Financial review
Results of operations
For the year to December 31, 2008 the Company’s total revenues increased by 24% to $3,022 million, compared to $2,436 million in 2007. Net income for the year to December 31, 2008 was $156 million compared to a net loss of $1,451 million in 2007.
Graham Hetherington
Chief Financial Officer
The following table provides an analysis of the Company’s total revenues:
| Year to December 31 | 2008 $'M |
2007 $'M |
Growth % |
|---|---|---|---|
| Net product sales: | |||
| SPECIALTY PHARMACEUTICALS (‘Specialty’) | |||
| Attention Deficit Hyperactivity Disorder('ADHD') | |||
| ADDERALL XR | 1,101.7 | 1,030.9 | 7% |
| VYVANSE | 318.9 | 76.5 | 317% |
| DAYTRANA | 78.7 | 64.2 | 23% |
| Gastrointestinal ('GI') | |||
| PENTASA | 185.5 | 176.4 | 5% |
| LIALDA/MEZAVANT | 140.4 | 50.5 | 178% |
| General products | |||
| FOSRENOL | 155.4 | 102.2 | 52% |
| CALCICHEW | 52.8 | 54.2 | -3% |
| CARBATROL | 75.9 | 72.3 | 5% |
| REMINYL/REMINYL XL | 34.4 | 31.2 | 10% |
| XAGRID | 78.7 | 66.8 | 18% |
| Other product sales | 50.1 | 119.3 | -58% |
| Total Specialty product sales | 2,272.5 | 1,844.5 | 23% |
| HUMAN GENETIC THERAPIES ('HGT') | |||
| ELAPRASE | 305.1 | 181.8 | 68% |
| REPLAGAL | 176.1 | 143.9 | 22% |
| FIRAZYR | 0.5 | - | - |
| Total HGT product sales | 481.7 | 325.7 | 48% |
| Total product sales | 2,754.2 | 2,170.2 | 27% |
| ROYALTY INCOME: | |||
| 3TC | 140.2 | 145.3 | -4% |
| ZEFFIX | 40.3 | 41.0 | -2% |
| Other | 65.0 | 60.9 | 7% |
| 245.5 | 247.2 | -1% | |
| Other revenues | 22.5 | 18.9 | 19% |
| Total revenues | 3,022.2 | 2,436.3 | 24% |
The following discussion includes references to US prescription and US market share data for key products. The source of this data is IMS Health ('IMS').
SPECIALTY PHARMACEUTICALS
US ADHD market share
The continued growth in market share of VYVANSE helped Shire grow its average annual share of the US ADHD market to 32.6% for the year to December 31, 2008 compared to 29.7% in 2007. Shire has the leading portfolio of products in the US ADHD market.
ADDERALL XR-ADHD
ADDERALL XR's average share of the US ADHD market for 2008 fell to 22.6% (2007: 25.5%). US prescriptions for ADDERALL XR for the year to December 31, 2008 decreased by 5% compared to 2007 due to an 11% fall in average market share offset by a 7% growth in the US ADHD market.
Sales of ADDERALL XR for the year to December 31, 2008 were $1,101.7 million, an increase of 7% compared to the same period in 2007 (2007: $1,030.9 million), with the decline in prescriptions being more than offset by price increases.
As previously disclosed, the United States Federal Trade Commission ('FTC') informed Shire on October 3, 2006 that it was reviewing the ADDERALL XR patent litigation settlement agreement between Shire and Barr. On June 22, 2007 the Company received a civil investigative demand requesting that it provide information to the FTC relating to its settlement with Barr and its earlier settlement with Impax Laboratories, Inc. The Company is co-operating fully with this investigation and believes that the settlements are in compliance with all applicable laws.
Litigation proceedings concerning Shire's ADDERALL XR patents are ongoing. Further information on this litigation can be found in our filings with the Securities and Exchange Commission ('SEC'), including our Annual Report on Form 10-K for the year to December 31, 2008.
VYVANSE-ADHD
VYVANSE was launched in the US in July 2007 as the first and only once-daily pro-drug stimulant to treat ADHD.
In April 2008 VYVANSE was approved by the FDA for use in adults and Shire launched VYVANSE for adult ADHD in June 2008.
In July 2008 Shire launched VYVANSE in 20mg, 40mg and 60mg dosage strengths, which are designed to increase the dosing flexibility of VYVANSE.
Product sales for the year to December 31, 2008 were $318.9 million (2007: $76.5 million). Product sales growth was driven by the increase in average share of the US ADHD market (8.2% for the year to December 31, 2008 compared to 1.8% in 2007) and a price increase in April 2008.
DAYTRANA-ADHD
Product sales for the year to December 31, 2008 were $78.7 million (2007: $64.2 million). DAYTRANA's average annual share of the US ADHD market decreased to 1.8% in 2008 compared to 2.1% in 2007.
Despite the 11% decrease in prescriptions compared to 2007, sales of DAYTRANA grew 23% compared to the same period last year due to growth in the US ADHD market of 7% and lower sales deductions in 2008 over 2007, primarily due to reduced coupon expense.
During 2008 Shire announced two voluntary market recalls of a limited portion of DAYTRANA patches because certain patches did not meet their release liner removal specifications which may have resulted in some patients and caregivers having difficulties removing the liners. The voluntary recalls were not due to safety issues. Shire and Noven Pharmaceuticals Inc. (the manufacturer of DAYTRANA) continue to pursue enhancements to the product and to work closely with the FDA to implement changes that may improve the usability of DAYTRANA. There has been no interruption in the production of DAYTRANA.
US Oral Mesalamine market share
Shire's annual average market share of the US Oral Mesalamine market rose to 28.4% for the year to December 31, 2008 (2007: 21.1%) driven by growth of LIALDA since it's launch in March 2007.
PENTASA-Ulcerative colitis
US prescriptions of PENTASA for the year to December 31, 2008 were down 1% compared to 2007 primarily due to a small decrease in PENTASA's average annual market share from 17.2% in 2007 to 16.7% in 2008, offset by a 2% increase in the US Oral Mesalamine prescription market.
Sales of PENTASA for the year to December 31, 2008 were $185.5 million, an increase of 5% compared to 2007 (2007: $176.4 million). Sales growth is higher than prescription growth primarily due to the impact of price increases.
LIALDA/MEZAVANT-Ulcerative colitis
US prescriptions of LIALDA for the year to December 31, 2008 were up 204% compared to the prior year and LIALDA's average market share for 2008 increased to 11.7% (2007: 3.9%). LIALDA's US product sales for the year to December 31, 2008 were $134.8 million compared to $50.3 million in 2007.
Sales of MEZAVANT outside the US for the year to December 31, 2008 were $5.6 million (2007: $0.2 million). By December 31, 2008 MEZAVANT was available in five EU countries. Launches are planned in other countries during 2009, subject to the successful conclusion of pricing and re-imbursement negotiations.
FOSRENOL-Hyperphosphatemia
At December 31, 2008 FOSRENOL was available in 30 countries and global sales grew by 52% to $155.4 million for the year to December 31, 2008 (2007: $102.2 million). Sales of FOSRENOL outside the US for the year ended December 31, 2008 were $69.5 million (2007: $40.1 million).
US sales of FOSRENOL for the year to December 31, 2008 were up 38% to $85.9 million compared to 2007 (2007: $62.1 million). FOSRENOL's average prescription share of the US phosphate binder retail market decreased to 8.1% for the year ending December 31, 2008 (2007: 8.6%). Product sales increased despite the decrease in prescriptions due to price and a 34% increase in FOSRENOL'S share of the non-retail market resulting from Shire's continued focus on specialist physicians, clinics and dialysis centers.
On February 9, 2009 Shire announced that it had received Paragraph IV Notice letters from Barr Laboratories, Inc. ('Barr') and Mylan Inc. ('Mylan') advising the filing of Abbreviated New Drug Applications for generic versions of 500 mg, 750mg, and 1 gram FOSRENOL. Shire is currently reviewing the detail of the Paragraph IV Notice letters from Barr and Mylan, and under the Hatch Waxman Act has 45 days to determine if it will file patent infringement suits.
XAGRID-Thrombocythemia
Sales for the year to December 31, 2008 were $78.7 million, an increase of 18% compared to the same period in 2007 (2007: $66.8 million). On a constant exchange rate basis, sales rose 15% (XAGRID is primarily sold in Euros and Pounds sterling).
DYNEPO-Anemia associated with chronic kidney disease
In July 2008 Shire announced that it had made the decision to cease the commercialization of DYNEPO, effective at the end of 2008, and recorded charges of $149.9 million to cover intangible asset impairment, inventory write-downs and other exit costs. Sales for the year to December 31, 2008 were $20.9 million (2007: $14.2 million).
HUMAN GENETIC THERAPIES
ELAPRASE-Hunter syndrome
Sales for the year to December 31, 2008 were $305.1 million, an increase of 68% compared to the same period in 2007 (2007: $181.8 million). The sales growth was driven by increased unit sales across all regions where ELAPRASE is sold: Europe, North America, Latin America, and Asia Pacific. On a constant exchange rate basis, sales increased by 64%.
REPLAGAL-Fabry disease
Sales for the year to December 31, 2008 were $176.1 million, an increase of 22% compared to the same period in 2007 (2007: $143.9 million). The sales growth was primarily driven by increased unit sales in Europe and Asia Pacific. On a constant exchange rate basis, sales rose by 19%.
FIRAZYR-Hereditary angroderma ('HAE')
During the second half of 2008, FIRAZYR was launched in some countries in Europe, and sales of $0.5 million were recognized (2007: $nil). Launches will continue across Europe through 2009 as re-imbursement negotiations successfully conclude. FIRAZYR has orphan exclusivity in the EU until 2018.
Royalties
Royalty revenue decreased by 1% to $245.5 million for the year to December 31, 2007 (2007: $247.2 million).
3TC
Royalties from sales of 3TC for the year to December 31, 2008 were $140.2 million, a decrease of 4% compared to the same period in 2007 (2007: $145.3 million). Excluding favorable foreign exchange movements of 2%, there has been a decline of 6% compared to the same period in 2007.
ZEFFIX
Royalties from sales of ZEFFIX for the year to December 31, 2008 were $40.3 million, a decrease of 2% compared to the same period in 2007 (2007: $41.0 million). On a constant exchange rate basis, royalties from sales of ZEFFIX fell 8%.
Other
Other royalties are primarily in respect of REMINYL and REMINYL XL (known as RAZADYNE and RAZADYNE ER in the US), for the symptomatic treatment of mild to moderately severe dementia of the Alzheimer's type.
Information on the RAZADYNE patent litigation (which rendered the relevant patent invalid in August 2008) and RAZADYNE ER patent litigation (which is ongoing) can be found in our filings with the SEC on our Annual Report on Form 10-K for the year to December 31, 2008.
Cost of product sales
The cost of product sales increased to $408.0 million for the year to December 31, 2008 (15% of product sales), from $320.3 million in the corresponding period in 2007 (15% of product sales).
For the year to December 31, 2008 cost of product sales included charges of $48.8 million (2% of product sales) (2007: $nil) relating to the write-down of inventory and exit costs for DYNEPO, which the Company has decided to stop commercializing, and depreciation of $16.2 million (2007: $11.8 million). Excluding these charges Cost of product sales as a percentage of product sales in the year to December 31, 2008 decreased by two percentage points compared to 2007 due to the impact of price increases on the Company's product sales and favorable changes in product mix.
Research and development ('R&D')
R&D expenditure decreased to $526.6 million for the year to December 31, 2008 (19% of product sales), from $576.4 million in the year to December 31, 2007 (27% of product sales). The year to December 31, 2007 included up-front and milestone payments for in-licensed products of $155.9 million representing 7% of product sales. R&D expenditure included $6.5 million (2007:$nil) of R&D commitments relating to DYNEPO and depreciation of $12.5 million (2007: $11.3 million).
Excluding these charges R&D expenditure increased over the same period in 2007, although decreasing as a percentage of product sales to 18% (2007: 19% of product sales). Contributing to the increase in R&D expenditure in 2008 over 2007 were projects in-licensed and acquired since the second half of 2007, including PLICERA, SPD550, AMIGAL, FIRAZYR and METAZYM together with Phase 3(b) and Phase 4 studies to support new product launches.
Selling, general and administrative ('SG&A')
SG&A expenses increased by 21% to $1,422.9 million in the year to December 31, 2008 from $1,178.8 million in the year to December 31, 2007. This increase in SG&A expenses was less than the product sales increase of 27%, and as a percentage of product sales SG&A expenses in 2008 compared to the same period in 2007 fell by two percentage points to 52% (2007: 54%).
SG&A for the year to December 31, 2008 includes intangible asset impairment charges of $97.1 million (4% of product sales) (2007: $0.4 million) of which $94.6 million relates to DYNEPO which the Group has decided to stop commercializing. Amortization of intangible assets in 2008 increased by $31.6 million to $126.2 million (2007: $94.6 million): this increase resulted from a full year's amortization in 2008 of the Company's VYVANSE intangible asset, of $55.8 million (2007: $28.9 million), and amortization in the second half of 2008 of the FIRAZYR intangible asset acquired through the Jerini business combination.
SG&A expenses also include depreciation charges of $48.5 million (2007: $42.1 million). SG&A expenses in the year to December 31, 2008 also included costs associated with the introduction of a new holding company totaling $14.8 million (2007: $nil). Other increases in SG&A expenses in 2008 over 2007 principally relate to the increase in advertising, promotional and marketing spend to support commercialization of the Company's new products.
Integration costs
For the year to December 31, 2008 the Company recorded integration costs of $10.3 million in respect of Jerini, primarily being acquisition related advisory fees incurred by Jerini and costs associated with the integration of Jerini into the Shire Group (2007: $1.3 million relating to the acquisition of New River Pharmaceuticals Inc ('New River')).
Gain on sale of product rights
For the year to December 31, 2008 Shire recognized gains of $20.7 million on the sale of product rights, primarily relating to the sale of non-core products to Almirall in 2007, for which some gains were deferred at December 31, 2007 pending the transfer of relevant consents. In the year to December 31, 2007 Shire recognized gains on the sale of product rights of $127.8 million, of which $114.8 million was for the products sold to Almirall.
In-Process Research and Development ('IPR&D')
During the year to December 31, 2008 the Company recorded an IPR&D charge of $263.1 million (2007: $1,866.4 million). The charge in 2008 related to FIRAZYR in those markets outside of the EU ($128.1 million) which had not been approved by the relevant regulatory authorities at the acquisition date, and for METAZYM ($135.0 million). In the year to December 31, 2007 the Company recorded an IPR&D charge of $1,866.4 million in respect of development projects acquired with New River, including VYVANSE for use in adults in the US market, which at the time of acquisition had yet to be approved by the FDA.
Interest income
For the year to December 31, 2008 Shire received interest income of $25.5 million (2007: $50.6 million). Interest income primarily relates to interest received on cash and cash equivalents. Interest income for the year to December 31, 2008 is lower than the same period in 2007 due to lower average cash and cash equivalent balances and lower average interest rates.
Interest expense
For the year to December 31, 2008 Shire incurred interest expense of $139.0 million (2007: $70.8 million). Interest expense for the year to December 31, 2008 includes $87.3 million (2007: $28.1 million) in respect of the TKT appraisal rights litigation. This litigation was settled in November 2008. Prior to reaching this settlement, the Company accrued interest based on a reasonable estimate of the amount that may be awarded by the Court to those former TKT shareholders who requested appraisal. After reaching the settlement, the Company accrued additional interest expense of $73.0 million in the year to December 31, 2008 consistent with the terms of the settlement agreement. For further details on the settlement of this litigation, see the Company's Annual Report on Form 10-K for the year to December 31, 2008.
Other income, net
Other (expenses)/income, net for the year to December 31, 2008 include other than temporary impairment charges in respect of available for sale securities totaling $58.0 million (2007: $3.0 million), including $44.3 million relating to the Company's investment in Renovo Group plc. These amounts reflect unrealized holding losses that have been reclassified from other comprehensive income to the statement of operations in 2008, as management have concluded that the impairment is other than temporary.
Income taxes
The effective tax rate for the year to December 31, 2008 was 36.9% (2007: -4.0%). Excluding IPR&D charges of $263.1 million (2007: $1,866.4 million) for which no tax benefit is currently recognized, the effective tax rate for the year to December 31, 2008 has increased by 7% to 19% (2007: 12%). The increase in 2008 over 2007 is primarily due to the combined effects of (a) in 2008, significant unfavorable rate impacts related to other than temporary impairment charges on available-for-sale securities and an increase in the valuation allowance and, (b) in 2007, favorable impacts recognized related to non-taxable gains on the sale of non-core products rights which were partially offset by an increase in the provision for uncertain tax benefits. The 2008 effective tax rate was also unfavorably impacted by exchange losses.
Equity in earnings/(losses) of equity method investees
Net earnings of equity method investees of $2.4 million were recorded for the year to December 31, 2008 (2007: $1.8 million). This comprised earnings of $5.8 million from the 50% share of the anti-viral commercialization partnership with GSK in Canada (2007: $6.5 million), offset by losses of $3.4 million being the Company's share of losses in the GeneChem, AgeChem and EGS Healthcare Funds (2007: losses of $4.7 million).
Discontinued operations
Losses from discontinued operations in 2008 of $17.6 million (2007: $nil) relate to those Jerini businesses that met the criteria for held for sale and discontinued operations at December 31, 2008, which Jerini announced in October 2008 that it intended to invest.