currency or interest rate exposure. The Board reviews and agrees policies for managing the risks and they are summarized below: Interest rate riskAs at December 31, 2005, the Company has no material debt outstanding. Therefore the Company's interest charge on its debt obligations is low and consequently the Company's interest expense charge has limited exposure to interest rate movements. The Company is exposed to movements in interest rates affecting interest income. This exposure is primarily to US Dollar interest rates. As the Company maintains all of its investments on a short-term basis for liquidity purposes this risk is not actively managed. In the year to December 31, 2005, the average interest rate received on cash and liquid investments was approximately 2.90% per annum. The largest proportion of investments was in US Dollar money market and liquidity funds. Foreign exchange riskThe Company is exposed to movements in foreign exchange rates against the US Dollar for trading transactions and the translation of net assets, liabilities and earnings of non-US subsidiaries. The main trading currencies of the Company are the US Dollar, the Canadian Dollar, Pounds Sterling, the Euro and Swedish Krona. The consolidated financial statements of foreign entities are translated using accounting policies described in Note 3 to the Company's consolidated financial statements in the Downloads section. The exposure to foreign exchange risk is managed and monitored by the treasury function. Exposures are generally managed through natural hedging via the currency denomination of cash balances. As at December 31, 2005 the Company had five outstanding forward foreign exchange contracts with a total principal amount of $206 million equivalent to manage the currency risk associated with certain inter-company loans. As at December 31, 2005 there were net unrealized gains of $2.6 million on these contracts. Market risk of investmentsAs at December 31, 2005, the Company has $50.2 million of investments comprising equity investment funds, private companies and publicly-quoted equities. The public-quoted companies are exposed to market risk. No financial instruments or derivatives have been employed to hedge this risk. Dividend policyAn interim dividend for the first half of 2005 of 1.8246¢ (1.0475p) per ordinary share equivalent to 5.4738¢ per ADS and 6.7629 Canadian ¢ per exchangeable share was paid in October 2005. The Board has resolved to pay a second interim dividend of 4.419¢ (2.5356p) per ordinary share equivalent to 13.257¢ per ADS and 15.2217 Canadian ¢ per exchangeable share for the six months to December 31, 2005. This is consistent with Shire's stated policy of paying a dividend semi-annually, set in US cents per share/ADS, with the first interim payment in each year being maintained at a consistent level. Any growth will come through increasing the second interim dividend in a financial year. Shire intends to pursue a progressive dividend policy. As a matter of English law, Shire may pay dividends only out of its distributable profits, which are the accumulated realized profits under generally accepted accounting principles in the United Kingdom (including reserves arising from a reduction of share capital), of Shire plc and not the consolidated Group, so far as not previously utilized by distribution or capitalization, less accumulated realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. On November 28, 2005, the High Court of Justice | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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