FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 2000
Commission File Number: 0-29630
SHIRE PHARMACEUTICALS GROUP PLC
(Exact name of registrant as specified in its charter)
England and Wales N.A.
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
East Anton, Andover, Hampshire SP10 5RG England
(Address of principal executive offices) (Zip Code)
44 1264 333 455
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Class Outstanding at August 9, 2000
Common Stock: Ordinary Shares 255,119,476
THE "SAFE HARBOR" STATEMENT UNDER SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
The statements in this form 10-Q that are not historical facts are
forward-looking statements that involve risks and uncertainties, including but
not limited to, risks associated with the inherent uncertainty of pharmaceutical
research, product development and commercialisation, the impact of competitive
products, patents, and other risks and uncertainties, including those detailed
from time to time in periodic reports, including the Annual Report filed on Form
10-K by Shire with the Securities and Exchange Commission.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share and per share data)
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS ----------- -----------
Current assets:
Cash and cash equivalents 89,443 54,082
Marketable securities and other current asset investments 62,402 84,344
Accounts receivable, net 82,455 59,018
Inventories, net 39,763 39,538
Deferred tax asset 11,484 5,312
Prepaid expenses and other current assets 17,033 9,012
------------ ------------
Total current assets 302,580 251,306
Investments 3,452 2,604
Property, plant and equipment, net 29,158 37,484
Intangible assets, net 545,682 557,934
Deferred tax asset 23,841 31,799
Other assets 3,124 6,636
------------ ------------
Total assets 907,837 887,763
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current instalments of long-term debt 5,392 9,608
Accounts and notes payable 96,544 114,509
Other current liabilities 18,841 48,703
------------ ------------
Total current liabilities 120,777 172,820
Long-term debt, excluding current instalments 128,113 126,314
Other long-term liabilities 522 1,345
------------ ------------
Total liabilities 249,412 300,479
------------ ------------
Shareholders' equity:
Common stock, 5p par value; 400,000,000 shares authorised; and
254,205,361 shares issued and outstanding (1999: 244,519,024) 20,826 20,063
Additional paid-in capital 905,422 832,650
Accumulated other comprehensive losses (27,802) (10,303)
Accumulated deficit (240,021) (255,126)
------------ ------------
Total shareholders' equity 658,425 587,284
------------ ------------
Total liabilities and shareholders' equity 907,837 887,763
------------ ------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. dollars, except share and per share data)
(Unaudited)
3 months to 3 months to 6 months to 6 months to
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Product sales 117,947 93,099 231,111 180,855
Licensing and development 4,371 1,336 9,281 7,747
Royalties 1,318 1,141 1,923 1,770
Other revenues 176 531 475 987
------------ ------------ ------------ ------------
Total revenues 123,812 96,107 242,790 191,359
Costs and expenses:
Cost of sales 20,680 19,229 41,585 42,740
Research and development 28,602 15,369 54,674 31,648
Selling, general and administrative (inclusive
of stock option compensation charge of $236,
$2,175, $23,482 and $7,057 respectively) 47,439 42,114 113,485 83,049
------------ ------------ ------------ ------------
Total operating expenses 96,721 76,712 209,744 157,437
------------ ------------ ------------ ------------
Operating income 27,091 19,395 33,046 33,922
Interest income 1,767 2,001 3,138 3,614
Interest expense (2,928) (2,335) (6,333) (4,893)
Other income/(expense), net 878 (522) 447 128
------------ ------------ ------------ ------------
Total other expenses (283) (856) (2,748) (1,151)
----------- ----------- ------------ ------------
Income before income taxes 26,808 18,539 30,298 32,771
Income taxes (7,437) (9,130) (15,193) (13,096)
------------ ------------ ------------ ------------
Net income 19,371 9,409 15,105 19,675
------------ ------------ ------------ ------------
Net income per share:
Basic $0.08 $0.04 $0.06 $0.08
Diluted $0.07 $0.04 $0.06 $0.08
Weighted average number of shares:
Basic 251,924,794 242,149,929 249,282,994 241,299,183
Diluted 262,200,813 248,264,519 257,686,354 248,179,621
The results for the three months and six months ended June 30, 1999 have been
restated to include the results of Roberts Pharmaceutical Corporation which was
accounted for as a pooling of interests in accordance with APB 16, Accounting
for Business Combinations.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHIRE PHARMACEUTICALS GROUP PLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
6 months to 6 months to
June 30, 2000 June 30, 1999
---------- ----------
<S> <C> <C>
Net cash (used in)/provided by operating activities (15,574) 41,573
---------- ----------
Cash flows from investing activities:
Redemption of marketable securities, net 43,970 4,642
Increase in cash placed on short-term deposit (22,029) (38,876)
Purchase of long term investment (837) -
Expenses of acquisition of subsidiaries (657) -
Purchase of intangible assets (11,836) (40,474)
Purchase of fixed assets (4,220) (2,268)
Proceeds from sale of intangible fixed assets - 166
Proceeds from sale of fixed assets 10,265 1,304
Collection on notes receivable 748 4,623
---------- ----------
Net cash provided by/(used in) investing activities 15,404 (70,883)
---------- ----------
Cash flows from financing activities:
Payments on long term debt, capital leases and notes (2,417) (8,041)
Proceeds from issue of common stock 5,427 3,654
Payment of stock issuance costs (3,385) -
Proceeds from exercise of options 38,178 2,920
---------- ----------
Net cash provided by/(used in) financing activities 37,803 (1,467)
---------- ----------
Effect of foreign exchange rate changes on cash and cash equivalents
(2,272) (249)
---------- ----------
Net increase/(decrease) in cash and cash equivalents 35,361 (31,026)
Cash and cash equivalents at beginning of period 54,082 52,973
---------- ----------
Cash and cash equivalents at end of period 89,443 21,947
---------- ----------
The results for the six months ended June 30, 1999 have been restated to include
the results of Roberts Pharmaceutical Corporation which was accounted for as a
pooling of interests in accordance with APB 16, Accounting for Business
Combinations.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
(Unaudited)
3 months to 3 months to 6 months to 6 months
June 30, June 30, June 30, to June
2000 1999 2000 30, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income 19,371 9,409 15,105 19,675
Foreign currency translation adjustments (14,680) (5,893) (17,499) (13,827)
------------ ------------ ------------ ------------
Comprehensive income/(loss) 4,691 3,516 (2,394) 5,848
------------ ------------ ------------ ------------
</TABLE>
There are no tax effects related to the items included above.
The results for the three months and six months ended June 30, 1999 have been
restated to include the results of Roberts Pharmaceutical Corporation which was
accounted for as a pooling of interests in accordance with APB 16, Accounting
for Business Combinations.
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
a) Description of Operations and Principles of Consolidation
Shire Pharmaceuticals Group plc is an international specialty pharmaceutical
company with a strategic focus on four therapeutic areas: central nervous system
disorders, metabolic diseases, oncology and gastroenterology. The Company's
principal products include Adderall, for the treatment of Attention Deficit
Hyperactivity Disorder, Agrylin, for the treatment of thrombocythemia, and
Pentasa, for the treatment of ulcerative colitis.
The Group has operations in the United States, Europe and the rest of the world.
Within these geographic operating segments, revenues are derived from three
sources: sales of products by the Company's own sales and marketing operations,
licensing and development fees, and royalties.
The accompanying consolidated financial statements include the accounts of Shire
Pharmaceuticals Group plc and all its subsidiary undertakings after elimination
of intercompany accounts and transactions.
b) New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivatives be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". This Statement defers for one year the effective date of
SFAS 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company has not yet determined the future impact of this statement on
its consolidated financial statements.
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133." SFAS 138 amends SFAS 133 to (a) exclude from the scope of
SFAS No. 133 nonfinancial assets that will be delivered in quantities expected
to be used or sold by the company over a reasonable period in the normal course
of business and for which physical delivery is probable, (b) permit hedging of a
benchmark interest rate, (c) allow hedging of foreign-currency-denominated
assets and liabilities and (d) allow for limited hedging of net foreign currency
exposures. The Company has not yet determined the future impact of SFAS 133 and
SFAS 138 on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 outlines the SEC's views on applying generally accepted accounting
principles to revenue recognition in financial statements. Specifically, the
bulletin provides both general and specific guidance as to the periods in which
companies should recognize revenues. In addition, SAB 101 also highlights
factors to be considered when determining whether to recognize revenues on a
gross or net basis. SAB 101, as amended by SAB 101/A and SAB101/B, is effective
beginning no later than their fourth fiscal quarter of the fiscal year beginning
after December 15, 1999; as the Group is a calendar year-end company, this would
be the quarter ending December 31, 2000. The group believes that its policies in
regards to the recognition of revenues are in compliance with the guidance of
SAB 101 and does not expect that the adoption of this standard will have any
material effects on its results of operations, cash flows of financial position.
c) Basis of Presentation
The accompanying consolidated financial statements, which include the operations
of the Company and its wholly owned subsidiaries and the financial information
included herein, are unaudited. 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. It is suggested that these consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements for the three years ended December 31, 1999 and notes
thereto.
<PAGE>
2. Inventory
Inventory consists of:
June 30, December 31,
2000 1999
-------------- --------------
Finished goods 22,022 26,573
Work-in-process 6,685 6,389
Raw materials 11,056 6,576
-------------- --------------
39,763 39,538
-------------- --------------
3. Analysis of revenue, operating income and reportable segments
The Company has disclosed segment information for the individual operating areas
of the business, based on the way in which the business is managed and
controlled. Shire's principal reporting segments are geographic, each being
managed and monitored separately and serving different markets. The Company
evaluates performance based on operating income.
<TABLE>
<CAPTION>
Three months ended June 30, 2000 Rest of
U.S. Europe World Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Product sales 96,449 15,108 6,390 117,947
Licensing and development 614 3,757 - 4,371
Royalties 85 1,233 - 1,318
Other revenues 9 - 167 176
---------- ---------- ---------- ----------
Total revenues 97,157 20,098 6,557 123,812
---------- ---------- ---------- ----------
Cost of revenues 12,483 5,662 2,535 20,680
Research and development 19,536 9,040 26 28,602
Selling, general and administrative 32,718 13,156 1,565 47,439
---------- ---------- ---------- ----------
Total operating expenses 64,737 27,858 4,126 96,721
---------- ---------- ---------- ----------
Operating income/(loss) 32,420 (7,760) 2,431 27,091
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, 1999 Rest of
U.S. Europe World Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Product sales 76,606 12,683 3,810 93,099
Licensing and development - 1,336 - 1,336
Royalties - 1,141 - 1,141
Other revenues - 531 531
---------- ---------- ---------- ----------
Total revenues 76,606 15,160 4,341 96,107
Cost of revenues 9,922 4,906 4,401 19,229
Research and development 9,369 5,988 12 15,369
Selling, general and administrative 31,332 9,288 1,494 42,114
---------- ---------- ---------- ----------
Total operating expenses 50,623 20,182 5,907 76,712
---------- ---------- ---------- ----------
Operating income/(loss) 25,983 (5,022) (1,566) 19,395
---------- ---------- ---------- ----------
Six months ended June 30, 2000 Rest of
U.S. Europe World Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
Product sales 189,550 30,351 11,210 231,111
Licensing and development 1,990 7,291 - 9,281
Royalties 129 1,794 - 1,923
Other revenues 13 - 462 475
---------- ---------- ---------- ----------
Total revenues 191,682 39,436 11,672 242,790
---------- ---------- ---------- ----------
Cost of revenues 25,437 11,393 4,755 41,585
Research and development 36,784 17,847 43 54,674
Selling, general and administrative 58,858 50,949 3,678 113,485
---------- ---------- ---------- ----------
Total operating expenses 121,079 80,189 8,476 209,744
---------- ---------- ---------- ----------
Operating income/(loss) 70,603 (40,753) 3,196 33,046
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999 Rest of
U.S. Europe World Total
$'000 $'000 $'000 $'000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Product sales 148,044 25,147 7,664 180,855
Licensing and development 1,097 6,650 - 7,747
Royalties - 1,770 - 1,770
Other revenues 188 - 799 987
---------- ---------- ---------- ----------
Total revenues 149,329 33,567 8,463 191,359
Cost of revenues 23,901 9,951 8,888 42,740
Research and development 16,791 14,835 22 31,648
Selling, general and administrative 55,377 24,700 2,972 83,049
---------- ---------- ---------- ----------
Total operating expenses 96,069 49,486 11,882 157,437
---------- ---------- ---------- ----------
Operating income/(loss) 53,260 (15,919) (3,419) 33,922
---------- ---------- ---------- ----------
</TABLE>
4. Net income per share
Basic net income 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 net income 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 net income
per share:
<TABLE>
<CAPTION>
3 months to 3 months to 6 months to 6 months to
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Numerator for basic
net income per share 19,371 9,409 15,105 19,675
Interest charged on convertible
debt 102 - - -
---------------- ---------------- ---------------- ----------------
Numerator for diluted net
income per share 19,473 9,409 15,105 19,675
---------------- ---------------- ---------------- ----------------
Weighted average shares: No. of shares No. of shares No. of shares No. of shares
Basic - weighted
average shares 251,924,794 242,149,929 249,282,994 241,299,183
Effect of dilutive
stock options 8,645,500 6,114,590 8,403,360 6,880,438
Convertible debt 1,630,519 - - -
---------------- ---------------- ---------------- ----------------
Diluted - weighted
average shares 262,200,813 248,264,519 257,686,354 248,179,621
---------------- ---------------- ---------------- ----------------
Basic net income per share $0.08 $0.04 $0.06 $0.08
---------------- ---------------- ---------------- ----------------
Diluted net income per share $0.07 $0.04 $0.06 $0.08
---------------- ---------------- ---------------- ----------------
</TABLE>
<PAGE>
The calculation of diluted net income per share for the six months ended June
30, 2000 excludes the effects of convertible debt securities issued by the
Company. These securities have been excluded from the diluted net income per
share because they have an antidilutive effect on the calculation, resulting
from the inclusion of the assumed interest savings associated with the repayment
of the related debt as a component of net income available for common
shareholders. These securities convert into 1,630,519 shares of common stock.
5. Restructuring
As a result of the merger with Roberts Pharmaceutical Corporation, the Company
recorded pre tax charges in the fourth quarter of 1999 totalling $75.9 million
comprising restructuring costs ($43.6 million) and merger related transaction
expenses ($32.3 million). The restructuring costs included $37.9 million for
employee termination and $5.7 million of property related expenses. The
termination costs consisted of payments for severance, medical and other
benefits, outplacement counselling, pension contributions and excise taxes.
In December 1999, the decision was made to close the Roberts' office facility in
Eatontown, New Jersey and consolidate the sales and marketing operations into
the existing Shire facility in Florence, Kentucky and to transfer the research
and development activities to Shire's facility in Rockville, Maryland.
Similarly, Roberts' sales and marketing operations in the U.K. were combined
with Shire's established operation in Andover, Hampshire.
As part of the restructuring and elimination of duplicate facilities, the
Company identified a total of 147 employees to be terminated. As of June 30,
2000 all of the planned terminations were completed. The office facility in
Eatontown was closed as of April 28, 2000 whilst the U.K. duplicate facility was
closed on March 10, 2000.
During the first quarter of 2000, the Company utilized $32.8 million of the
restructuring reserve. This was primarily related to payments for severance as a
result of the closure of the duplicate facilities and pension contributions.
During the second quarter of 2000, the Company utilized a further $2.8 million
of the restructuring reserve. This was in respect of employee termination costs
and property related expenses.
As of June 30, 2000 the Company had a combined reserve balance of $8.0 million,
of which $6.3 million comprised excise taxes. Management is satisfied that the
restructure programme is progressing as planned. Cost savings of approximately
$4.0 million and $6.0 million arose in the first and second quarters of the year
respectively, and it is anticipated that further benefits will arise in the
second half of the year.
<PAGE>
6. Consolidated statement of changes in shareholders' equity
Movements in shareholders' equity for the six months ended June 30, 2000 are as
follows:
<TABLE>
<CAPTION>
Accumu-
Common Common Additional Accumu- lated other Total
Stock Stock paid-in lated comprehen- shareholders'
Amount No. Shares capital deficit sive losses equity
------------ ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
As at January 1, 2000 20,063 244,519 832,650 (255,126) (10,303) 587,284
Net income - - - 15,105 - 15,105
Foreign currency translation - - - - (17,499) (17,499)
Issuance of new shares 55 694 5,372 - - 5,427
Options exercised 708 8,992 37,470 - - 38,178
Issuance costs - - (3,385) - - (3,385)
Stock option compensation - - 23,484 - - 23,484
Tax benefit associated with - - 9,831 - - 9,831
exercise of stock options
------------- ----------- ------------- ------------- ------------- -------------
As at June 30, 2000 20,826 254,205 905,422 (240,021) (27,802) 658,425
------------- ----------- ------------- ------------- ------------- -------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of operations for the three months ended June 30, 2000, as compared with
those for the three months ended June 30, 1999
Overview of financial results
Group revenues for the three months ended June 30, 2000 increased by 29 per cent
to $123.8 million as compared to the three months ended June 30, 1999, primarily
the result of a $24.8 million increase in product sales. The Group recorded
second quarter net income of $19.4 million (1999: $9.4 million).
Sales and marketing
Product sales represented 95 per cent of total revenues at $117.9 million, an
increase of 27 per cent over quarter two 1999 product sales of $93.1 million.
Product sales in the U.S. continue to represent a significant percentage of our
worldwide sales, 82% in the three months ended June 30, 2000.
Product sales by segment 3 months to 3 months to
June 30, 2000 June 30, 1999 % change
$'000 $'000
United States 96,449 76,606 25.9
Europe 15,108 12,683 19.1
Rest of World 6,390 3,810 67.7
------------ ------------ ------------
Total product sales 117,947 93,099 26.7
------------ ------------ ------------
Second quarter sales of Adderall and DextroStat, products marketed in the U.S.
for the treatment of Attention Deficit Hyperactivity Disorder (ADHD), were $46.2
million, representing growth of 46 per cent over the second quarter of 1999.
Shire had gained 35.7 per cent of prescriptions written for ADHD in the US
compared to 25.1 per cent at June 30, 1999. Adderall is now the brand leader in
the US market for ADHD.
Sales of Agrylin, the only U.S. product licensed for the treatment of essential
thrombocythemia were $18.5 million, a 3 per cent decrease over quarter two 1999
sales of $19.2 million. Sales in quarter two 1999 were exceptionally high due to
wholesaler stock building in anticipation of a 7 per cent price increase in July
1999. Shire achieved a script share of 16.7 per cent at June 30, 2000 of the
total U.S. Agrylin market, including Hydrea and generic hydroxyurea, compared to
10.2 per cent at June 30, 1999.
Sales of Pentasa, licensed for the treatment of ulcerative colitis, at $13.2
million, were 54 per cent higher than the comparable period last year.
Prescriptions for Pentasa increased by 5 per cent during the quarter and reached
a market share of 18.0 per cent of the U.S. oral mesalamine/obsalazine market at
June 30, 2000 compared to 17.7 per cent at June 30, 1999.
Carbatrol recorded sales growth of 39 per cent from sales of $3.8 million in the
three months ended June 30, 1999 to $5.3 million in the three months ended June
30, 2000. This translates to 28.1 per cent of the US extended release
carbamazepine prescription market at the end of June 2000, compared to 17.0 per
cent at June 30, 1999.
Licensing
Licensing and development fees in the three months ended June 30, 2000 increased
by 227 per cent to $4.4 million compared to $1.3 million in the three months
ended June 30, 1999. These results reflect the variability of this income
quarter on quarter, based substantially as it is on the reimbursement of actual
costs incurred on relevant projects, in particular Reminyl. Royalties increased
by $0.2 million to $1.3 million.
<PAGE>
Cost of sales and operating expenses
Gross margin on product sales increased from 79 per cent in the three months
ended June 30, 1999 to 82 per cent in the three months ended June 30, 2000. This
is due to the faster growth rate of the higher margin products, particularly
Adderall which contributed 38 per cent of total product sales compared to 31 per
cent in quarter two 1999.
R&D expenditure increased 86 per cent to $28.6 million (1999: $15.4 million).
This rise reflects the increased costs associated with the significant
proportion of projects at Phase II or later where development costs tend to be
higher. R&D expenditure in second quarter 2000 represents 23 per cent of
revenues compared to 16 per cent in second quarter 1999.
Selling, general and administrative expenses increased by 13 per cent to $47.4
million (1999: $42.1 million). This increase reflects growth in the US sales
force and is partly offset by merger cost savings of around $6 million for the
second quarter 2000. The APB25 charge for the quarter was $0.2 million (1999:
$2,175). This substantial reduction compared to the first quarter 2000 charge of
$23.2 million reflects certain amendments to the executive share option scheme
effective from March 1, 2000 that allow for compensation for elements of this
arrangement to be recorded based upon the share price at that date, rather than
being based on our share price at each reporting date.
Depreciation and amortisation increased by 22 per cent to $7.7 million (1999:
$6.3 million). This increase reflects the amortisation charge on those
intangible assets acquired since the second quarter of 1999. Relevant
acquisitions include the buy out of the Agrylin royalties, the purchase of the
US marketing rights for Fareston and the addition of the Fuisz subsidiaries.
Income taxes
For the three months ended June 30, 2000 income taxes decreased $1.7 million
from $9.1 million to $7.4 million. The Company's effective tax rate before the
stock compensation charge was 28 per cent for the three months ended June 30,
2000 (Q2 1999: 44 per cent). The Company has recorded net deferred tax assets of
approximately $35 million. Realization is dependent upon generating sufficient
taxable income to utilize such assets. Although realization on these assets is
not assured, management believes it is more likely than not that the deferred
tax assets will be realized.
Results of operations for the six months ended June 30, 2000, as compared with
those for the six months ended June 30, 1999
Overview of financial results
Group revenues for the six months ended June 30, 2000 were $242.8 million, an
increase of $51.4 million or 27 per cent over the six months ended June 30,
1999. The Group recorded net income of $15.1 million (1999: $19.7 million). Net
income in the six months to June 30, 2000 includes an APB 25 charge of $23.5
million compared to $7.1 million in the comparative period last year.
Sales and marketing
Product sales were $231.1 million in the six months to June 30, 2000 (1999:
$180.9 million), representing an increase of 28 per cent. Of particular note,
Adderall sales at $98.9 million were 63 per cent higher than in the first half
of 1999.
Other products contributing to the overall 28 per cent increase are Agrylin
(increase of $5.2 million or 21 per cent), Carbatrol (increase of $4.5 million
or 70 per cent) and ProAmatine (increase of $1.8 million or 23 per cent).
US product sales for both the six months ended June 30, 2000 and June 30, 1999
represented 82 per cent of the group's total sales revenue.
<PAGE>
Product sales by segment 6 months to 6 months to
June 30, 2000 June 30, 1999 % change
$'000 $'000
United States 189,550 148,044 28.0
Europe 30,351 25,147 20.7
Rest of World 11,210 7,664 46.3
------------ ------------ ------------
Total product sales 231,111 180,855 27.8
------------ ------------ ------------
Licensing
Licensing and development fees in the six months ended June 30, 2000 increased
by 20 per cent to $9.3 million compared to $7.7 million in the six months ended
June 30, 1999.
Royalties increased by $0.1 million to $1.9 million.
Cost of sales and operating expenses
Gross margin on product sales increased from 76 per cent in the six months ended
June 30, 1999 to 82 per cent in the six months ended June 30, 2000. This is due
to the faster growth rate of the higher margin products, particularly Adderall,
which contributed 43 per cent of total product sales compared to 34 per cent in
the six months ended June 30, 1999.
R&D expenditure increased 73 per cent to $54.7 million (1999: $31.7 million).
This rise reflects the increased costs associated with the significant
proportion of projects at Phase II or later where development costs tend to be
higher. R&D expenditure in the six months ended June 30, 2000 represents 23 per
cent of revenues compared to 17 per cent in the comparative period last year.
Selling, general and administrative expenses increased by 37 per cent to $113.5
million (1999: $83.0 million). A significant factor is the APB25 charge for the
six months to June 30, 2000 of $23.5 million (1999: $7.1). In 2000, $23.3
million of this charge was recorded during the first fiscal quarter. The
executive share option scheme was amended effective from March 1, 2000 to allow
for compensation for this arrangement to be recorded based upon the share price
at that date, rather than being based on our share price at each reporting date.
Depreciation and amortisation increased by 22 per cent to $15.3 million (1999:
$12.5 million). As noted above, this increase reflects the amortisation charge
on those intangible assets acquired since the second quarter of 1999.
Income taxes
For the six months ended June 30, 2000 income taxes were $15.2 million,
representing an effective rate of tax on income pre APB 25 charge of 28 per
cent.
Liquidity and Financial Condition
The Company's funding requirements depend on a number of factors, including the
Company's product development programs, business and product acquisitions, the
level of resources required for the expansion of marketing capabilities as the
product base expands, increased investment in accounts receivable and inventory
which may arise as sales levels increase, competitive and technological
developments, the timing and cost of obtaining required regulatory approvals for
new products, and the continuing revenues generated from sales of its key
products.
<PAGE>
At June 30, 2000, the Company had net cash funds available as follows:
Selected data: June 30, December 31,
2000 1999
$'000 $'000
-------------- --------------
Cash and cash equivalents 89,443 54,082
Marketable securities and other
current asset investments 62,402 84,344
Debt (133,505) (135,922)
-------------- --------------
Net cash 18,340 2,504
-------------- --------------
Net cash used in operating activities in the six months ended June 30, 2000 was
$15.6 compared to $41.6 million cash provided by operating activities in the six
months to June 30, 1999. Cash payments in respect of restructuring and merger
related expenses following the acquisition of Roberts Pharmaceutical Corporation
in December 1999 are a major contributor to the outflow.
Investing activities provided $15.4 million, which mainly comprised $44.0
million on redemption of marketable securities offset by $22.0 million of cash
placed on other short term deposits, $10.3 million of proceeds from the sale of
fixed assets offset by new capital expenditure of $17.6 million and collection
on notes receivable of $0.7 million. The fixed assets proceeds relate to the
sale of the Eatontown site in New Jersey.
Financing activities provided $37.8 million, which mainly comprised proceeds
from the exercise of stock options.
Capital expenditure
Capital expenditure in the six months to June 30, 2000 included $4.2 million for
tangible fixed assets and $11.8 million for intangible assets comprising the
purchase of the exclusive rights in certain European countries of balsalazide, a
treatment for ulcerative colitis.
Other matters
As a result of the merger with Roberts Pharmaceutical Corporation, the Company
recorded pre tax charges in the fourth quarter of 1999 totalling $75.9 million
comprising restructuring costs ($43.6 million) and merger related transaction
expenses ($32.3 million). The restructuring costs included $37.9 million for
employee termination and $5.7 million of property related expenses. The
termination costs consisted of payments for severance, medical and other
benefits, outplacement counselling, pension contributions and excise taxes.
In December 1999, the decision was made to close the Roberts' office facility in
Eatontown, New Jersey and consolidate the sales and marketing operations into
the existing Shire facility in Florence, Kentucky and to transfer the research
and development activities to Shire's facility in Rockville, Maryland.
Similarly, Roberts' sales and marketing operations in the U.K. were combined
with Shire's established operation in Andover, Hampshire.
As part of the restructuring and elimination of duplicate facilities, the
Company identified a total of 147 employees to be terminated. As of June 30,
2000 all of the planned terminations were completed. The office facility in
Eatontown was closed as of April 28, 2000 whilst the U.K. duplicate facility was
closed on March 10, 2000.
<PAGE>
During the first quarter of 2000, the Company utilized $32.8 million of the
restructuring reserve. This was primarily related to payments for severance as a
result of the closure of the duplicate facilities and pension contributions.
During the second quarter of 2000, the Company utilized a further $2.8 million
of the restructuring reserve. This was in respect of employee termination costs
and property related expenses.
As of June 30, 2000 the Company had a combined reserve balance of $8.0 million,
of which $6.3 million comprised excise taxes. Management is satisfied that the
restructure programme is progressing as planned. Cost savings of approximately
$4.0 million and $6.0 million arose in the first and second quarters of the year
respectively, and it is anticipated that further benefits will arise in the
second half of the year.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
There have been no material changes in the Company's market risk exposure since
December 31, 1999. The Company's Annual Report on Form 10-K for the year ended
December 31, 1999 contains a detailed discussion of the Company's market risk
exposure in relation to interest rate market risk and foreign exchange market
risk.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
We are currently a defendant in approximately 3,000 lawsuits, in both federal
and state courts, which seek damages for, among other things, personal injury
arising from phentermine products supplied for the treatment of obesity by us
and several other pharmaceutical companies. We have been sued as a manufacturer
and distributor of phentermine, an anorectic used in the short-term treatment of
obesity and one of the products addressed by the lawsuits. If we are found
liable in some or all of these lawsuits for damages in excess of its assets, we
would be required to consider reorganizing and seeking protection in bankruptcy
or initiating insolvency proceedings. The suits relate to phentermine either
alone or together with fenfluramine or dexfenfluramine. In 136 of these suits,
the plaintiffs have specifically alleged in the complaint or subsequent
discovery that they used Oby-Cap or Oby-Trim, phentermine products produced by
us. The lawsuits generally allege the following claims:
o the defendants marketed phentermine and the other products for the
treatment of obesity and misled users about the products and the dangers
associated with them;
o the defendants failed to adequately test phentermine individually and when
taken in combination with the other drugs; and
o the defendants knew or should have known about the negative effects of the
drug and should have informed the public about such risks and/or failed to
provide appropriate warning labels.
We became involved with phentermine through the acquisition of certain assets of
Rexar Pharmaceutical Corp. in January 1994. In addition to liability as a result
of its own production of Oby-Cap, plaintiffs may seek to impose liability on us
as a successor to Rexar. Class certification has been sought for certain of the
claims made against us and the other defendants. In addition, pending federal
lawsuits have been consolidated as a multidistrict litigation in the Eastern
District of Pennysylvania.
We intend to vigorously defend all lawsuits and pursue all available reasonable
defenses. Legal expenses have thus far been paid by the insurers of our
supplier, Eon Labs Manufacturing Inc. Through approximately June 2000, Eon and
its distributors, including us, had exhausted approximately $50 million in
insurance proceeds defending the lawsuits. We have our own insurance up to a
maximum of $3 million for lawsuits filed in the period to April 28, 1998, an
unlimited indemnity given by Eon for phentermine it manufactured for us and a
limited indemnity from the former shareholders of Shire Richwood Inc. ("SRI")
given at the time of our acquisition of SRI. We have already spent a substantial
amount of resources in managing these lawsuits and will continue to do so.
Through June 2000, we were named as a defendant in approximately 3,600 lawsuits
and had been dismissed from approximately 600 of these cases. There are
approximately 2,400 additional cases pending dismissal as of June 30, 2000. In
only 136 cases pending was it alleged in the complaint or subsequent discovery
that the plaintiff had used our particular product and we have been dismissed
from 36 of these cases as well.
Reference is hereby made to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, for a description of certain other legal
proceedings to which the Company is a party.
<PAGE>
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
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule - June 30, 2000
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the quarter
ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHIRE PHARMACEUTICALS GROUP PLC
(Registrant)
Date: August 10, 2000 By: Angus C Russell
Group Finance Director
Date: August 10, 2000 By: Rolf Stahel
Chief Executive
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(27) Financial Data Schedule - June 30, 2000
