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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 0-29630
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SHIRE PHARMACEUTICALS GROUP PLC
(Exact name of registrant as specified in its charter)
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<S> <C>
ENGLAND AND WALES
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
N.A.
EAST ANTON, ANDOVER, HAMPSHIRE SP10 5RG ENGLAND
(Address of principal executive offices) (Zip Code)
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44 1264 333455
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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American Depository Shares, each representing Nasdaq National Market
3 Ordinary Shares, 5 pence nominal value
per share
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Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
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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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. / /
As of March 24, 2000, the aggregate market value of the ordinary shares,
L0.05 par value per share of the Registrant held by non-affiliates was
approximately $3,950,000,000.
As of March 24, 2000, the number of outstanding ordinary shares was
250,868,396.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Shire Pharmaceuticals Group plc's definitive Proxy Statement for
its Annual Meeting of Shareholders to be held in May 2000 are incorporated into
Part III.
THE "SAFE HARBOR" STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements included herein which are not historical facts are forward
looking statements. The forward looking statements involve a number of risks and
uncertainties and are subject to change at any time. In the event such risks or
uncertainties materialize, our results could be materially affected. The risks
and uncertainties include, but are not limited to, risks associated with the
inherent uncertainty of pharmaceutical research, product development and
commercialization, the impact of competitive products, government regulation and
approval, product liability litigation and other risks and uncertainties
detailed from time to time in our filings with the Securities and Exchange
Commission including this annual report on Form 10-K for the year ended
December 31, 1999.
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ITEM 1: BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
We are an international specialty pharmaceutical company with a strategic
focus on four therapeutic areas: central nervous system disorders, metabolic
diseases, cancer and gastrointestinal disorders. We operate and manage our
business in three geographic areas--the United States, Europe and the rest of
the world. Within these geographical segments, revenues are derived from three
sources: sales of products by our own sales and marketing operations, licensing
and development fees, and royalties. Sales and marketing operations are
principally in the U.S., the U.K. and Ireland and Canada.
We have expanded our business both organically and through acquisitions,
including a merger with Roberts Pharmaceutical Corporation in December 1999. The
merger with Roberts has provided an enhanced product pipeline, a strengthened
geographical presence and the critical mass and financial resources necessary to
capitalize on worldwide opportunities.
We were incorporated under the laws of England and Wales on January 1, 1994.
As part of a recapitalization, we acquired the entire share capital of Shire
Holdings Ltd on December 19, 1994, including the operations of Rybar
Laboratories Ltd, a U.K. based sales and marketing company acquired by our
predecessor in July 1992. In September 1995, we acquired Imperial Pharmaceutical
Services Ltd (subsequently renamed Shire Pharmaceutical Contracts Ltd), a
company specializing in the development of oral hormone replacement therapy
products for licensees. We acquired Pharmavene, Inc. (subsequently renamed Shire
Laboratories Inc.) in March 1997 and Richwood Pharmaceutical Company, Inc.
(subsequently renamed Shire Richwood Inc.) in August 1997. In October 1999, we
acquired the German, French and Italian sales and marketing subsidiaries of
Fuisz Technologies Ltd.
We are a public limited company organized under the laws of England and
Wales. Our principal executive offices are located at East Anton, Andover,
Hampshire, SP10 5RG, England and the telephone number is 44 1264 333455.
In this report, the term the "Company" refers to Shire Pharmaceuticals Group
plc and its subsidiaries unless the context indicates otherwise.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Substantially all of our revenues, operating profits or losses and assets
are attributable to one line of business, the acquisition, development and sale
of pharmaceutical products in three geographical segments, the United States,
Europe and the rest of the world.
(C) DESCRIPTION OF BUSINESS
STRATEGY AND APPROACH
Our strategy is to develop products primarily for our own specialty
marketing in the major countries of the world. The key elements of our operating
strategy are described below:
- MARKET PROPRIETARY PRODUCTS THROUGH OUR OWN SALES FORCE.
We believe that higher financial returns can be achieved by marketing our
products directly, as opposed to receiving royalties on licensees' sales. The
1999 acquisition of marketing subsidiaries from Fuisz Technologies Ltd in
Germany, France and Italy represents the first step towards building expanded
direct sales and marketing capability in continental Europe.
- FOCUS ON CNS DISORDERS, METABOLIC DISEASES, GASTROINTESTINAL DISORDERS AND
CANCER
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The merger with Roberts Pharmaceutical Corporation broadens our therapeutic
focus from central nervous system disorders and metabolic diseases to include
cancer and gastrointestinal disorders. We believe that due to the specialized
nature of these diseases, our focused sales force can effectively market to high
volume prescribers.
- MANAGE OPERATING AND FINANCIAL RISK BY MAINTAINING A BROAD AND BALANCED
PORTFOLIO AND SELECTIVELY INVOLVING MULTINATIONAL PARTNERS IN RETURN FOR
OUT-LICENSING PRODUCT MARKETING RIGHTS.
We have a portfolio of six key U.S. marketed products, each with significant
potential. The development pipeline has 13 projects, one of which is in
registration and nine of which are post Phase II. As the Company increases in
size there are likely to be fewer occasions where out-licensing of marketing
rights will be appropriate. However, we remain committed to ongoing
collaborations such as that with Janssen, the co-development and licensing
partner for galantamine (Reminyl) in the treatment of Alzheimer's disease.
- SALES AND MARKETING
We intend to use our existing sales and marketing infrastructure to sell and
market most of our internally developed products. Our sales and marketing
operations in the U.S., U.K., Ireland, continental Europe and Canada presently
consist of 432 sales representatives. We believe that our sales and marketing
infrastructure can be expanded rapidly to meet product opportunities.
CURRENTLY MARKETED PRODUCTS
The table below lists our key currently marketed products by therapeutic
areas, indicating the owner or licenser of the product, the marketer of the
product and the territory where the product is being marketed.
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MARKETED
PRINCIPAL BY/RELEVANT
PRODUCTS INDICATION(S) OWNER/LICENSER TERRITORY
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TREATMENTS FOR CENTRAL NERVOUS SYSTEM DISORDERS
Adderall ADHD Shire Shire/U.S.
DextroStat ADHD Shire Shire/U.S.
Carbatrol Epilepsy Shire Shire/U.S.
TREATMENTS FOR METABOLIC DISEASES
Calcichew range Osteoporosis adjunct Nycomed Shire/U.K. and
Ireland
TREATMENTS FOR CANCER
Agrylin Elevated blood platelets Shire Shire/U.S. and
Canada
ProAmatine Low blood pressure Nycomed Shire/U.S. and
Canada
TREATMENTS FOR GASTROINTESTINAL DISORDERS
Pentasa Ulcerative colitis Ferring Shire/U.S.
</TABLE>
TREATMENTS FOR CENTRAL NERVOUS SYSTEM DISORDERS
- ADDERALL AND DEXTROSTAT. Attention deficit hyperactivity disorder is a
central nervous system disorder of unknown cause and is characterized by varying
degrees of inattention, impulsivity and hyperactivity. ADHD is primarily a
childhood disorder, although it is increasingly being recognized as continuing
through adolescence and into adulthood. According to IMS America, the U.S.
market for treatments for ADHD was approximately $614 million for the year ended
December 31, 1999. It is
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estimated that between three and five percent of children in the U.S. suffer
from the condition. U.S. Drug Enforcement Agency Schedule II products,
specifically methylphenidate and amphetamines, are currently the only approved
first line treatments for ADHD available. Our approved ADHD products, Adderall
and DextroStat, are branded psychostimulants. DextroStat is a branded generic
formulation of dextroamphetamine. We believe that Adderall, a unique combination
of four amphetamine salts, is generally administered in fewer daily doses than
its major competitors, eliminating the need for a dose during school hours.
According to IMS America, retail sales of Adderall and DextroStat represented
approximately 25% of the aggregate ADHD market for the year ended December 31,
1999 with our percentage of the market increasing from 20.4% in December 1998 to
30.5% in December 1999.
In the year ended December 31, 1999, sales of Adderall were $142.0 million,
representing approximately 35% of our total revenues. As a result, factors
adversely affecting the sale or production of Adderall would have a material
adverse effect on our financial condition and results of operation.
An incident in August 1998 at Arenol Corporation, our previous supplier of
the active ingredients for Adderall halted production for a total of 84 days.
The manufacture of these ingredients was transferred to the premises of B.I.
Chemicals, Inc. In July 1999, we purchased certain assets related to the
production of Adderall's active ingredients. In addition, production of the raw
materials for Adderall was transferred from Arenol to B.I. If a similar incident
were to occur at B.I., sales of Adderall would be adversely affected.
Other factors which could adversely affect sales of Adderall include:
- development of competitive pharmaceuticals;
- technological advances;
- increased production costs;
- marketing or pricing actions by Shire's competitors;
- changes in prescription writing practices;
- the occurrence of adverse reactions to Adderall;
- changes in reimbursement policies of third-party payers; and
- product liability claims
- CARBATROL. Approximately 2.5 million people in the U.S. suffer from
epilepsy. Epilepsy is characterized by an episodic disturbance of consciousness
during which seizure activity occurs in the brain. Carbatrol is an extended
release formulation of carbamazepine, an approved compound for the treatment of
epilepsy. Carbatrol is designed to improve compliance by delivering steady blood
levels of drug over 24 hours, when taken twice daily. It can be administered as
a capsule or sprinkled on food and can be taken with or without meals.
Carbamazepine is one of the most widely prescribed antiepilectic drugs
accounting for approximately 23% of total prescriptions written in 1999 for
antiepilectic drugs dispensed in the U.S. Prescription numbers for Carbatrol
increased from 16,000 in January 1999 to 46,000 in December 1999.
The FDA approved Carbatrol on September 30, 1997 for marketing in the U.S.
Carbatrol was originally out-licensed to Athena, a subsidiary of Elan
Corporation plc. In December 1997, we reacquired the worldwide rights to
Carbatrol, together with inventory and certain plant and equipment for
$25 million. We launched Carbatrol in the U.S. in June 1998. Effective
March 31, 1999, we terminated our promotion agreement with Athena, and now
promote the product on our own.
In 1994, we obtained a patent in the U.S. covering the formulation of
Carbatrol with an expiration date of 2011. Patent applications covering this
technology are pending in other countries.
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In the year ended December 31, 1999, sales of Carbatrol were $16.0 million
representing 4% of our total revenues.
TREATMENTS FOR METABOLIC DISEASES
Osteoporosis is characterized by a progressive loss of bone mass which
renders bone fragile and liable to fracture. More than three million people in
the U.K. are estimated to suffer from this condition. Osteoporosis affects both
sexes but is more rapid and profound in women, largely as a result of the
decline in estrogen production following menopause. Our principal products for
the treatment of osteoporosis are the Calcichew range of calcium and
calcium/vitamin D supplements which are sold mainly in the U.K. and Ireland,
although certain of the ClimaRange and BetaRange products include osteoporosis
as an indication in their licenses. Our Calcichew range includes, among others,
Calcichew, Calcichew D(3) and Calcichew D(3) Forte, which are used as adjuncts
to other therapies and which we believe are more palatable than alternative
products. We held a leading position in the L15 million (approximately
$24.5 million) U.K. prescription calcium market with a market share of
approximately 73% for the year ended December 31, 1999.
TREATMENTS FOR CANCER
- AGRYLIN. In 1991, we obtained an exclusive worldwide license from
Bristol-Myers Squibb to develop, market and sell Agrylin (anagrelide), which has
been developed as an oral treatment for thrombocythemia, a blood disorder
characterized by high blood platelet counts which could result in abnormally
high incidence of adverse blood clotting events, including heart attack and
stroke. There is evidence that some patients with increased platelet counts have
thrombosis or hemorrhage which can be treated successfully by lowering the
platelet count. Agrylin is intended to inhibit excessive platelet production and
reduce the morbidity and mortality of heart attack and stroke in thrombocytosis
patients.
In March 1997, we received notification from the FDA that the NDA for
Agrylin was approved. Active marketing and sales activities commenced in the
second quarter of 1997. There is no other FDA approved treatment available for
thrombocythemia. Other current therapies used to reduce excessive platelet
production have distinct disadvantages, such as leukemogenesis, leukopenia and
anemia. Further, Agrylin has been designated by the FDA as an Orphan Drug, a
status which entitles us to seven years of market exclusivity. In
December 1997, we filed an application with the FDA to expand the indications of
Agrylin to include polycythemia vera. In December 1998, we received approval for
the expanded indication for Agrylin for thrombocytosis secondary to
myeloproliferative diseases, including polycythemia vera and chronic myelogenous
leukemia.
In June 1998, the U.S. Department of Commerce, Patent and Trademark office
issued a patent covering an improved process for manufacturing anagrelide HCl,
the active ingredient in Agrylin. Currently, anagrelide is commercially prepared
utilizing a time consuming and difficult synthesis involving a starting material
possessing environmentally unfriendly properties. The new process, which
eliminates this precursor material and greatly simplifies the synthesis,
represents both an environmentally sound and a significantly more economical
method of manufacture. The patent for this new process expires in 2017.
In the year ended December 31, 1999, sales of Agrylin were $32.6 million,
representing 8.1% of our total revenues.
- PROAMATINE. In 1996, ProAmatine was given accelerated approval by the
FDA as a new drug for life-threatening illnesses and is currently the only FDA
approved treatment available in the U.S. for orthostatic hypotension. This is a
condition involving low blood pressure upon assuming an upright posture,
resulting in dizziness, weakness or unconsciousness. ProAmatine has been
designated as an
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Orphan Drug by the FDA, giving a seven year period of market exclusivity in the
U.S. Sales of ProAmatine in 1999 were $19.8 million, representing 4.9% of our
total revenues.
TREATMENTS FOR GASTROINTESTINAL DISORDERS
- PENTASA. In April 1998, exclusive U.S. marketing rights to Pentasa were
acquired from Hoechst Marion Roussel for $125 million. Pentasa is a patented
gastrointestinal drug for the treatment of ulcerative colitis. This drug
addresses a market of over 2 million patients in the U.S. Sales of Pentasa in
1999 were $51.8 million, representing 12.9% of our total revenues.
PRODUCTS UNDER DEVELOPMENT
We seek to maintain a broad and balanced approach to our development of new
products and have historically leveraged third-party research and development
expertise. This strategy has declined over time and we now focus primarily on
independently developing projects for our own marketing. We have entered into
collaborative arrangements with, among others, Janssen Pharmaceutica NV, a
subsidiary of Johnson & Johnson, and Novartis. Recognizing the inherent risks in
drug development, our policy is to manage this risk by maintaining a broad range
of products in different development phases. We aim to optimize the level of
fixed overhead by using contract research organizations to manage multi-center
and/or international clinical trials on a day-to-day basis. In the year ended
December 31, 1999, we spent approximately $77.5 million on research and
development.
The table below lists our key products under development by therapeutic
area, indicating their development status, their territorial rights and
licenses, if any.
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PRINCIPAL TERRITORIAL
PRODUCTS INDICATION(S) STATUS RIGHTS LICENSEE(S)
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TREATMENTS FOR CENTRAL NERVOUS SYSTEM
DISORDERS
Reminyl (galantamine) Alzheimer's disease In registration Global Janssen
(approved in Sweden)
Dirame Moderate/mod- Phase III Global
erately severe pain
SLI381 ADHD pre Phase III Global
SPD417 Bipolar disorder pre Phase III Global
SPD503 ADHD Pre-clinical Global
SPD412 Epilepsy Phase I Global
SPD418 Epilepsy Pre-clinical Global
SPD421 Epilepsy Phase I Global
SPD502 Stroke Phase I Global excl.
Nordic and
Baltic
countries
TREATMENTS FOR METABOLIC DISEASES
Lambda High blood Phase III Global
phosphate levels in
patients with
kidney failure
</TABLE>
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<TABLE>
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PRINCIPAL TERRITORIAL
PRODUCTS INDICATION(S) STATUS RIGHTS LICENSEE(S)
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TREATMENTS FOR GASTROINTESTINAL DISORDERS
Pentasa Ulcerative colitis Phase III U.S.
Emitasol Nausea and vomiting pre Phase III U.S., Canada
and Mexico
TREATMENTS FOR CANCER
SPD424 Prostate cancer Phase III North America,
Europe
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TREATMENTS FOR CENTRAL NERVOUS SYSTEM DISORDERS
- REMINYL (GALANTAMINE) FOR ALZHEIMER'S DISEASE. Alzheimer's disease is
characterized by loss of memory, particularly for recent events, confusion and
disorientation, followed by gross intellectual disturbances, personality changes
and emotional disintegration. It is progressive, with death usually occurring
within five to nine years following the onset of symptoms. Patients with
Alzheimer's disease have been shown to have reduced levels of the
neurotransmitter acetylcholine ("ACh"), which is broken down by
acetylcholinesterase. Improvements in cognition have been achieved in patients
using acetylcholinesterase inhibitors. Galantamine, a naturally occurring
alkaloid, is an inhibitor of acetylcholinesterase, which in turn increases the
level of ACh. We are co-developing Reminyl for the treatment of Alzheimer's
disease with Janssen. It is estimated that eight million people in the U.S. and
Western Europe suffer from Alzheimer's disease.
In July 1998, Phase III results for galantamine were announced at the 6(th)
International Conference on Alzheimer's Disease and Related Disorders in
Amsterdam. Results presented were for two pivotal six month Phase III studies
conducted by Janssen Research Foundation, an affiliate of Johnson & Johnson,
which is co-developing galantamine with us. An in vitro study of nicotinic
effects of the drug was also presented.
In a double-blind, placebo-controlled U.S. trial involving 636 patients with
mild to moderate Alzheimer's disease, study participants were tested using the
cognitive portion of Alzheimer's Disease Assessment Scale (ADAS-cog). This scale
is commonly used to assess memory and learning skills such as word recall and
recognition, ability to remember test instructions, and accuracy in naming
objects and figures. Among those who completed the study, patients who took
galantamine achieved cognitive scores that were an average of 3.7 to 3.8 points
higher than individuals who received placebo. In a second study carried out
across eight European countries and involving 653 patients, those who were
treated with galantamine and completed the study had average ADAS-cog scores
after treatment that were up to 4.1 points higher than patients on placebo. As
expected, adverse events in both studies were typically cholinergicin in nature
with nausea, vomiting and other gastrointestinal side effects occurring at
approximately two to four times placebo rate. These side effects were usually
transient, generally subsiding within one week.
Unlike other agents, galantamine appears to act on the brain's nicotinic
receptors. The "modulation" of these receptors could lead to an increase in
release of several neuro-transmitters, including ACh. Further investigation is
required to determine the clinical significance and potential impact of this
additional mechanism of action.
On March 31, 1999, we announced the first European regulatory submission for
galantamine. Reminyl received its first regulatory approval within the European
Union from Sweden on March 3, 2000. Reminyl will subsequently be submitted
through the EU Mutual Recognition Procedure for marketing approval in the E.U.
It is anticipated that Reminyl will be launched using natural galantamine
extracted from daffodil bulbs. Although the necessary supply agreements are in
place, there can be no assurance that adequate
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supplies of daffodil bulbs of a suitable quality will be available or that the
supplier will be able to supply sufficient galantamine of the required quality.
We also expect, along with Janssen, to seek regulatory approval for the
synthetic manufacture of galantamine, which may be delayed or withheld. We will
be relying on Janssen and Waldheim Pharmaceutica for the supply of synthetic
galantamine of suitable quality and there can be no assurance that adequate
supplies will be available.
- DIRAME. Dirame is an orally administered centrally-acting analegesic for
treating moderate to moderately severe pain. In total, over 4000 patients have
been treated with Dirame. We believe that Dirame could have a favorable
side-effect profile especially in terms of low addiction potential. Exclusive
worldwide rights to Dirame were acquired from Bayer. The analgesic market is
approximately $3.5 billion in the U.S. The compound could have applications in
several therapeutic categories including pain associated with cancer, advanced
arthritis and post-surgical pain.
- ADHD PRODUCTS. We have initiated two development programs focused on
products for the treatment of ADHD.
- SPD 502. In February 1998, we in-licensed from NeuroSearch A/S a series
of AMPA antagonists for CNS disorders including the acute treatment of stroke.
Primary focus will be on the development of the lead compound SPD 502, which is
in early clinical development.
There are two types of strokes: ischemic and the less common hemorrhagic. An
ischemic stroke occurs after a blood clot starves the brain of oxygen. During
periods of ischemia (resulting from stroke or other causes), glutamate, a potent
cell toxin is released in the brain. In animal models of ischemia, AMPA
antagonists inhibit toxic effects of glutamate and reduce the amount of brain
damage. Stroke is the leading cause of adult disability in the western world,
with a prevalence of 500-800 per 100,000. It accounts for 10% of all deaths in
men and 17% of deaths in women. Around three-quarters of patients who survive a
stroke will suffer some sort of disability, and contribute significantly to
healthcare costs. It is estimated that the yearly costs to treat stroke victims
in the U.S. are $30 billion.
TREATMENTS FOR METABOLIC DISEASES
- LAMBDA. Lambda (lanthanum carbonate) is being developed for the
prevention and treatment of hyperphosphataemia in patients with chronic kidney
failure. Hyperphosphatemia, meaning high levels of phosphate in the blood, is a
condition arising from the inability of damaged kidneys to eliminate the excess
dietary phosphate which is widespread in food. Renal dialysis and a restricted
diet are generally unable to reduce these phosphate levels sufficiently. If left
untreated, hyperphosphatemia can result in renal osteodystrophy, a painful
condition with similarities to osteoporosis, in which there are abnormalities in
the formation and structure of bone. Lambda is designed to be administered with
food and act as a "phosphate binder," forming an insoluble phosphate salt in the
intestine, causing the phosphate salt to be eliminated in the faeces.
It is estimated that there are 650,000 patients worldwide with end-stage
renal disease. We believe that the market for Lambda could grow because of its
potential to be used predialysis. In addition, we believe that current therapies
are not ideal: aluminium salts can cause neural toxicity and are no longer
widely used; calcium salts are inefficient binders requiring large doses and
often cause hypercalcemia, which among other things, can result in calcification
of blood vessels.
Lambda is currently undergoing Phase III clinical trials in Europe and the
U.S. following positive interim Phase II results. The pre-planned interim
analysis of Phase II showed that of the 28 patients treated, 26 re-established
control of their blood phosphate concentrations below the target level set for
the study. Adverse events were generally mild and transient. Phase I trials of
Lambda have also commenced in Japan under the "In-Country Caretaker Scheme".
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TREATMENTS FOR GASTROINTESTINAL DISORDERS
- PENTASA. Pentasa 250mg, which is currently licensed in the U.S., is used
to treat ulcerative colitis. As part of the acquisition of Pentasa from Hoechst
Marion Roussel, we received U.S. rights to a 500mg tablet, which is currently in
Phase III development. The new 500mg tablet formulation will aid the compliance
of patients who often need to take large doses.
- EMITASOL. Emitasol is an intranasal form of metoclopramide, an existing
anti-nausea drug currently available in oral and injectable forms. Emitasol will
shortly enter Phase III clinical trials. We have been contracted by
RiboGene, Inc. to develop this product and RiboGene, Inc. will provide up to
$7 million in funding for the development of the product.
TREATMENTS FOR CANCER
- SPD424. We are developing a compound to treat prostate cancer designated
SPD424. This compound in a patented delivery system has been licensed
exclusively to us for use in North America and Europe and has completed Phase II
clinical trials. We acquired the rights from Hydro Med Sciences to a patented
hydrogel implant delivery technology for use in the development of SPD424 for
the hormonal treatment of prostate cancer. SPD424 is a synthetic gonadotropic
hormone releasing factor agonist that, due to its long-term inhibition of
pituitary release of gonodatrophins, can block both ovarian and testicular
function. The hydrogel implant employs a proprietary technology that delivers
therapeutic agents at a controlled, constant release rate for more than one
year. It is a retrievable subcutaneous implant that can be inserted in a
physician's office using a local anesthetic.
DRUG DELIVERY TECHNOLOGIES
We have a platform of five drug delivery technologies that can be applied to
drugs in order to enhance their effectiveness or their convenience to patients
in terms of dosage regimen. Generally, this involves reformulating the drug into
a new delivery system designed either to enhance the absorption of the drug into
the blood stream or, alternatively, to delay absorption of the drug into the
bloodstream, thereby requiring the patient to take fewer daily doses.
Our portfolio of drug delivery technologies includes a number of
technologies designed to improve the oral delivery of drugs, a technology
designed to provide an extended release drug delivery profile and a system to
provide enhanced solubility and extended release delivery. These technologies
can be made available to third parties in return for development fees,
milestones and royalties. We also intend to employ these technologies
selectively to products being developed internally where the characteristics of
the product can be improved or modified to secure a competitive advantage.
MANUFACTURING AND DISTRIBUTION
We manufacture finished product and package our Schedule II drugs at our
9,700 square foot facility in Valley Stream, New York. Due to control and
capacity issues that arose during the previous ownership, we undertook a
complete renovation of the facility in 1995. This included hiring new
management, replacing virtually all of the manufacturing equipment and
modernizing the laboratory.
Adderall is manufactured solely by us in compliance with specifications and
quality standards that were developed internally and reviewed by the FDA. Until
August 1998, raw materials for Adderall were manufactured solely by
Arenol, Inc. Arenol's factory was destroyed following an explosion in
August 1998 and raw material manufacturing was transferred to B.I.'s plant in
Petersburg, Virginia. At the current time, the Company believes that B.I. is the
only manufacturer available for three out of the four active ingredients in
Adderall and that potential additional manufacturers are few due to the very
limited number of FDA and DEA manufacturers for the class of active ingredients
in Adderall. If B.I. suffered a similar incident to that which occurred at
Arenol, sales of Adderall would be adversely affected.
In July 1999, we purchased certain assets from Arenol related to the
production of Adderall's active ingredients.
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In July 1997, we concluded the purchase of a 100,000 square foot
pharmaceutical manufacturing facility previously operated by Monsanto's Searle
Division located in Oakville, Ontario, Canada. The facility is approved by the
Health Protection Branch of the Canadian Ministry of Health. We expect to
receive FDA accreditation within the next twelve months.
In January 1999, we sold our 17,000 square foot Indianapolis, Indiana plant,
together with the products manufactured at that facility. All other products are
either manufactured and/or packaged in Valley Stream, New York or by third party
contract manufacturers.
Our 5,900 square foot distribution center, which includes a large vault to
house DEA regulated Schedule II products, is located in Florence, Kentucky. From
there, we distribute our ADHD products to nearly all the wholesale distribution
centers and the three major warehousing pharmacy chains that stock Schedule II
drugs in the U.S., providing access to nearly all pharmacies in the U.S.
In October 1997, we completed the acquisition of an approximately 70,000
square foot distribution facility located in a suburb of Chicago. Distribution
from this facility commenced in the second quarter of 1998.
All products marketed by the U.K. based sales and marketing operation are
either manufactured and supplied by the originator of the product under supply
arrangements or are manufactured for Shire by third parties under contract.
Distribution in the U.K. and Ireland and to export territories is also
contracted out to third parties. We have access to all principal drug wholesale
chains in the U.K. and Ireland and their respective distribution centers.
In both the U.S. and the U.K., a small number of large wholesale
distributors control a significant share of each market. In recent years the
number of independent drug stores and small chains has decreased as a result of
consolidation. Consolidation or financial difficulties could cause customers to
reduce their inventory levels, or otherwise reduce purchases of our products.
In the U.S., our customers include McKesson Corp., Bergen Brunswig Corp. and
Cardinal Health Inc. In the U.K., our customers include The Boots Company PLC,
AAH Pharmaceuticals Ltd and Unichem Plc. For the fiscal year ended December 31,
1999, our two largest customers accounted for approximately 25% and 14% of total
revenues, respectively. The loss of either of these customer accounts could have
a material adverse effect on our financial condition and results of operations.
INTELLECTUAL PROPERTY
An important part of our business strategy is to protect our products and
technologies through the use of patents, proprietary technologies and
trademarks, to the extent available. Our policy is to seek patent protection
whenever possible in the U.S., major European countries and Japan. Where
practicable, we seek patent protection in other countries on a selective basis.
In all cases, we will either obtain patent protection ourselves or support
applications by our licensers. Our largest marketed product is not protected by
patent; however, the formulation and manufacturing controls associated with the
product require certain technical information, which we believe are only
available to us and to certain of our suppliers that have signed confidentiality
agreements.
Our licensers have obtained patent protection or made applications for
patent protection for the use of galantamine for the treatment of Alzheimer's
disease. Generally this protection will be by either method of treatment claims
in the U.S. or by Swiss-type use patents directed to the use of the
pharmaceutical agent in connection with the manufacture of a product for use
with the new medical indication. The patents and patent applications relating to
the phosphate binder under development by Shire for use in the treatment of
hyperphosphatemia contain both Swiss-type use claims and formulation claims
directed to the phosphate binder under development. The patent and patent
applications for our product relating to the use of hyaluronic acid and its
salts in improving the effectiveness of certain therapeutic agents in the
treatment of acne contain both Swiss-type use claims and formulation claims.
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Patents have been issued or applications made in relation to our process
technologies and, where appropriate, in respect of the formulation of products
made by those processes or incorporating those technologies.
We also rely on trade secrets, unpatented know-how and technological
innovations, trademarks and contractual arrangements with third parties to
maintain and enhance our competitive position in situations where we are unable
to obtain patent protection or our marketed products are not covered by specific
patents.
In the regular course of business, we are a party to litigation or other
proceedings relating to intellectual property rights. We cannot assure you that
our patents or patent applications or those of our third party manufacturers
will provide valid patent protection and will not be revoked as a result of
proceedings by third parties. If patents are granted to other parties that
contain claims having a scope that is interpreted by the relevant authorities to
cover any of our products or technologies, there can be no guarantee that we
will be able to obtain licenses to such patents or make other arrangements at
reasonable cost, if at all. Competitors or potential competitors may have filed
applications for, been granted patents for, or obtained additional patents and
proprietary rights that may relate to products and/or technologies competitive
with our products or those of our licensees.
We cannot assure you that our patents or those of our licensers will
ultimately be held valid or that efforts to defend any patents or know-how or
other intellectual property rights would be successful. An adverse outcome in
any litigation or proceeding could have a material adverse effect on the sale or
development of the product or technology in question and lead to the abandonment
or delay in development or sale of that product or technology and lead to
additional expenses.
COMPETITION
The manufacture and sale of pharmaceuticals is highly competitive. Many of
our competitors are large, well known pharmaceutical, chemical and health care
companies that have considerably greater financial, sales, marketing and
technical resources. Additionally, many of our present and potential competitors
have research and development capabilities that may allow them to develop new or
improved products that compete with our products. The pharmaceutical industry is
characterized by rapid product development and technological change. Our
pharmaceutical products may be rendered obsolete or uneconomical by the
development of new pharmaceuticals to treat the conditions addressed by our
products or as the result of either technological advances affecting the cost of
production or marketing or pricing action by competitors.
We believe that competition in our markets is based on, among other things,
product safety, efficacy, convenience of dosing, reliability, availability and
price. Companies with greater resources and larger research and development
expenditures have a greater ability to fund research and clinical trials
necessary for regulatory applications, and may have an improved likelihood of
obtaining approval of drugs that would compete with our drugs. Prior regulatory
approvals for competing products would force our development products to compete
with an established drug. Other products now in use or under development by
others may be more effective or have fewer side effects than our current or
future products. For example, we are aware of a number of products which may
compete with Reminyl, including: Aricept by Pfizer Inc.; Exelon by Novartis
Pharma A.G., and propentofylline by Hoechst Marion Rousell Ltd. Of these,
Aricept and Exelon have been launched in certain countries, while
propentofylline is still in development or registration. Lambda's principal
competitor is likely to be RenaGel, which was launched in 1998. The product was
developed by GelTex Pharmaceuticals, Inc. and is marketed by Genzyme Corporation
General Division.
In addition, we are aware of efforts by competitors to develop both improved
formulations of existing Schedule II drugs and new, non-Schedule II drugs, for
the treatment of ADHD. For example, Alza Corporation, Novartis (in collaboration
with Elan Corporation plc), Medeva plc (in collaboration
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with Eurand Group) and Noven Pharmaceuticals, Inc. are believed to be developing
extended release, once-a-day formulations of methylphenidate while Celgene
Corporation and Medeva plc (believed to be collaborating with Chiroscience
Group plc) are both working to develop a single isomer version of
methylphenidate. Glaxo Wellcome plc, Eli Lilly and Company, Bristol-Myers Squibb
(in collaboration with Sano Corporation) and Abbott Laboratories are believed to
be developing non Schedule II products for ADHD. Should any of these products be
approved by the FDA, they could have a material adverse effect on the sales of
Adderall, which represented approximately 35% of our total revenues for the year
ended December 31, 1999.
PRINCIPAL LICENSING AND COLLABORATIVE AGREEMENTS
- - NEUROSEARCH A/S--CNS DISORDERS
In February 1998, we entered into a development and license agreement with
NeuroSearch A/S by which NeuroSearch granted us an exclusive license to certain
of its information and patent rights with respect to treatment for CNS disorders
in exchange for milestone and royalty payments. Our marketing rights to the
products extend throughout the world excluding Denmark, Norway, Sweden, Finland,
Iceland, Lithuania, Estonia and Latvia. The agreement remains in effect so long
as any royalty payments are due to NeuroSearch under the agreement.
- - NYCOMED--CALCIUM PRODUCTS
We entered into two principal agreements with Nycomed in January 1987 and
May 1992 by which Nycomed granted to us distribution rights for its calcium
range of products in the U.K. and Ireland and certain export territories. The
agreements, which remain in force until 2004 and 2002, respectively, will
continue after these dates for further periods of three years unless terminated
by 12 months written notice. Under the agreements, Nycomed undertakes to supply
exclusively us with the products for the U.K. and Ireland.
- - NOVARTIS--ORAL HRT PRODUCTS
In August 1995, we entered into a license agreement with Novartis, under
which we granted Novartis an exclusive license for the manufacture, marketing
and sale of all the ClimaRange products throughout the world excluding the U.S.,
Japan, South Africa, certain other African countries, the U.K. and Ireland for
an initial period of 10 years commencing on the issue of the first product
license. Novartis has an option, subject to certain limitations, to extend its
rights to the ClimaRange products in these countries. We also granted to
Novartis a first option to purchase (on terms to be agreed between the parties)
the exclusive rights to manufacture and sell any products developed by us which
are similar to or derived from the ClimaRange products. We have obtained
approval for product license applications for each of the first five ClimaRange
products under the decentralized application procedure for the European
Community. Under the license agreement, Novartis has made milestone payments to
us upon the completion of studies, submission of product license applications
and grant of product licenses in identified territories. Novartis will also pay
royalties on sales of the ClimaRange products in the licensed territories.
Novartis has launched ClimaRange products in seven countries. In those countries
where Novartis indicates that it does not intend to launch the products, we
intend to negotiate with Novartis for the return of the rights to these products
in such territories.
- - VARIOUS GALANTAMINE AGREEMENTS
Pursuant to an agreement with Synaptech Inc., the owner of the patents on
galantamine for use in the treatment of Alzheimer's disease, we have undertaken
technical, pre-clinical and clinical work on the use of Reminyl in Alzheimer's
disease. We initially paid Synaptech an up front payment of L1 million
(approximately $1.6 million) which was accounted for as a development cost, and
have agreed to pay royalties on sales of Reminyl. We have also entered into a
co-development agreement with Janssen under which we licensed to Janssen all of
our clinical data and know-how relating to the
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use of galantamine in Alzheimer's disease worldwide, except for the U.K. and
Ireland. The agreement provides for a one-time upfront payment, a milestone
payment and the reimbursement of development costs. The upfront and milestone
payments were recognized as licensing and development income when they became
due. Under these arrangements, Janssen undertook to finance substantially all
the future research and development costs of Reminyl as a treatment for
Alzheimer's disease and to conduct clinical trials, obtain regulatory approvals
and manufacture and market Reminyl. As a result, we are dependent on Janssen for
any revenues derived from Reminyl. Moreover, there can be no assurance that our
interests will continue to coincide with Janssen.
Our rights to develop, manufacture and sell Reminyl for use in the treatment
of Alzheimer's disease under the patents of Synaptech extend throughout the
world but exclude North America, Korea, Taiwan, Thailand and Singapore. We have,
in turn, entered into a sub-license with Janssen under which we granted Janssen
exclusive rights to develop, manufacture and sell Reminyl for use in Alzheimer's
disease in all territories licensed to us except the U.K. and Ireland. We also
have the right to reacquire the rights to sell Reminyl in one of a specified
group of major European countries. Janssen has entered into a separate license
agreement with Synaptech covering North America, Korea, Taiwan, Thailand and
Singapore. Synaptech authorized us to enter into the above co-development
agreement and the above sub-license agreement with Janssen, under which, among
other things, we will receive royalties on sales of Reminyl by Janssen in the
U.S.
The co-development agreement and sub-license granted to Janssen may be
terminated by Janssen on 90 days' notice. If Janssen exercises its right to
terminate the license and co-development agreement under this provision, the
licenses granted to Janssen terminate and Janssen is also obligated to transfer
to us data and other information and responsibility for the management of
continuing development and registrations of the product. The costs of ongoing
studies will be shared by us and Janssen in the relevant proportions in the
agreement for three months after the date of termination except for the costs
payable for clinical trials, which will be shared until they can be properly
terminated. Under the agreement, we have the right to complete the registration
of the products and seek alternative partners.
We have had a continuing relationship with MacFarlan Smith Limited ("MS"), a
subsidiary of Meconic plc, since October 1991 under which MS produces
galantamine for use in our clinical trials. In June 1997, we concluded
agreements with MS and Janssen for the procurement of daffodil bulbs by MS and
the extraction from those bulbs of galantamine for use in the production of
galantamine for commercial launch of the product. Under these arrangements, it
is anticipated that MS will arrange for the production, planting and harvesting
of daffodil bulbs in sufficient quantities to provide the worldwide launch stock
for the product and will also construct a plant to undertake the extraction of
galantamine with an agreed maximum plant cost of L7 million (approximately
$11.2 million). Reciprocal arrangements have been concluded with Janssen, which
will bear the entire cost other than a proportion relative to the supply of
bulbs and product for sale by us in the U.K. and Ireland. These arrangements
with MS may be terminated by us and Janssen.
- - JOHNSON MATTHEY--LAMBDA
Johnson Matthey plc has applied in the U.S., Europe and elsewhere for
patents for the use of lanthanum carbonate for the treatment or prevention of
hyperphosphatemia. In February 1996, we entered into an agreement with Johnson
Matthey under which Johnson Matthey granted to us an exclusive license agreement
to develop, manufacture, use and sell Lambda worldwide. Under the license
agreement, in return for an exclusive license expiring on the expiration of the
relevant patent, we will pay an upfront payment and a royalty on sales of
Lambda. We have consented to the assignment by Johnson Matthey of its patents to
AnorMed Inc., a Canadian company, which is partially owned by Johnson Matthey.
As part of these arrangements, we amended the agreement and received an
exclusive worldwide license to use Johnson Matthey's manufacturing know-how in
return for upfront payments and royalties.
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GOVERNMENT REGULATION
The clinical development, manufacturing and marketing of our products are
subject to regulation by various authorities in the U.S. and the E.U., including
the FDA, the DEA and the Occupational Safety and Health Administration and in
the U.K., principally the Medicines Control Agency. The Federal Food, Drug, and
Cosmetic Act, the Public Health Service Act in the U.S. and numerous directives
and guidelines in the E.U. govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of our
products. Product development and approval within these regulatory frameworks
takes a number of years and involves the expenditure of substantial resources.
Regulatory approval is required in the major markets in which we or our
licensees seek to test or market products. At a minimum, approval requires the
evaluation of data relating to the quality, safety and efficacy of a product for
its proposed use. The specific types of data required and the regulations
relating to this data differ depending on the territory, the drug involved and
the stage of development.
In general, for a new chemical entity, a product needs to undergo rigorous
preclinical testing before it can be used in humans, both in the laboratory and,
until suitable alternative tests are found, in animals. Clinical trials for new
products are typically conducted in three sequential phases that may overlap. In
Phase I, the initial introduction of the pharmaceutical into healthy human
volunteers, the emphasis is on testing for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to determine the initial
efficacy of the pharmaceutical for specific targeted indications, to determine
dosage tolerance and optimal dosage and to identify possible adverse side
effects and safety risks. Once a compound is found to be effective and to have
an acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to more fully evaluate clinical outcomes.
In the U.S., data need to be submitted to the FDA as part of an Initial New
Drug submission which, unless the FDA objects, will become effective 30 days
following receipt by the FDA; Phase I studies in human volunteers may commence
only after this lack of objection. Prior regulatory approval for human volunteer
studies is not required in the U.K., although the same level of testing will
need to have been completed before we decide it is safe to proceed. Following
successful completion of Phase I studies, data are then submitted in summarized
format to the Medicines Control Agency as a clinical trial exemption application
in support of a specific Phase II clinical study or program, and provided no
objection has been received within a maximum of 63 days after receipt, the Phase
II studies may commence. For any additional studies, Phase II and/or Phase III,
further submissions to regulatory authorities are necessary, detailing results
of previous trials, updating ongoing preclinical studies and describing full
details of the proposed studies. Authorities may require additional data before
allowing the studies to commence and could demand the studies be discontinued at
any time if there are significant safety issues. In addition to the regulatory
review, the study must often be approved by an independent body. The exact
composition and responsibilities of this body differs from territory to
territory. In the U.S., for example, each study is conducted under the auspices
of an independent Institutional Review Board at the institution at which the
study is conducted. This board considers among other things, the design of the
study, ethical factors, the safety of the human subjects and the possible
liability risk for the institution. The U.K. equivalent of this body, the Ethics
Committee, has a very similar approach. Other authorities around Europe and the
rest of the world have slightly differing requirements involving both the
execution of clinical trials and the import/ export of pharmaceutical products.
It is our responsibility to ensure we conduct our business in accordance with
the regulations of each relevant territory.
Information generated in this process is susceptible to varying
interpretations that could delay, limit or prevent regulatory approval at any
stage of the approval process. The failure to adequately demonstrate the
quality, safety and efficacy of a therapeutic drug under development would delay
or
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prevent regulatory approval of the product. There can be no assurance that if
clinical trials are completed, either we or our collaborative partners will
submit applications for required authorizations to manufacture and/or market
potential products (including a marketing authorization, New Drug Applications
or Abbreviated New Drug Applications) or that appropriate regulatory authorities
will review and approve any application in a timely manner, if at all.
In order to gain marketing approval, we must submit a dossier to the
relevant authority for review. The format is usually specific and laid out by
each authority, although in general it will include information on the chemistry
and pharmaceutical aspects of the product as well as the pre-clinical and
clinical data. The FDA undertakes the review for the U.S.; in Europe the review
may be undertaken by the European Medicines Evaluation Agency or an individual
country's agency, followed by "mutual recognition" of this review by a number of
other countries' agencies, depending on the process applicable to the drug in
question. Approval can take several months to several years or can be denied
altogether. The approval process can be affected by a number of factors;
additional animal studies or clinical trials may be requested during the review
and may delay marketing approval and involve unbudgeted costs. The agency may
conduct an inspection of the facility, review manufacturing procedures,
operating systems and personnel qualifications. In addition to obtaining
approval for each product, in many cases each drug manufacturing facility must
be approved. Further inspections may occur over the life of the product. As a
condition of approval, the regulatory agency may require post-marketing
surveillance to monitor for adverse effects. After approval for the initial
indication, further clinical studies are necessary to gain approval for any
additional indications. The terms of any approval, including labeling content,
may be more restrictive than expected and could affect the marketability of a
product.
We believe that the approval process for certain of our drug/delivery
combinations now under development including ClimaRange and BetaRange may be
shorter than the full process described above because the safety and efficacy of
the compounds have already been established in currently marketed formulations.
In the U.S., the Drug Price Competition and Patent Restoration Term Act of 1984,
known as the Waxman-Hatch Act, established abbreviated application procedures
for obtaining FDA approval for many brand name drugs that are off-patent and
whose marketing exclusivity has expired. Approval to manufacture these drugs is
obtained by filing abbreviated drug applications. As a substitute for conducting
full-scale preclinical and clinical studies of the brand name drug, the FDA
requires data establishing that the drug formulation, which is the subject of an
abbreviated application, is either bio-equivalent or has the same therapeutic
effect as the previously approved drug, among other requirements. The European
guidelines also allow for the submission of abridged applications using similar
criteria to the U.S. system.
For both currently marketed and future products, failure to comply with
applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. Renewals in Europe may require additional
data, which may result in a license being withdrawn. In the U.S., the FDA has
the authority to revoke or suspend approvals of previously approved products, to
prevent companies and individuals from participating in the drug-approval
process, to request recalls, to seize violative products and to obtain
injunctions to close manufacturing plants not operating in conformity with
regulatory requirements and to stop shipments of violative products. The FDA
also may impose pre-clearance requirements on products currently being marketed
without FDA approval. Some of our products are being marketed as "old drugs"
without New Drug Application clearance. The FDA's position is that essentially
all prescription drugs should ultimately be subject to "new drug" status. It is
possible that the FDA will seek in the future to regulate these "old" products
as "new drugs", subject to premarket clearance requirements. In addition,
changes in regulation could have a material adverse effect on our financial
condition and results of operation.
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The DEA also controls the national production and distribution of
Schedule II drugs in the U.S. by allocating production quotas based, in part,
upon the DEAs view of national demand. As Schedule II drugs, the production and
sale of our ADHD products are strictly controlled.
THIRD PARTY REIMBURSEMENT
Our ability to market products depends in part on the extent to which
healthcare providers pay at appropriate reimbursement levels for the cost of the
products and related treatment. Third-party payers are increasingly challenging
the pricing of pharmaceutical products and/or seeking pharmacoeconomic data to
justify reimbursement practices. In the U.S., several factors outside of our
control could significantly influence the purchase of pharmaceutical products
including the trend toward managed health care, the growth of organizations such
as health maintenance organizations and managed care organizations and
legislative proposals to reform health care and government insurance programs.
These factors could result in lower prices or a reduction in demand for our
products.
Similar developments may take place in the E.U. markets, where the emphasis
will likely be on price controls and non-reimbursement for new and highly priced
medicines for which the economic as well as the therapeutic rationales are not
established. Significant uncertainty exists about the reimbursement status of
newly approved pharmaceutical products. There can be no assurance that
reimbursement will be available for any of our products. Limits on reimbursement
available from third-party payers may reduce the demand for our products.
EMPLOYEES
On December 31, 1999, we employed 1,010 individuals, 533 of whom were in
sales and marketing, 137 of whom were in research and development, 192 of whom
were in manufacturing and distribution, and 148 of whom were in general and
administrative. In addition to our full and part time staff, we engage
professional personnel on a consultancy basis and, from time to time,
consultants and others on a per day or hourly basis. We believe that relations
with our employees are satisfactory. None of our employees is represented by a
labor union.
Our success is dependent on our ability to attract and retain highly
qualified management and scientific personnel. We face intense competition for
personnel from other companies, academic institutions, government entities and
other organizations. There can be no assurance that we will be successful in
attracting and retaining such personnel. In general, we have agreements with our
key scientific and management personnel for periods of one year or less.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
Financial information about Foreign and Domestic Operations is presented in
Note 20 to the Company's consolidated financial statements. See "Notes to the
Consolidated Financial Statements--Note 20."
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RISK FACTORS
ANY DECREASE IN THE SALE OF ADDERALL COULD SIGNIFICANTLY REDUCE REVENUES.
In 1999, sales of Adderall were approximately $142 million, representing
approximately 35% of our revenues. Any factors which decrease sales or reduce
production of Adderall would significantly reduce our revenues. An explosion in
August 1998 at our then supplier of the active ingredients for Adderall halted
its production for a total of 84 days. If a similar incident were to occur
again, we would experience a substantial decrease in revenues. Other factors
which could adversely affect sales of Adderall include:
- development of competitive pharmaceuticals;
- technological advances;
- increased production costs;
- marketing or pricing actions by our competitors;
- changes in prescription writing practices;
- the occurrence of adverse reactions to Adderall;
- changes in reimbursement policies of third party payers; or
- product liability claims.
WE ARE NAMED AS A DEFENDANT IN A LARGE NUMBER OF LAWSUITS INVOLVING PHENTERMINE
AND IF WE ARE FOUND LIABLE IN SOME OR ALL OF THOSE LAWSUITS FOR DAMAGES IN
EXCESS OF OUR ASSETS, WE WOULD BE REQUIRED TO REORGANIZE OR SEEK BANKRUPTCY
PROTECTION.
We are currently a defendant in approximately 3,500 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 127 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:
- 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;
- the defendants failed to adequately test phentermine individually and when
taken in combination with the other drugs; and
- the defendants knew or should have known about the negative effects of the
drugs and should have informed the public about such risks and/or failed
to provide appropriate warning labels.
We became involved with phentermine through our acquisition of certain
assets of Rexar Pharmacal Corp. in January 1994. In addition to liability as a
result of our 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 Pennsylvania.
We intend to vigorously defend all the lawsuits and pursue all available
reasonable defenses. Legal expenses have thus far been paid by the insurers of
our supplier, Eon Labs Manufacturing Inc.
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Through approximately March 2000, Eon and its distributors, including us, had
exhausted approximately $39 million in insurance proceeds defending the
lawsuits. Additional insurance is available to us and the other Eon distributors
through Eon's carriers in the amount of approximately $12 million in the
aggregate. In addition, 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 and a limited indemnity from the former shareholders of Shire Richwood
given at the time of our acquisition of Shire Richwood. We have already spent a
substantial amount of resources in managing these lawsuits and will continue to
do so.
WE MAY NOT ACHIEVE SUSTAINED PROFITABILITY DUE TO A NUMBER OF FACTORS, SOME OF
WHICH ARE BEYOND OUR CONTROL.
We have experienced net losses in four out of the past five fiscal years and
may not achieve sustained profitability. Our results of operations have varied,
and will vary in the future, from period to period, due to a variety of factors,
including:
- costs incurred to acquire, license, develop and market pharmaceutical
products;
- spending on research and development of products;
- the introduction of new products by us or its competitors;
- cost increases from our third-party manufacturers;
- supply interruptions;
- the expiration of intellectual property protection;
- the mix of products sold;
- changes in marketing and sales expenditures; and
- market acceptance of our products.
A CHANGE IN THE VALUE OF THE U.S. DOLLAR COULD ADVERSELY AFFECT OUR RESULTS.
Changes in exchange rates, particularly those between the U.S. dollar and
pound sterling will affect our results of operations. For the year ended
December 31, 1999, approximately 22% of our revenue was earned in currencies
other than U.S. dollars compared to approximately 31% of our expenses.
IF WE ARE UNABLE TO SUCCESSFULLY COMPLETE CLINICAL TRIALS, OUR PRODUCTS WILL NOT
RECEIVE AUTHORIZATION FOR MANUFACTURE AND SALE.
Before obtaining regulatory approvals for the commercial sale of each
product under development, we must demonstrate through clinical trials that the
product is of appropriate quality, and is safe and effective for the claimed
use. Clinical trials of any product under development may not demonstrate the
quality, safety and efficacy required to result in an approvable or a marketable
product. Failure to demonstrate adequately the quality, safety and efficacy of a
therapeutic drug under development would delay or prevent regulatory approval of
the product. In addition, regulatory authorities in Europe or the U.S.
(including the U.K. Medicines Control Agency and the U.S. FDA) may require
additional clinical trials, which could result in increased costs and
significant development delays.
The completion rate of clinical trials is dependent upon, among other
factors, obtaining adequate clinical supplies and recruiting patients. Delays in
patient enrollment in clinical trials may also result in increased costs and
program delays. Additional delays can occur in instances in which we share
control over the planning and execution of product development with
collaborative partners. We intend to continue to out-license a number of
products and the clinical development of such out-licensed products would then
be the responsibility of the licensee. We cannot assure you that if clinical
trials are
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completed, either we or our collaborative partners will file for or receive
required authorizations to manufacture and/or market potential products in a
timely manner.
BECAUSE THE PHARMACEUTICAL INDUSTRY IS HIGHLY REGULATED, WE MUST UTILIZE A LARGE
AMOUNT OF RESOURCES BEFORE WE CAN PRODUCE AND SELL OUR PRODUCTS.
The clinical development, manufacture, marketing and sale of pharmaceutical
products are subject to extensive regulation, including separate regulation by
each country in the E.U., the E.U. itself, and federal, state and local
regulation in the U.S. Unanticipated legislative and other regulatory actions
and developments concerning various aspects of our operations and products may
restrict our ability to sell one or more of its products or to sell those
products at a profit. The primary regulatory authorities which regulate our
ability to manufacture and sell pharmaceutical products include the Medicines
Control Agency in the U.K., the FDA and the DEA in the U.S. and the Health
Protection Branch of the Ministry of Health in Canada.
Drug companies that manufacture or market drugs are required to obtain
regulatory approval before marketing most drug products. Regulatory approval is
generally based on the results of:
- preclinical testing;
- clinical data;
- manufacturing, chemistry and control data; and
- bioavailability.
The generation of data is regulated and any generated data are susceptible
to varying interpretations that could delay, limit or prevent regulatory
approval. Required regulatory approvals may not be obtained in a timely manner,
if at all. In addition, other regulatory requirements for any such proposed
products may be met. Even if we obtain regulatory approvals, the terms of any
product approval, including labeling, may be more restrictive than desired and
could affect the marketability of our products. Regulatory authorities have the
power to:
- revoke or suspend approvals of previously approved products;
- require the recall of products that fail to meet regulatory requirements;
and
- close manufacturing plants that do not operate in conformity with current
Good Manufacturing Practices and/or other regulatory requirements or
approvals.
Such delays or actions could affect our ability to manufacture and sell our
products.
WE FACE A RISK OF PRODUCT LIABILITY CLAIMS FOR WHICH WE MAY NOT HAVE ADEQUATE
INSURANCE.
The testing, manufacturing, marketing and selling of pharmaceutical products
entails a risk of product liability. If, in the absence of insurance, we do not
have sufficient financial resources to satisfy a liability resulting from such a
claim or to fund the legal defense of such a claim, we could become insolvent.
Product liability insurance coverage is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. Although we carry
primary product liability insurance in the amount of L100 million (approximately
$160 million) per claim and L100 million in the aggregate on a claims-made basis
and umbrella liability insurance, which can also be used for product liability
claims, in the amount of L20 million (approximately $32 million) per claim and
L20 million in the aggregate, this coverage may not be adequate. This insurance
coverage does not include phentermine, which is not separately insured by us in
the current year. In addition, we cannot be certain that insurance coverage for
present or future products will continue to be available.
18
<PAGE>
IF WE ARE UNABLE TO RENEW OR EXTEND CONTRACTS WITH MANUFACTURERS OR LICENSEES AS
THEY EXPIRE, WE MAY NOT BE ABLE TO DEVELOP OR MANUFACTURE SOME OF OUR
PRODUCTS.
We have entered into licensing and co-development agreements with a number
of parties. There is a risk that, upon expiration or termination of a third
party agreement, we may not be able to renew or extend the agreement with the
third party as interests may no longer coincide. In addition, we may not be able
to obtain an alternative supplier for the necessary goods or services on
commercially viable terms if at all. Our development agreements are generally
terminable upon the occurrence of events described in the agreements, such as
the non-payment of royalties or the insolvency of one of the parties to the
agreement, and, in some cases, upon notice. In such circumstances, we may be
unable to continue to develop or market our products as planned and could be
required to abandon or divest a product line.
The principal components of our products are active and inactive
pharmaceutical ingredients and special packaging materials. Many of these
components are available only from one supplier. We may not be able to establish
or maintain good relationships with suppliers. Additionally, there is no
assurance that suppliers will continue to exist or be able to supply ingredients
which meet regulatory requirements. We currently contract for some of our
manufacturing needs with manufacturers that comply with current Good
Manufacturing Practices, and other applicable laws and regulations. Our
third-party manufacturers may not be able to supply finished products which meet
these requirements. The availability of finished products may also be
interrupted because of noncompliance with regulatory requirements. In the case
of a new product, we are also subject to the risk that third party manufacturers
will not be able to meet our need to supply market requirements for production
in sufficient quantities.
The development and approval of our products depends on the ability to
procure active ingredients and special packaging materials from sources approved
by regulatory authorities. Because the marketing approval process requires
manufacturers to specify their own proposed suppliers of active ingredients and
special packaging materials in their applications, regulatory approval of a new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The need to qualify a new
supplier could delay our development and marketing efforts.
LARGER COMPETITORS MAY BE ABLE TO TAKE OUR MARKET SHARE BY DEVELOPING SUPERIOR
OR MORE COST-EFFECTIVE PRODUCTS.
The manufacture and sale of pharmaceuticals is highly competitive. If any
products are approved by the FDA to compete with one of our principal drugs,
sales of those drugs will likely fall. Many of our competitors are large,
well-known pharmaceutical, chemical and health care companies, which have
considerably greater resources. Many of our present and potential competitors
have research and development capabilities that may allow them to develop new or
improved products that may compete with our products. Companies with more
resources and larger research and development expenditures have a greater
ability to fund research and clinical trials necessary for regulatory
applications. They may also have an improved likelihood of obtaining approval of
drugs competing with those currently marketed or under development by us. The
pharmaceutical industry is characterized by rapid product development and
technological change. Our pharmaceuticals could be rendered obsolete or
uneconomical by the development of new pharmaceuticals or as the result of
either technological advances affecting the cost of production or marketing or
pricing action by one or more competitors.
19
<PAGE>
OUR FUTURE RESULTS OF OPERATIONS WILL DEPEND, TO A SIGNIFICANT EXTENT, UPON OUR
ABILITY TO SUCCESSFULLY IN-LICENSE, ACQUIRE, DEVELOP AND MARKET NEW PRODUCTS.
Due to the complexity of the formulation and development of pharmaceuticals,
we cannot assure you that we will successfully complete the development of new
products, or, if successful, that such products will be commercially viable. The
failure to in-license or acquire new products or to develop, on a commercially
viable basis, new products would have a material adverse effect on our financial
condition and results of operations.
WE INTEND TO CONTINUE TO EXPLORE ACQUISITIONS, AND IF WE DO NOT SUCCESSFULLY
INTEGRATE FUTURE ACQUISITIONS, WE MAY HAVE PRODUCTS OR OPERATIONS THAT DO NOT
YIELD ANY BENEFIT TO US OR OUR SHAREHOLDERS.
We intend to pursue product acquisitions that could complement or expand our
business. However, we may not be able to identify appropriate product
acquisition candidates in the future. If a product acquisition candidate is
identified, we do not know if we will be able to successfully negotiate the
terms of the acquisition, finance the acquisition or integrate an acquired
product into our existing business and products. The negotiation and
consummation of potential product acquisitions could cause diversion of
management's time and resources. If we consummate one or more significant
product acquisitions through the issuance of ordinary shares or ADSs, holders of
ordinary shares and ADSs could suffer significant dilution of their ownership
interests.
IF WE CANNOT OBTAIN THE FINANCING NECESSARY TO FUND OUR EXPANSION, WE WILL NOT
BE ABLE TO RESPOND TO CHANGES IN DEMAND FROM OUR CUSTOMERS.
We anticipate that our existing capital resources, together with cash
expected from operations and available from bank borrowings, should be
sufficient to finance current and anticipated operations and working capital
requirements for the next twelve months. However, the acquisition and licensing
of products, the expansion of our sales force, and any expansion or relocation
of our facilities would require substantial capital resources. If adequate funds
are not available, we may be unable to pursue acquisitions, or be forced to
curtail in-licensing or research and development programs. To satisfy our
capital requirements, we may need to raise additional funds through public and
private financings, including equity financings. We may also seek additional
funding through corporate collaborations and other financing arrangements. We do
not know whether adequate funds will be available when needed or on terms
acceptable to us. Alternatively, we may need to obtain funds through
arrangements with future collaborative partners or others that may require us to
relinquish rights to some or all of our technologies or product candidates. If
we are successful in obtaining additional financing, the terms of the financing
may have the effect of diluting the value of ordinary shares and ADSs.
OUR SALES WILL DECLINE IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MEDICAL
COMMUNITY.
Our ability to sell any pharmaceutical products after the receipt of
regulatory approval will depend in part on the acceptance of those products by
physicians and patients. Unanticipated side effects or unfavorable publicity
concerning any of our products generally or those of our competitors could have
an adverse effect on our ability to maintain and/or obtain regulatory approvals
or successfully market our products. Our future results of operations will also
depend on continued market acceptance of our current products and the lack of
substitutes which are cheaper or more effective.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, COMPETITORS MAY
MANUFACTURE AND MARKET PRODUCTS SIMILAR TO OURS.
An important part of our business strategy is to protect our products and
technologies through the use of patents, proprietary technology and trademarks,
to the extent available. In addition, our success
20
<PAGE>
depends upon the ability of our collaborators and licensers to protect their own
intellectual property rights. Patents and patent applications covering a number
of the technologies and processes owned or licensed to us have been granted or
are pending in various countries, including the U.S. We intend to enforce
vigorously our patent rights and believes that our collaborators intend to
vigorously enforce patent rights that have been licensed to us. However, patent
rights may not prevent other entities from developing, using or commercializing
products that are similar or functionally equivalent to our products or
technologies or processes for formulating or manufacturing similar or
functionally equivalent products. Patent rights may be successfully challenged
in the future. Additionally, our products or the technologies or processes used
to formulate or manufacture those products may now or in the future infringe the
patent rights of third parties. It is also possible that third parties will
obtain patent or other proprietary rights that might be necessary or useful for
the development, manufacture or sale of our products. If third parties are the
first to invent a particular product or technology, it is possible that those
parties will obtain patent rights that will be sufficiently broad to prevent us
or our strategic collaborators from developing, manufacturing or selling our
products. We may need to obtain licenses for intellectual property rights from
others to develop, manufacture and market commercially viable products. We may
not be able to obtain these licenses on commercially reasonable terms, if at
all. In addition, any licensed patents or proprietary rights may not be valid
and enforceable.
There has been substantial litigation in the pharmaceutical industry with
respect to the manufacture, use and sale of new products that are the subject of
conflicting patent rights. These lawsuits relate to the validity and
infringement of patents. The expense of defending lawsuits brought against us
could cause us not to defend these suits and abandon the products. In the past,
innovators of products which we are in the process of developing have filed
patent infringement lawsuits challenging notices of non-infringement submitted
as part of regulatory filings. These lawsuits may be brought by innovators
against us or our collaborative partners while we or our collaborative partners
pursue regulatory approvals for our products. The ultimate outcome of this type
of litigation, if brought, may not be favorable. Our own patents may be subject
to infringement by others. While we may pursue litigation in order to protect
these rights, we may not be successful in these lawsuits. We are also required
to certify to regulatory authorities, such as the FDA, when seeking approval of
some of our products that the product does not infringe upon third party rights.
A patent holder may challenge a notice of non-infringement or invalidity by
filing suit for patent infringement within 45 days of receiving notice. This
challenge, if made, would prevent regulatory approval in the U.S. until the suit
is resolved or until at least 30 months had elapsed.
We also rely on trade secrets and other un-patented proprietary information,
which we generally seek to protect by confidentiality and nondisclosure
agreements with our employees, consultants, advisors and collaborators. These
agreements may not effectively prevent disclosure of confidential information
and may not provide us with an adequate remedy in the event of unauthorized
disclosure of such information. For example, although we rely on proprietary
information and trade secrets relating to Adderall, Adderall is not patent
protected and competitors may be able to produce competing products. If our
employees, scientific consultants or collaborators develop inventions or
processes that may be applicable to our products under development, such
inventions and processes will not necessarily become our property, but may
remain the property of those persons or their employers. Protracted and costly
litigation could be necessary to enforce and determine the scope of our
proprietary rights. Our failure to obtain or maintain patent and trade secret
protection, for any reason, could allow other companies to make competing
products and reduce the sales of our products.
We have filed applications to register various trademarks for use in
connection with pharmaceuticals and related laboratory services in the U.S. and
intend to continue to trademark new product names as they are developed. In
addition, with respect to certain products, we rely on the trademarks of third
parties. These trademarks may not afford adequate protection, or we and the
third parties may not have the financial resources to enforce any rights under
any of these trademarks. Our
21
<PAGE>
inability or the inability of these third parties to protect their trademarks
because of successful third party claims to those trademarks could allow others
to use our trademarks and dilute their value.
REIMBURSEMENT POLICIES OF THIRD PARTIES MAY AFFECT THE MARKETING OF OUR
PRODUCTS.
Our ability to market our products will depend in part on reimbursement
levels for the cost of the products and related treatment established by health
care providers, including government authorities, private health insurers and
other organizations, such as health maintenance organizations and managed care
organizations. Third party payers are increasingly challenging the pricing of
pharmaceutical products and reviewing their reimbursement practices. In
addition, the purchase of pharmaceutical products could be significantly
influenced by the following, which would result in lower prices and a reduced
demand for our products:
- the trend toward managed health care in the U.S.;
- the growth of organizations such as HMOs and MCOs;
- legislative proposals to reform health care and government insurance
programs; and
- price controls and non-reimbursement of new and highly priced medicines
for which the economic and therapeutic rationales are not established.
These cost containment measures and health care reform could affect our
ability to sell our products.
The reimbursement status of a newly approved pharmaceutical product may be
uncertain. Reimbursement might not be available for some of our products.
Reimbursement for a product, if granted, may not be maintained. Limits placed on
reimbursement could reduce the demand for, or make it harder for people to buy
our products. The unavailability or inadequacy of third party reimbursement for
our products would reduce or possibly eliminate demand for its products. We are
unable to predict whether governmental authorities will enact additional
legislation or regulation which will affect third party coverage and
reimbursement that reduces demand for our products.
CONTINUED CONSOLIDATION COULD CAUSE A DECLINE IN OUR SALES.
In both the U.S. and the U.K., a small number of large wholesale
distributors control a significant share of each market. In addition, the number
of independent drug stores and small chains has decreased as retail pharmacy
consolidation has occurred. Consolidation or financial difficulties could cause
customers to reduce their inventory levels, or otherwise reduce purchases of our
products.
IF WE DO NOT ACHIEVE A DIVERSIFIED CUSTOMER BASE, WE WILL BE VULNERABLE TO THE
LOSS OF IMPORTANT INDIVIDUAL CUSTOMERS.
In the U.S., our customers include McKesson Corp., Bergen Brunswig Corp. and
Cardinal Health, Inc. In the U.K., our customers include The Boots Company plc,
AAH Pharmaceuticals Ltd and Unichem plc. For the fiscal year ended December 31,
1999, our two largest customers accounted for approximately 25% and 14% of our
revenues, respectively. The loss of either of these customer accounts could
substantially reduce our revenues.
ANY LOSS OF KEY PERSONNEL COULD PREVENT US FROM DEVELOPING NEW PRODUCTS.
Our success is dependent on our ability to attract and retain highly
qualified management and scientific personnel. We face intense competition for
personnel from other companies, academic institutions, government entities and
other organizations. We may not be able to successfully attract and retain such
personnel. In general, we have agreements with some of our key scientific and
management personnel for periods of one year or less. The loss of such
personnel, or the inability to attract and retain the additional, highly skilled
employees required for our activities, could prevent us from developing new
products. We have key man insurance for Rolf Stahel, our Chief Executive, in the
amount of $1 million.
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<PAGE>
ITEM 2: PROPERTIES
Our worldwide headquarters are located at East Anton, Andover, Hampshire,
England, which consist of an aggregate of 17,500 square feet leased office
space.
In addition, the following principal premises were occupied as of
December 31, 1999:
<TABLE>
<CAPTION>
LOCATION USE SQUARE FOOTAGE OWNED OR LEASED
- -------- ----------------------------- -------------- ---------------
<S> <C> <C> <C>
Rockville, Maryland................. Office accommodation and 44,500 Leased
laboratories
Florence, Kentucky.................. Office accommodation and 32,000 Leased
warehousing
Eatontown, New Jersey (1)........... Office accommodation 115,000 Owned
Valley Stream, New York............. Manufacturing facility and 9,700 Leased
laboratories
Oakville, Ontario, Canada........... Manufacturing facility and 100,000 Owned
office accommodation
Buffalo Grove, Illinois............. Distribution facility 70,000 Owned
Guildford, Surrey, England (2)...... Office accommodation 3,800 Leased
</TABLE>
- ------------------------
(1) In December 1999, we decided to close the office facility in Eatontown, New
Jersey and have commenced negotiations with potential purchasers of the
property.
(2) The office accommodation at Guildford, Surrey was vacated in March 2000 and
will subsequently be sublet.
ITEM 3: LEGAL PROCEEDINGS
We are currently a defendant in approximately 3,500 lawsuits, in both U.S.
federal and state courts, which seek damages for, among other things, personal
injury arising from certain products supplied for the treatment of obesity by us
and several other pharmaceutical companies. See "Risk Factors--We are named as a
defendant in a large number of lawsuits involving phentermine and if we are
found liable in some or all of those lawsuits for damages in excess of our
assets, we would be required to reorganize or seek bankruptcy protection."
Pursuant to a license agreement we entered into with Rhone-Poulenc
Rorer, Inc. and Armour Pharmaceutical Company, a wholly-owned subsidiary of RPR,
we licensed our patented manufacturing process and related technology for BChE
to RPR and Armour. The license agreement required RPR to use its best efforts to
research, develop, market and sell BChE throughout the world. We believe that
RPR has materially failed to perform its obligations under this license
agreement and as a result we have not received appropriate milestone payments
and BChE's development as a viable product has been significantly delayed. We
have initiated arbitration against RPR and its other partners for breach of the
license agreement or other actions.
We are a party to an arbitration proceeding before the American Arbitration
Association in which Staticon International GmbH has asserted approximately $16
million in claims against us, relating to the sale of our contract clinical
research subsidiary, VRG International Inc., in May 1998. We have asserted
approximately $3.5 million in claims against Staticon, relating primarily to the
remaining balance due under a promissory note issued to us by Staticon in
connection with the sale of VRG. We are not able to make a reasonable estimate
of the possible outcome of this matter, although we believe that we have
meritorious defenses and will prevail in this matter. We are vigorously
defending the claims that have been asserted against us and are pursuing the
claims we have made against Staticon.
23
<PAGE>
In addition, we are from time to time party to litigation or other legal
proceedings. Other than as discussed above, we are not a party to any litigation
or other legal proceedings that we believe could reasonably be expected to have
a material adverse effect on our financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 22, 1999, we held an Extraordinary General Meeting for the
purposes of considering and, if thought fit, passing the following resolution
proposed as an ordinary resolution:
Ordinary resolution concerning:
- the acquisition of Roberts Pharmaceutical Corporation;
- an increase in our authorized share capital from L10,000,000 to
L20,000,000 by the creation of 200,000,000 new ordinary shares of 5p each
forming a single class with the existing ordinary shares of 5p each in our
capital;
- the issuance and allotment of relevant securities up to an aggregate
nominal amount of L9,019,562;
- increasing the maximum amount of aggregate fees paid to our directors for
their services as directors on an annual basis from L150,000
(approximately $240,000) to L500,000 (approximately $800,000); and
- the authority to borrow up to US$250,000,000 pursuant to a credit facility
entered into on November 19, 1999 between, inter alia, us and our U.S.
subsidiaries as borrowers and DLJ Capital Funding, Inc as agent.
Our shareholders approved the resolution with 39,840,645 ordinary shares voting
in favor of the resolution, 5,676 ordinary shares voting against the resolution
and 33,773 ordinary shares abstaining.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company as of December 31, 1999
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Dr James Cavanaugh........................ 62 Non-executive Chairman
Rolf Stahel............................... 55 Chief Executive
Angus Russell............................. 43 Group Finance Director
Dr Wilson Totten.......................... 44 Group Research and Development Director
Dr Barry Price............................ 56 Senior Non-executive Director
Dr Bernard Canavan........................ 64 Non-executive Director
Dr Zola Horovitz.......................... 65 Non-executive Director
Ronald Nordman............................ 58 Non-executive Director
Joseph Smith.............................. 61 Non-executive Director
Dr Robert Vukovich........................ 56 Non-executive Director (resigned February
15, 2000)
John Spitznagel........................... 58 Non-executive Director
</TABLE>
The brief biographical details of the Directors are as follows:
DR JAMES CAVANAUGH joined the Board on March 24, 1997 and was appointed as
Non-executive Chairman with effect from May 11, 1999. Dr Cavanaugh is the
President of HealthCare Ventures LLC. Formerly he was President of SmithKline &
French Laboratories, the US pharmaceutical division of SmithKline Beecham
Corporation. Prior to that, he was President of SmithKline Beecham
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<PAGE>
Corporation's clinical laboratory business and, before that, President of
Allergan International. Prior to his industry experience, Dr Cavanaugh served as
Deputy Assistant to the President of the US for Health Affairs on the White
House Staff in Washington, DC. He is a Non-executive Director of MedImmune Inc.
and Diverse Corporation.
ROLF STAHEL joined Shire in March 1994 as Chief Executive from Wellcome plc
where he worked for 27 years. From April 1990 until February 1994, he served as
Director of Group Marketing reporting to the Chief Executive. A business studies
graduate of KSL Lucerne, Switzerland, he attended the 97(th) Advanced Managers
Program at Harvard Business School.
ANGUS RUSSELL joined Shire on December 13, 1999 as Group Finance Director.
Mr Russell worked for ICI, Zeneca and AstraZeneca for a total of 19 years. His
last position was Vice President--Corporate Finance at Astra Zeneca PLC, where
he was responsible for financial input into M&A activities, management of tax,
legal and finance structure, investor relations activities and the management of
various financial risks. Prior to this, he held a number of positions within
Zeneca Group PLC and ICI including Group Treasurer, Group Investor Relations
Manager, Strategic Planner, Marketing Manager and management accounting roles in
manufacturing and R&D operations. Mr Russell is a chartered accountant, having
qualified with Coopers & Lybrand and is a member of the Association of Corporate
Treasurers.
DR WILSON TOTTEN joined Shire in January 1998 as Group Research and
Development Director. Dr Totten is a medical doctor and has wide experience in
the pharmaceutical industry covering all phases of drug development. He has
substantial experience in the field of CNS disorders. His last position was Vice
President of Clinical Research and Development with Astra Charnwood where he
served from 1995 to 1997, having previously worked for Fisons Pharmaceuticals
from 1989 to 1995, and prior to that with 3M Health Care and Eli Lilly.
DR BARRY PRICE joined the Board on January 24, 1996 having spent 28 years
with Glaxo holding a succession of key executive positions with Glaxo Group
Research. He is a Non-executive Director of Celltech Chiroscience plc. and
Chairman of Antisoma plc. Dr Price is Senior Non-executive Director and Chairman
of the Remuneration Committee.
DR BERNARD CANAVAN joined the Board as a Non-executive Director on
March 11, 1999. Dr Canavan is a medical doctor and graduate of the University of
Edinburgh. He was employed by American Home Products for over 25 years until he
retired in January 1994. He was president of that Corporation from 1990 to 1994,
and prior to that was Chairman and Chief Executive Officer of American Home
Products, Pharmaceutical Division, Wyeth-Ayerst Laboratories. Dr Canavan is also
a director of Biochem Pharma Inc., Magainin Pharmaceuticals Inc., 3-Dimensional
Pharmaceuticals Inc. and Nelson Communications Inc. Dr Canavan is Chairman of
the Audit Committee.
DR ZOLA HOROVITZ, Ph.D. joined the Board on December 23, 1999 having
previously served as a director of Roberts Pharmaceutical Corporation since
October 1996. Dr Horovitz has been self-employed as a consultant in the
biotechnology and pharmaceutical industries since 1994. From 1959 to 1994 Dr
Horovitz held various positions at Squibb Corporation and its successor
corporation, Bristol-Meyers Squibb & Co, including that of Vice President,
Business Development and Planning. Dr Horovitz received undergraduate and
masters degrees and a Ph.D. from the University of Pittsburgh.
RONALD NORDMANN joined the Board on December 23, 1999 having previously
served as a non-executive director of Roberts Pharmaceutical Corporation since
May 1999 and has been a financial analyst in healthcare securities since 1971.
Since September 1994 he has been an analyst and limited partner at Deerfield
Management. He has held senior positions with PaineWebber, Oppenheimer & Co., F.
Eberstadt & Co., and Warner-Chilcott Laboratories, a division of Warner-Lambert.
25
<PAGE>
Mr Nordmann received his undergraduate degree from the John Hopkins University
and an M.B.A. from Fairleigh Dickinson University.
JOSEPH SMITH joined the Board on December 23, 1999 having previously served
as a non-executive director of Roberts since August 1998. From 1989 to 1997, Mr
Smith served in various positions at Warner-Lambert Company, including President
of Parke-Davis Pharmaceuticals and President of Shaving Products Division
(Schick and Wilkinson Sword). Mr Smith previously held positions at Johnson &
Johnson and served as President of Rorer Pharmaceutical Corporation. Mr Smith
received his undergraduate degree from the University of Buffalo and an M.B.A.
degree from the Wharton School of the University of Pennsylvania.
ROBERT VUKOVICH, Ph.D. joined the Board on December 23, 1999 having
previously served as non-executive Chairman of Roberts Pharmaceutical
Corporation since the inception of that company in 1983 and was Chief Executive
Officer until September 1997. Dr. Vukovich also acted as a consultant to Roberts
Pharmaceutical Corporation with respect to researching and developing
pharmaceutical products and identifying and evaluating products and businesses
for potential licensing and acquisition. He currently serves as Chairman,
President and Chief Executive Officer of Wellspring Pharmaceutical Corporation.
Dr. Vukovich has worked in various positions for Revlon Health Care Group, the
Squibb Institute and The Warner Lambert Research Institute. Dr Vukovich is a
graduate of Jefferson Medical College, Philadelphia, Pennsylvania, with training
in pharmacology and pathology.
Dr. Vukovich resigned from the Board on February 15, 2000.
JOHN SPITZNAGEL joined the Board on December 23, 1999 having previously
served as President and Chief Executive Officer of Roberts Pharmaceutical
Corporation since September 1997 and as a director since July 1996. He was
Executive Vice President--Worldwide Sales and Marketing form March 1996 to
September 1997, having served as President of Reed and Carnrick Pharmaceuticals
from September 1990 until July 1995. He previously served as Chief Executive
Officer of BioCryst Pharmaceuticals, Inc. having held before that various sales,
marketing and management positions in the industry.
26
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ORDINARY SHARES
Our ordinary shares are traded on the London Stock Exchange. The following
table sets forth, for the quarters indicated, the high and low middle market
closing quotations (and VWAP prices (see below) from December 14, 1998) for the
ordinary shares on the London Stock Exchange as reported on its Daily Official
List. The middle market closing quotation of a security was the standard method
of describing the price of a security listed on the LSE until December 13, 1998,
and is the mean of (i) the highest price offered by any registered market maker
to purchase the security, and (ii) the lowest price required by any market maker
to sell the security, as at the close of business on a given day. As of
December 14, 1998, the LSE adopted the Volume-Weighted Average Price (VWAP) as
the method for calculating the closing price. The VWAP is derived by dividing
the total value of trades in the last 10 minutes of the trading period by the
total volume of trades in the same period. If there are no trades in the closing
10 minutes the VWAP price equals the price of the last automatically executed
trade prior to the closing 10 minutes.
<TABLE>
<CAPTION>
HIGH LOW
------------------------ ------------------------
PENCE PER ORDINARY SHARE PENCE PER ORDINARY SHARE
------------------------ ------------------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
1(st) Quarter..................................... 410.0 286.5
2(nd) Quarter..................................... 444.0 380.0
3(rd) Quarter..................................... 540.5 293.5
4(th) Quarter..................................... 435.0 346.0
YEAR ENDED DECEMBER 31, 1999
1(st) Quarter..................................... 516.5 374.0
2(nd) Quarter..................................... 527.5 396.0
3(rd) Quarter..................................... 613.0 473.5
4(th) Quarter..................................... 733.5 559.0
</TABLE>
Number of record holders of Ordinary Shares as of March 24, 2000:
<TABLE>
<S> <C>
U.S. holders................................................ 37
Total holders............................................... 5,067
</TABLE>
AMERICAN DEPOSITORY SHARES
American Depository Shares (each representing three ordinary shares)
evidenced by American Depository Receipts issued by Morgan Guaranty Trust
Company of New York, as depository, are quoted on the NASDAQ National Market. As
of March 24, 2000, the proportion of Ordinary Shares represented by American
Depository Receipts was 40.1% of the Ordinary Shares outstanding.
The following table sets forth, for the quarters indicated, the high and low
market quotations for the ADS's quoted on the NASDAQ National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
$ PER ADS $ PER ADS
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
1(st) Quarter............................................... --(1) --(1)
2(nd) Quarter............................................... 23.00 19.00
3(rd) Quarter............................................... 27.81 16.56
4(th) Quarter............................................... 22.50 18.63
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
$ PER ADS $ PER ADS
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999
1(st) Quarter............................................... 25.50 19.13
2(nd) Quarter............................................... 26.00 18.88
3(rd) Quarter............................................... 29.31 23.75
4(th) Quarter............................................... 35.06 26.19
</TABLE>
- ------------------------
(1) On April 1, 1998, we completed an initial offering of 7,265,177 American
Depository shares.
The number of record holders of American Depository Shares in the United
States as of March 24, 2000 was 389. Since certain of the ADRs are held by
broker nominees, the number of record holders may not be representative of the
number of beneficial owners.
DIVIDEND POLICY
Historically, we have not paid any dividends. We do not anticipate paying
any dividends on ordinary shares, or indirectly on ADSs, in the foreseeable
future. As a matter of English law, we may pay dividends only out of our
distributable profits, which are accumulated realized profits under U.K. GAAP,
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. As of December 31, 1999, we
had accumulated profits of L1.8 million (approximtely $2.9 million). Future
dividend policy will be dependent upon our distributable profits, our financial
condition, the terms of any then existing debt facilities and other relevant
factors existing at that time.
ITEM 6: SELECTED FINANCIAL DATA
The results for all periods presented below have been restated to reflect
the combined results of Shire and Roberts Pharmaceutical Corporation. The merger
was accounted for as a pooling of interests. The selected consolidated financial
data for the Company should be read in conjunction with "Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Company's consolidated financial statements and related notes appearing
elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
$'000 $'000 $'000 $'000 $'000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................... 401,532 308,984 191,554 127,772 137,624
Operating expenses......................... (477,600) (285,748) (277,395) (183,086) (152,655)
(Loss)/income from operations.............. (76,068) 23,236 (85,841) (55,314) (15,031)
Interest and other, net.................... (2,868) 327 3,109 3,236 (3,437)
(Loss)/income from continuing operations
before taxes............................. (78,936) 23,563 (82,732) (52,078) (18,488)
Income taxes............................... (16,062) (2,991) (1,420) 15,815 (2,518)
(Loss)/income from continuing operations... (94,998) 20,572 (84,152) (36,263) (21,006)
(Loss)/income from discontinued operations,
net of tax............................... -- -- -- (27,045) 556
Net (loss)/income.......................... (94,998) 20,572 (84,152) (35,707) (48,051)
Net (loss)/income per share from continuing
operations--basic........................ $ (0.39) $ 0.09 $ (0.45) $ (0.31) $ (0.25)
Net (loss)/income per share from continuing
operations--diluted...................... $ (0.39) $ 0.08 $ (0.45) $ (0.31) $ (0.25)
Weighted average number of shares
outstanding--basic....................... 244,699 234,045 185,153 118,766 83,083
Weighted average number of shares
outstanding--diluted..................... 244,699 242,806 185,153 118,766 83,083
-------- -------- -------- -------- --------
Cash and cash equivalents.................. 54,082 52,973 59,868 96,056 24,352
Total assets............................... 887,763 873,605 664,930 435,338 356,410
Long term debt............................. 126,314 126,774 10,327 10,639 16,183
Shareholders' equity....................... 587,284 663,314 565,920 361,365 242,292
-------- -------- -------- -------- --------
</TABLE>
28
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The results for the three years ended December 31, 1999, 1998 and 1997 have
been restated from prior periods to reflect the merger of Shire Pharmaceuticals
Group plc and Roberts Pharmaceutical Corporation as if the merger had occurred
on January 1, 1997.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
OVERVIEW
On December 23, 1999, Shire and Roberts merged in a tax-free exchange of
shares. Shire exchanged 1.0427 ADSs for each common share of Roberts. This
transaction was accounted for as a pooling of interests. Merger transaction
expenses and merger related restructuring costs totaled $75.9 million and are
reflected in Shire's 1999 accounts.
For the year ended December 31, 1999, total revenue increased by 30% to
$401.5 million, compared to $309.0 million in fiscal 1998. This increase was
primarily the result of an increase in product sales. Product sales in the U.S.
continue to represent a significant percentage of worldwide sales, increasing to
81% in 1999 from 78% in 1998.
The Company manages and controls the business on geographic lines. The three
reportable segments are the United States, Europe and the rest of the World.
Additional information regarding segments is provided in Note 20 to the
consolidated financial statements.
PRODUCT SALES
<TABLE>
<CAPTION>
PRODUCT SALES BY SEGMENT 1999 % CHANGE 1998 % CHANGE 1997
- ------------------------ -------- -------- -------- -------- --------
$M $M $M
<S> <C> <C> <C> <C> <C>
United States........................................... 314 38.3 227 99.1 114
Europe.................................................. 55 10.0 50 21.9 41
Rest of World........................................... 16 14.3 15 7.1 14
--- ---- ---- ---- ---
Total product sales................................. 385 32.3 292 72.3 169
=== ==== ==== ==== ===
</TABLE>
For the year ended December 31, 1999, total product sales increased by 32%
to $385.2 million, compared to $291.8 million in the prior year. Of the
Company's total product sales, 39% related to Adderall and DextroStat, the
Company's products marketed in the U.S. for the treatment of ADHD. On a combined
basis, these products increased their share of the total U.S. ADHD prescriptions
written from 20.4% in December 1998 to 30.5% in December 1999.
Other significant contributors to the increase in product sales in 1999 were
the U.S. marketed products Pentasa, Carbatrol and Agrylin. The Company acquired
Pentasa, licensed for the treatment of ulcerative colitis, in the second quarter
of 1998, and recorded sales of $51.8 million in 1999 compared to $33.3 million
in 1998. Carbatrol increased its share of total U.S. extended release
carbamazepine prescriptions written to 22.8% at December 31, 1999 from 8.5% in
December 1998 and Agrylin sales grew 37% over 1998 to $32.6 million in 1999.
COST OF SALES
For the year ended December 31, 1999 cost of sales amounted to 24.3% of
product sales as compared to 32.6% in 1998. The decrease in cost of sales
percentage and corresponding increase in
29
<PAGE>
gross margin is attributable to an improved product mix due to the faster growth
of products with a higher gross margin. Additionally, the Company acquired all
rights to Agrylin including the ending of royalty obligations from Bristol Myers
Squibb, which enhanced the gross margin of this product.
COSTS AND EXPENSES
In 1999 the Company recorded charges totaling $135.2 million pre-tax for
asset impairments ($48.5 million), merger-related transaction expenses
($32.3 million), restructuring ($43.6 million), loss on product dispositions
($5.8 million) and other charges ($5.0 million). These charges are disclosed
separately within operating expenses in the Statement of Income.
The Company recorded an impairment charge of $34.2 million to adjust
intangible asset values, primarily product rights, to their estimated fair
value. These charges are consistent with the Company's accounting policy to
review periodically the carrying value of the intangibles and evaluate whether
there has been any impairment in the carrying value of those intangibles as
compared with estimated undiscounted future cash flow relating to those
intangibles. Other asset impairments are the write off of inventory held for
research and development work and duplicate equipment ($3.2 million),
adjustments to the carrying value of the RiboGene investment to its estimated
realizable value at December 31, 1999 ($7.6 million), and write down of notes
receivable to their estimated realizable value ($3.5 million).
The components of the restructuring charge are as follows:
<TABLE>
<CAPTION>
$ MILLIONS
----------
<S> <C>
Employee termination costs.................................. 37.9
Property.................................................... 5.7
43.6
</TABLE>
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 & development activities to Shire's facility in Rockville,
Maryland. Similarly, Roberts' sales and marketing operation in the U.K. was
combined with Shire's established operation in Andover, Hampshire.
As a result of the restructuring and elimination of duplicate facilities,
147 employees will be terminated. These positions were mainly based in the U.S.
working in the sales and marketing, research and development and administrative
functions. All employees were notified of their termination prior to December
31, 1999. Included in the employee termination costs is approximately $18
million related to pension contributions, which was paid prior to the year end.
The Company anticipates all activities associated with this restructuring to be
substantially complete at the end of 2000 with the remaining cash expenditures
expected in this period.
The termination costs consist of payments for severance, medical and other
benefits, outplacement counseling, pension contributions and excise taxes.
Shire has commenced negotiations with potential purchasers of the property
at Eatontown, which has been written down to its estimated fair value.
The Company anticipates realizing annual savings resulting from the merger
of approximately $20 million.
30
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenditure increased from $59.3 million in 1998 to
$77.5 million in 1999, representing an overall increase of 30.7%. This increase
reflects the significant portion of development projects at Phase II or later
where development costs tend to be higher.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $39.7 million from
$131.7 million in 1998 to $171.4 million in fiscal 1999, primarily due to an
increase in size of the U.S. sales force and higher levels of marketing
expenditure. As a percentage of total revenues, selling, general and
administrative expenses were constant at approximately 43% in 1998 and 1999. A
significant component of selling, general and administrative expenses is
amortization, which increased from $22.0 million in 1998 to $24.4 million in
1999, due to the addition of the Pentasa and Agrylin product rights.
INTEREST INCOME AND EXPENSE
In the year ended December 31, 1999 the Company received interest income of
$7.3 million compared with $6.4 million in 1998. Interest expense increased from
$6.5 million in 1998 to $9.7 million in 1999 as a result of a full year's
interest expense from the financing of the Pentasa acquisition.
INCOME TAXES
For the year ended December 31, 1999, income taxes increased $13.1 million
from $3.0 million to $16.1 million. The Company's effective tax rate in 1999
(before merger related transaction expenses, restructuring costs and asset
impairments) was 29%. The Company has recorded net deferred tax assets of
approximately $37 million. Realization is dependent upon generating sufficient
taxable income to utilize such assets. Although realization on these tax assets
is not assured, management believes it is more likely than not that the deferred
tax assets will be realized.
YEARS ENDED DECEMBER 31, 1997 AND 1998
TOTAL REVENUES
For the year ended December 31, 1998, total revenue increased by 61.3% to
$309.0 million, compared to $191.6 million in fiscal 1997. This increase was
primarily the result of an increase in product sales.
PRODUCT SALES
For the year ended December 31, 1998, total product sales increased by 72.8%
to $291.8 million, compared to $168.9 million in the prior year. The fiscal year
ended December 31, 1997 included the results of Shire Richwood, Inc. ("SRI") for
131 days whereas in 1998 the results are included for a full year. SRI
contributed $87.7 million in 1998 compared to $22.2 million in 1997. Of SRI's
total product sales, 91% related to Adderall and DextroStat, the Company's
products for the treatment of ADHD in the U.S. On a combined basis, these
products increased their share of the total U.S. ADHD prescriptions written from
9.5% in August 1997, the month of acquisition, to 12.8% in December 1997 and to
20.4% in December 1998.
Carbatrol, an extended release formulation of Carbamazepine, was launched in
the U.S. in June 1998. Carbamazepine is used as a first line treatment for
epilepsy, a condition that affects approximately 2.5 million people in the U.S.
Since its launch, Carbatrol has become one of Shire's largest products with
sales of $5.3 million in 1998.
31
<PAGE>
A significant contributor to the increase in product sales in the U.S.,
acquired by the Company in the second quarter of 1998, was Pentasa with sales of
$33.3 million. Increased sales of the U.S. marketed products, Agrylin and
ProAmatine contributed $9.2 million and $9.0 million to the increase over 1997
sales levels respectively.
COST OF SALES
For the year ended December 31, 1998 cost of sales amounted to 32.6% of
product sales as compared to 39.7% in 1997. This decrease in cost of sales
percentage and corresponding increase in gross margin is attributable primarily
to the addition of Pentasa and its higher gross margin to the product mix, and
to the inclusion of the comparatively higher gross margin ADHD products for a
full year.
RESEARCH AND DEVELOPMENT
Research and development expenditure increased from $40.7 million in 1997 to
$59.3 million in 1998, representing an overall increase of 45.7%. In 1998, Shire
in-licensed from NeuroSearch A/S a series of AMPA antagonists for disorders of
the central nervous system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $45.1 million from
$86.6 million in 1997 to $131.7 million in fiscal 1998. A significant
contributor to the increase was a rise in amortization expense of
$11.6 million, due to the addition of the Pentasa product rights full years'
charge on the capitalized goodwill resulting from the acquisitions of Shire
Laboratories and Shire Richwood.
As a percentage of total revenues, selling, general and administrative
expenses decreased from 45.2% in 1997 to 42.6% in fiscal 1998.
OTHER CHARGES
As a result of the acquisition of Shire Laboratories in March 1997, Shire
incurred a charge of $83.1 million, representing the acquisition of in-process
research and development.
INTEREST INCOME AND EXPENSE
In the year ended December 31, 1998 the Company received interest income of
$6.4 million compared with $6.5 million in 1997. Interest expense increased from
$1.0 million in 1997 to $6.5 million in 1998 as a result of interest costs from
the financing of the Pentasa acquisition.
INCOME TAXES
For the year ended December 31, 1998, income taxes increased $1.6 million
from $1.4 million to $3.0 million. The Company's effective tax rate in 1998 was
12.7%. The Company has recorded net deferred tax assets of approximately
$38 million. Realization is dependent upon generating sufficient taxable income
to utilize such assets. Although realization on these tax assets is not assured,
management believes it is more likely than not that the deferred tax assets will
be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through private and
public offerings of equity securities, the issuance of loan notes, collaborative
licensing and development fees, product sales and investment income.
32
<PAGE>
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.
As of December 31, 1999, 1998 and 1997 the Company had cash, cash
equivalents and marketable securities of $138.4 million, $124.7 million and
$99.8 million, respectively which consisted of immediately available money
market fund balances and investment grade securities.
DEBT
In 1998, the Company acquired the product rights to Pentasa. The majority of
the purchase price was financed through a credit agreement between Roberts, DLJ
Capital Funding and various other lenders. Under this credit agreement, the
merger of Shire and Roberts constituted a change of control, which would trigger
the acceleration of the repayment of the principal amounts outstanding. On
November 19, 1999, Roberts, Shire's U.S. subsidiaries and Shire entered into an
agreement with DLJ to replace the existing credit agreement with a $250 million
credit facility consisting of a $125 million five-year revolving credit facility
and a $125 million five-year term loan facility. In connection with the credit
facility, the Company is subject to certain affirmative and negative covenants
and maintenance tests that require the Company to maintain a minimum net worth,
a specified leverage ratio and a specific coverage ratio. At December 31, 1999
the Company satisfied the aforementioned covenants and maintenance tests.
CAPITAL EXPENDITURE
Capital expenditures in 1999 of approximately $4.8 million were principally
for the upgrade and expansion of sales and administration functions. Expenditure
in 1998 of approximately $13.9 million primarily relates to an upgrade of the
manufacturing facility in Canada and significant investments in new computer
hardware and software.
BUSINESS COMBINATIONS AND DIVESTITURES
During October and November 1999 the Company acquired the European sales and
marketing subsidiaries from Fuisz Technologies Ltd. The operations located in
France, Germany and Italy were acquired for approximately $39.5 million in cash.
A substantial portion of the purchase price was allocated to intangible assets,
which are amortized over 20 years.
On December 23, 1999 Shire Pharmaceuticals Group plc, and Roberts
Pharmaceutical Corporation merged in a tax-free exchange of shares. This
transaction was accounted for as a pooling of interests. Shire exchanged 1.0427
ADSs for each common share of Roberts. Merger transaction expenses and
merger-related restructuring costs totaled $75.9 million. These charges are
disclosed separately in operating expenses.
On January 13, 1999 Shire disposed of its Indianapolis manufacturing plant
for a net consideration after expenses of $1.5 million including a loan note of
$0.5 million. The net gain of $0.8 million is included in results of operations.
During November 1999, the Company sold the product Tigan for $6.4 million. The
Company incurred a loss on disposal of $5.8 million, which is included within
the results of operations.
33
<PAGE>
OTHER COMMITMENTS
Information regarding other commitments is disclosed in Note 18 to the
consolidated financial statements.
FOREIGN CURRENCY FLUCTUATIONS
The Group's parent company and a number of subsidiary operations are located
outside the United States. As such, the consolidated financial results are
subject to fluctuations in exchange rates, particularly those between the U.S.
dollar and British pound. The accumulated foreign currency translation
differences are reported within accumulated other comprehensive income.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of short-term cash investments and trade
accounts receivable.
As revenues are mainly derived from agreements with major pharmaceutical
companies and relationships with drug distributors, and such clients typically
have significant cash resources, any credit risk associated with these
transactions is considered minimal. The Company operates credit evaluation
procedures.
Excess cash is invested in short-term money market instruments, including
bank and building society term deposits and commercial paper from a variety of
companies with strong credit ratings. These investments typically bear minimal
risk.
INFLATION
Although at reduced levels in recent years, inflation continues to apply
upward pressure on the cost of goods and services used by the Company. However,
management believes that the net effect of inflation on the Company's operations
has been minimal during the past three years.
YEAR 2000
The Year 2000 ("Y2K") issue results from the inability of some computer
programs to identify the year 2000 properly, potentially leading to errors or
systems failures. The Company did not incur any significant problems relating to
the Y2K issue and does not expect to incur significant expenses to remediate
minor operating issues.
EURO CONVERSION
On January 1, 1999, the European Economic and Monetary Union (the "EMU")
introduced the Euro as the official currency of the 11 participating member
countries. On that date, the currency exchange rates of the participating
countries were fixed against the Euro. There is a three year transition to the
Euro, and at the end of 2001 the currency will come into circulation and
national currencies will be withdrawn by July 2002.
The U.K. did not participate in the EMU at the commencement of the third
stage on January 1, 1999 and it is uncertain whether or on what terms the U.K.
would be permitted to join at a later date. There can be no prediction as to
whether the U.K. will participate in the EMU or as to the rate at which the
pound sterling would be converted into the Euro. Furthermore, there can be no
prediction as to the likely impact on the U.S. dollar/sterling exchange rate of
a decision by the U.K. to participate in the EMU.
It is anticipated that the pricing of goods and services will be more
transparent through the use of a single currency within the participating member
states. Competition is likely to increase with the
34
<PAGE>
greater price transparency and removal of exchange rate risk. In the longer term
more general price convergence is likely, assuming the EMU leads to greater
harmonization of healthcare policies across the participating member states.
Shire has sales and marketing operations in France, Germany and Italy and
therefore there may be some impact on the Company's business and competitive
position as a result of the increased price transparency.
The Company has reviewed its financial and operating systems and is
satisfied that the introduction of the Euro will not cause any disruption to the
business, and that the systems are in place to receive and make payments in
Euros. Shire will continue to monitor the U.K.'s stance in relation to
participation in the Euro and assess the impact of any significant changes in
policy.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Shire's principal treasury operations are managed by the Group's treasury
function based in the U.K. in accordance with the Group's treasury policies and
procedures which are approved by Shire's Board. As a matter of policy, Shire
does not undertake speculative transactions which would increase its currency or
interest rate exposure.
The Company is subject to market risk exposure in the following areas:
INTEREST RATE MARKET RISK
The Company has cash and cash equivalents on which interest income is earned
at variable rates.
The financing and cash management requirements of the operating subsidiaries
are transacted within the Group's treasury function, where appropriate, in order
to improve the return on liquid assets, manage any currency exposure on non-U.S.
dollar denominated deposits and maintain internal controls.
The Company also has a $250 million credit facility composed of a
$125 million five-year revolving credit facility (including a $25 million letter
of credit facility) and a $125 million five-year term loan facility. The
applicable interest rate on the credit facility ranges between 0.5% and 1.5%
over the prime rate of DLJ Capital Funding, Inc. or the Federal Funds Rate plus
0.5% or between 1.5% and 2.5% over the London Interbank Overnight rate, in each
case depending on Shire's credit rating. The facility is secured by all material
property owned by Shire and its subsidiaries and the capital stock of Shire's
subsidiaries. If Shire's credit rating reaches specified levels, the facility
will not be secured. The facility contains customary covenants and additional
maintenance tests that require Shire to maintain a minimum net worth, a
specified leverage ratio and a specified coverage ratio.
The Company has no amounts due in respect of debt denoted in foreign
currencies.
FOREIGN EXCHANGE MARKET RISK
The Group's parent company and a number of subsidiary operations are located
outside the United States. As such, the consolidated financial results are
subject to fluctuations in exchange rates, particularly between the British
pound and Canadian dollar against the U.S. dollar. The financial statements of
foreign entities are translated using the accounting policies described in
Note 1 of the Notes to the Consolidated Financial Statements. The exposure to
foreign exchange market risk is managed by the Group's treasury function, using
forecasts provided by the operating units. Derivative instruments in the form of
average rate options are used to hedge Shire's currency exposures. The premium
paid for the options is amortized over the hedging period. There were no
derivatives outstanding at December 31, 1999 or 1998.
35
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
called for by this item are submitted as a separate section of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors of the Company required to be
furnished pursuant to this item is incorporated herein by reference to these
sections entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act" from the Company's definitive Proxy Statement for
its Annual Meeting of Shareholders to be held in May 2000. Certain information
relating to executive officers of the Company is set forth in Item 4A of Part I
of this Form 10-K under the caption "Executive Officers of the Registrant".
ITEM 11: EXECUTIVE COMPENSATION
Information pertaining to executive compensation is incorporated herein by
reference to the section entitled "Election of Directors--Executive
Compensation" from the Company's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held in May 2000.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of certain beneficial owners
and management is incorporated herein by reference to the sections entitled
"Principal Shareholders" and "Security Ownership of Management" from the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held in May 2000.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Any information relating to this item is incorporated herein by reference
from the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in May 2000.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the Index of the Financial Statements and Financial
Statement Schedules hereinafter contained (see F-1).
3. EXHIBITS
Reference is made to the Index of Exhibits herein contained (see E-1).
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SHIRE PHARMACEUTICALS GROUP PLC
(Registrant)
By: /s/ ROLF STAHEL
-----------------------------------------
Rolf Stahel
Date: March 29, 2000 CHIEF EXECUTIVE
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES HENRY CAVANAUGH Non-executive Chairman
------------------------------------------- March 29, 2000
James Henry Cavanaugh
/s/ ROLF STAHEL Chief Executive
------------------------------------------- March 29, 2000
Rolf Stahel
/s/ ANGUS CHARLES RUSSELL Group Finance Director
------------------------------------------- March 29, 2000
Angus Charles Russell
/s/ JOSEPH WILSON TOTTEN Group Research and Development
------------------------------------------- Officer March 29, 2000
Joseph Wilson Totten
/s/ BARRY JOHN PRICE Senior Non-executive Director
------------------------------------------- March 29, 2000
Barry John Price
/s/ BERNARD CANAVAN Non-executive Director
------------------------------------------- March 29, 2000
Bernard Canavan
/s/ ZOLA PHILIP HOROVITZ Non-executive Director
------------------------------------------- March 29, 2000
Zola Philip Horovitz
/s/ RONALD MAURICE NORDMANN Non-executive Director
------------------------------------------- March 29, 2000
Ronald Maurice Nordmann
/s/ JOSEPH EDWARD SMITH Non-executive Director
------------------------------------------- March 29, 2000
Joseph Edward Smith
/s/ JOHN TETJE SPITZNAGEL Non-executive Director
------------------------------------------- March 29, 2000
John Tetje Spitznagel
</TABLE>
37
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Public Accountants................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-5
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997...... F-7
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997.............. F-8
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-9
Notes to the Consolidated Financial Statements.............. F-10
Schedules
Schedule II, Valuation and Qualifying Accounts.............. S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF SHIRE PHARMACEUTICALS GROUP PLC:
We have audited the financial statements and schedule on pages F-5 to F-41
and S-1 which have been prepared under the historical cost convention and the
accounting policies set out on pages F-10 to F-14.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for preparing the financial statements and
schedule. It is our responsibility to form an independent opinion, based on our
audit on the financial statements and schedule and to report our opinion to you.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with Auditing Standards issued by the
United Kingdom Auditing Practices Board which are substantially consistent with
United States Generally Accepted Auditing Standards. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgments made by the directors in the preparation of
the financial statements and of whether the accounting policies are appropriate
to the circumstances of the group, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
We did not audit the financial statements for the years ended
31 December 1997 and 31 December 1998 of Roberts Pharmaceutical Corporation, a
company acquired during 1999 in a transaction accounted for as a pooling of
interests. Such statements are included in the consolidated financial statements
of Shire Pharmaceuticals Group plc and reflect total assets and total revenues
of 55% percent and 64% percent, respectively, of the related consolidated totals
for the year ended 31 December 1997 and 60% and 57% respectively for the year
ended 31 December 1998. These statements were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to
amounts included for Roberts Pharmaceutical Corporation for the years ended
31 December 1997 and 31 December 1998, is based solely upon the report of the
other auditors.
We believe that our audit and the reports of other auditors provide a
reasonable basis for our opinion.
OPINION
In our opinion, based on our audit and the report of the other auditors, the
financial statements present fairly the state of affairs of the group at
31 December 1998 and 1999 and of the group's profits/(losses) and cash flows for
the years ended 31 December 1997, 1998 and 1999 and in accordance with generally
accepted accounting principles in the United States.
Our audit opinion was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion based on our audit and reports of other auditors, fairly states in all
material aspects the financial data required to be set forth therein in relation
to the basic financial statements taken as a whole.
Arthur Andersen
Chartered Accountants
Reading, England
29 February 2000
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Roberts Pharmaceutical Corporation
We have audited the consolidated balance sheet of Roberts Pharmaceutical
Corporation (the "Company") as of December 31, 1998, and the related
consolidated statement of operations, stockholders' equity and cash flow for the
year ended December 31, 1998, which are not separately presented herein. Our
audit also included the financial statement schedule of Roberts Pharmaceutical
Corporation, not separately presented herein, listed in the Index at Item 14(a)
of the Roberts Pharmaceutical Annual Report on Form 10-K/A. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1998 and the consolidated results of their
operations and their cash flow for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole present fairly in
all material respects, the information set forth therein for 1998.
Ernst & Young LLP
MetroPark, New Jersey
February 16, 1999
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Shire Pharmaceuticals Group plc:
In our opinion, the consolidated statements of operations, of cash flows and
of changes in shareholders' equity of Roberts Pharmaceutical Corporation and
Subsidiaries (not presented separately herein) present fairly, in all material
respects, the results of their operations and their cash flows for the year
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United states. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Roberts Pharmaceutical
Corporation and Subsidiaries for any period subsequent to December 31, 1997.
PricewaterhouseCoopers LLP (signed)
February 5, 1998
F-4
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... 54,082 52,973
Marketable securities and other current asset investments... 84,344 71,726
Accounts receivable, net.................................... 59,018 76,622
Inventories, net............................................ 39,538 34,639
Deferred tax asset.......................................... 5,312 5,222
Prepaid expenses and other current assets................... 9,012 5,116
-------- --------
Total current assets........................................ 251,306 246,298
Investments................................................. 2,604 10,000
Property, plant and equipment, net.......................... 37,484 42,682
Intangible assets, net...................................... 557,934 537,159
Deferred tax asset.......................................... 31,799 32,632
Other assets................................................ 6,636 4,834
-------- --------
Total assets................................................ 887,763 873,605
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt...................... 9,608 12,351
Accounts and notes payable.................................. 114,509 54,896
Other current liabilities................................... 48,703 14,041
-------- --------
Total current liabilities................................... 172,820 81,288
Long-term debt, excluding current installments.............. 126,314 126,774
Other long-term liabilities................................. 1,345 2,229
-------- --------
Total liabilities........................................... 300,479 210,291
-------- --------
Shareholders' equity:
Common stock, 5p par value; 400,000,000 shares authorized
(1998: 200,000,000); and 244,519,024 shares issued and
outstanding
(1998: 141,092,395)....................................... 20,063 11,725
Additional paid-in capital.................................. 832,650 814,953
Accumulated other comprehensive income/(losses)............. (10,303) (3,236)
Accumulated deficit......................................... (255,126) (160,128)
-------- --------
Total shareholders' equity.................................. 587,284 663,314
-------- --------
Total liabilities and shareholders' equity.................. 887,763 873,605
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product sales......................................... 385,203 291,785 168,916
Licensing and development............................. 10,772 11,821 20,130
Royalties............................................. 3,562 3,697 1,612
Other revenues........................................ 1,995 1,681 896
----------- ----------- -----------
Total revenues........................................ 401,532 308,984 191,554
Costs and expenses:
Cost of sales......................................... 93,475 95,013 67,090
Research and development.............................. 77,503 59,253 40,663
Selling, general and administrative................... 171,386 131,702 86,555
Other charges:
In-process research and development................... -- -- 83,087
Asset impairments and restructuring charges........... 97,132 -- --
Merger transaction expenses........................... 32,279
Loss/(profit) on sale of product rights............... 5,825 (220) --
----------- ----------- -----------
Total operating expenses.............................. 477,600 285,748 277,395
----------- ----------- -----------
Operating(loss)/income................................ (76,068) 23,236 (85,841)
Interest income....................................... 7,349 6,398 6,547
Interest expense...................................... (9,742) (6,511) (964)
Other (expenses)/income............................... (475) 440 (2,474)
----------- ----------- -----------
Total other (expenses)/income......................... (2,868) 327 3,109
----------- ----------- -----------
(Loss)/income before income taxes..................... (78,936) 23,563 (82,732)
Income taxes.......................................... (16,062) (2,991) (1,420)
----------- ----------- -----------
Net (loss)/income..................................... (94,998) 20,572 (84,152)
----------- ----------- -----------
Net (loss)/income per share:
Basic............................................... $ (0.39) $ 0.09 $ (0.45)
Diluted............................................. $ (0.39) $ 0.08 $ (0.45)
Weighted average number of shares:
Basic............................................... 244,698,721 234,044,732 185,153,065
Diluted............................................. 244,698,721 242,806,410 185,153,065
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
ACCUMU-
LATED
OTHER
COMPRE-
COMMON STOCK ADDITIONAL ACCUMU- HENSIVE TOTAL
------------------- PAID-IN LATED INCOME/ SHAREHOLDERS'
AMOUNT SHARES CAPITAL DEFICIT (LOSSES) EQUITY
-------- -------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER 31, 1996.......... 5,140 60,995 451,940 (95,414) (301) 361,365
Net (loss)................................ -- -- -- (84,152) -- (84,152)
Dividends paid by pooled entity........... -- -- -- (1,100) -- (1,100)
Foreign currency translation.............. -- -- -- -- (2,095) (2,095)
Issuance of common stock.................. 5,123 62,535 251,169 -- -- 256,292
Issuance of common and preferred stock by
pooled entity........................... -- -- 7,076 -- -- 7,076
Issuance costs............................ -- -- (3,355) -- -- (3,355)
Options exercised......................... 82 1,001 850 -- -- 932
Options granted on acquisition of
subsidiaries............................ -- -- 28,390 -- -- 28,390
Stock option compensation................. -- -- 2,567 -- -- 2,567
------ ------- ------- -------- ------- -------
BALANCES AS OF DECEMBER 31, 1997.......... 10,345 124,531 738,637 (180,666) (2,396) 565,920
Net income................................ -- -- -- 20,572 -- 20,572
Dividends paid by pooled entity........... -- -- -- (34) -- (34)
Foreign currency translation.............. -- -- -- -- (840) (840)
Issuance of common stock.................. 905 10,861 57,105 -- -- 58,010
Issuance of common and preferred stock by
pooled entity........................... -- -- 9,220 -- -- 9,220
Issuance costs............................ -- -- (2,124) -- -- (2,124)
Options exercised......................... 475 5,700 3,610 -- -- 4,085
Stock option compensation................. -- -- 5,499 -- -- 5,499
Tax benefit associated with exercise of
stock options........................... -- -- 3,006 -- -- 3,006
------ ------- ------- -------- ------- -------
BALANCES AS OF DECEMBER 31, 1998.......... 11,725 141,092 814,953 (160,128) (3,236) 663,314
Net loss.................................. -- -- -- (94,998) -- (94,998)
Foreign currency translation.............. -- -- -- -- (7,067) (7,067)
Issuance of common stock for
acquisitions............................ 8,123 100,767 (8,123) -- -- --
Issuance of common and preferred stock by
pooled entity........................... -- -- 8,613 -- -- 8,613
Options exercised......................... 215 2,660 3,308 -- -- 3,523
Stock option compensation................. -- -- 11,932 -- -- 11,932
Tax benefit associated with exercise of
stock options........................... -- -- 1,967 -- -- 1,967
------ ------- ------- -------- ------- -------
BALANCES AS OF DECEMBER 31, 1999.......... 20,063 244,519 832,650 (255,126) (10,303) 587,284
====== ======= ======= ======== ======= =======
</TABLE>
F-7
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net (loss)/income........................................... (94,998) 20,572 (84,152)
Foreign currency translation adjustments.................... (7,067) (840) (2,095)
Unrealized holding (loss)/gain on marketable securities..... (411) 96 199
-------- ------ -------
Comprehensive (loss)/income................................. (102,065) 19,732 (86,247)
======== ====== =======
</TABLE>
There are no tax effects related to the items included above.
The accompanying notes are an integral part of these consolidated financial
statements
F-8
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss)/income......................................... (94,998) 20,572 (84,152)
------- -------- -------
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities:
Depreciation and amortization........................... 28,598 25,249 12,309
Stock option compensation............................... 13,900 8,505 2,567
Acquisition of in--process research and development..... -- -- 83,087
Non cash exchange gains and losses...................... (664) (1,816) (1,289)
(Gain)/loss on sale of fixed assets..................... (828) 16 (13)
Loss on sale of intangible assets....................... 5,825 -- --
Write--down of investment............................... 7,546 -- --
Decrease/(increase) in accounts receivable.............. 17,012 (24,988) (5,751)
(Increase) in inventory................................. (6,543) (5,170) (4,657)
Increase in accounts payable............................ 37,083 12,186 511
Reserve for restructuring charges....................... 83,608 -- --
Carbatrol milestone payment............................. -- -- 8,000
Impact of discontinued operations....................... -- -- (629)
------- -------- -------
Net cash provided by operating activities............. 90,539 34,554 9,983
------- -------- -------
Cash flows from investing activities:
(Investment in)/redemption of marketable securities....... (7,940) 3,825 (32,094)
Purchase of long--term investment......................... -- (10,000) --
Deferred consideration.................................... -- -- (10,000)
Purchase of subsidiary undertakings....................... (32,000) -- (41,053)
Expenses of acquisition................................... -- (551) (3,118)
Net cash acquired with subsidiary undertakings............ 1,979 -- 6,759
Purchase of intangible assets............................. (57,848) (142,258) (10,066)
Purchase of fixed assets.................................. (4,786) (13,871) (13,936)
Proceeds from sale of intangible fixed assets............. 6,575 1,033 --
Proceeds from sale of fixed assets........................ 1,413 60 20
Collection on notes receivable............................ 7,195 1,751 6,738
------- -------- -------
Net cash used in investing activities................. (85,412) (160,011) (96,750)
------- -------- -------
Cash flows from financing activities:
(Increase)/decrease in cash placed on short--term
deposit................................................. (4,677) (35,664) 33,949
Long term debt issued..................................... -- 125,000 --
Payments on long term debt, capital leases and notes...... (11,499) (11,708) (7,410)
Payment of debt issuance costs............................ -- (2,528) --
Proceeds from issue of common stock, net.................. 8,615 35,027 19,054
Proceeds from exercise of options......................... 3,523 4,082 1,016
Proceeds from issue of preferred stock.................... -- 4,494 6,000
Cash dividends paid....................................... -- (150) (1,629)
------- -------- -------
Net cash (used in)/provided by financing activities... (4,038) 118,553 50,980
------- -------- -------
Effect of foreign exchange rate changes on cash and cash
equivalents............................................... 20 9 (401)
Net increase/(decrease) in cash and cash equivalents........ 1,109 (6,895) (36,188)
Cash and cash equivalents at beginning of period............ 52,973 59,868 96,056
------- -------- -------
Cash and cash equivalents at end of period.................. 54,082 52,973 59,868
------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION: 1999 1998 1997
- ----------------------------------- -------- -------- --------
<S> <C> <C> <C>
Interest paid............................................... 11,612 3,948 953
Income taxes paid........................................... 11,356 5,285 2,534
Non cash activities:
Notes issued for product acquisitions..................... 11,800 -- 7,250
Notes received for sale of product rights................. -- 218 --
Common stock issued for product acquisitions.............. -- 11,572 --
Common stock issued on conversion of zero-coupon note..... -- 14,042 --
Common stock issued for acquisitions of subsidiaries...... -- -- 259,000
Debt assumed on acquisition of subsidiaries............... 3,300 -- --
Capitalized leases........................................ -- 131 256
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-9
<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, cancer and gastrointestinal disorders. The
Company's principal products include Adderall, for the treatment of Attention
Deficit Hyperactivity Disorder, 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) USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
C) REVENUE RECOGNITION
Product sales are recognized upon shipment of products. Reserves for product
returns are established on an accruals basis at the time revenue for product
sales is recognized.
Licensing and development fees represent revenues derived from license
agreements and from collaborative research and development arrangements.
Licensing fees are recognized upon transfer or licensing of intellectual
property rights. Development fee revenue relates to ongoing research and
development in connection with licensed technology. Revenue in respect of
research and development performed on a cost plus or fixed percentage of cost
basis is recognized as research and development work is performed. The total
cost of research and development work performed is based on accrued project
costs, including employee related expenses determined according to actual hours
worked. Where collaborative research and development arrangements stipulate
payment on a milestone basis, revenue is recognized upon achievement of those
milestones.
Royalty revenue relating to licensed technology is recognized when
receivable.
Revenues are stated net of value added tax and similar taxes, trade
discounts and intercompany transactions.
No revenue is recognized for consideration, the value or receipt of which is
dependent on future events, future performance, or refund obligations.
D) RESEARCH AND DEVELOPMENT
Research and development expenditures include funded and unfunded
expenditure and are charged to operations in the period in which the expense is
incurred. Milestones payable in respect of
F-10
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
research and development work are charged to the income statement on achievement
of those milestones.
E) LEASED ASSETS
The cost of operating leases is charged to operations on a straight line
basis over the lease term, even if rental payments are not made on such a basis.
Assets acquired under finance leases are included in the balance sheet as
tangible fixed assets and are depreciated over the shorter of the period of
lease or their useful lives. The capital elements of future lease payments are
recorded as liabilities, while the interest elements are charged to the income
statement over the period of the leases to give a constant charge on the balance
of the capital repayments outstanding.
F) PENSIONS
The Group contributes to personal defined contribution pension plans of
employees. Contributions are charged to the income statement as they become
payable. Details of the Supplemental Executive Retirement Plan operated by the
Group are given in Note 22.
G) FINANCE COSTS OF DEBT
Finance costs of debt are recorded as a deferred asset and then amortized to
the income statement over the term of the debt at a constant rate on the
carrying amount. Deferred financing costs relating to debt terminated early are
written off to the income statement in that period.
H) INCOME TAXES
The Company provides for income taxes in accordance with SFAS No.109,
"Accounting for Income Taxes". Deferred tax assets and liabilities are provided
for differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts. The
deferred tax assets and liabilities are measured using the enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Income tax expense is computed as the tax payable or refundable
for the period plus or minus the change during the period in deferred tax assets
and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
I) ADVERTISING EXPENSE
The Company expenses the cost of advertising as incurred. Advertising costs
amounted to $6,646,000, $6,715,000 and $5,284,000 for the years ended
December 31, 1999, 1998 and 1997 respectively.
J) FOREIGN CURRENCY
Monetary assets and liabilities in foreign currencies are translated into
U.S. dollars at the rate of exchange ruling at the balance sheet date.
Transactions in foreign currencies are translated into U.S.
F-11
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
dollars at the rate of exchange ruling at the date of the transaction. Exchange
differences are taken into account in arriving at operating income.
The results of overseas operations are translated at the average rates of
exchange during the period and their balance sheets at the rates ruling at the
balance sheet date. The cumulative effect of exchange rate movements is included
in a separate component of other comprehensive income.
The consolidated financial statements are prepared from records maintained
in the country in which the subsidiary is located and are translated into U.S.
dollars according to the above policy.
Foreign currency transaction gains and losses on an after-tax basis included
in consolidated net income in the years ended December 31, 1999, 1998, and 1997,
pursuant to Statement of Financial Accounting Standards (SFAS) No. 52, Foreign
Currency Translation, amounted to $880,000 loss, $457,000 gain and $106,000
loss, respectively.
K) EMPLOYEE STOCK PLANS
The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations.
L) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include cash in banks and bank short-term
investments with original maturities of less than ninety days. Marketable
securities classified as available for sale consist primarily of debt
instruments with maturities of more than three months. They are marked to market
at each balance sheet date, with gains and losses recorded in a separate
component of other comprehensive income. Other than temporary impairments in
value are recorded through the income statement.
M) INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the lower
of cost and net realizable value. Cost incurred in bringing each product to its
present location and condition is based on purchase costs calculated on a
first-in, first-out basis, including transport. Net realizable value is based on
estimated normal selling price less further costs expected to be incurred to
completion and disposal. Provision is made for obsolete, slow moving or
defective items where appropriate.
N) INVESTMENTS
Investments which are accounted for under the cost method are stated at
cost, less provisions for other than temporary impairment in value. Impairment
is assessed by reference to the fair value of the securities as determined using
established financial methodologies. The fair value of investments in private
entities and non-traded securities of public entities are measured by valuation
methodologies including discounted cash flows.
O) INTANGIBLE ASSETS
Intangible assets comprise goodwill and intellectual property rights.
F-12
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill arising on the acquisition of subsidiary undertakings and
businesses, representing any excess of the fair value of the consideration given
over the fair value of the identifiable assets and liabilities acquired, is
capitalized and written off on a straight line basis over its useful economic
life.
Goodwill recognized in each significant business combination is being
amortized over a period of 5 to 30 years on a straight line basis depending on
the nature of the goodwill, and is evaluated periodically for realizability
based on expectations of undiscounted cash flows for each subsidiary having a
material goodwill balance.
The following factors are considered in estimating the useful lives. Where
an intangible asset is a composite of a number of factors, the period of
amortization is determined from considering these factors together:
- regulatory and legal provisions, including the regulatory approval and
review process, patent issues and actions by government agencies
- the effects of obsolescence, changes in demand, competing products and
other economic factors, including the development of competing drugs that
are more effective clinically or economically
- actions of competitors, suppliers, regulatory agencies or others that may
eliminate current competitive advantages
Impairments to goodwill are recognized if expected undiscounted cash flows
are not sufficient to recover the goodwill. If a material impairment is
identified, goodwill is written down to its fair value. Fair value is determined
based on the present value of expected net cash flows to be generated by the
business, discounted using a rate commensurate with the risks involved.
Intellectual property, including trademarks for products with an immediate
defined revenue stream and acquired for valuable consideration, is recorded at
cost and amortized in equal annual installments over the estimated useful life
of the related product which range from 5 to 40 years. Intellectual property
with no defined revenue stream where the related product has not yet completed
the necessary approval process is written off on acquisition. Amounts recorded
as intangible assets are reviewed for impairment on a periodic basis using
expected undiscounted cash flows.
Continuing milestone payments on intellectual property with no defined
revenue stream are charged to operations. Royalty payments due on sales of
products are charged to operations when a liability has been incurred.
P) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is shown at cost less accumulated depreciation
and any provision for impairment. Depreciation is provided on a straight line
basis at rates calculated to write off the cost less estimated residual value of
each asset over its estimated useful life as follows:
<TABLE>
<S> <C>
Land and buildings.......................................... 50 years
Office furniture, fittings and equipment.................... 4 to 5 years
Warehouse, laboratory and manufacturing equipment........... 4 to 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as incurred;
costs of major renewals and improvements are capitalized. At the time property,
plant and equipment are retired or
F-13
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
otherwise disposed of, the cost and accumulated depreciation are eliminated from
the asset and accumulated depreciation accounts and the profit or loss on such
disposition is reflected in income.
Q) CONCENTRATION OF CREDIT RISK
Revenues are mainly derived from agreements with major pharmaceutical
companies and relationships with drug distributors. Such clients have
significant cash resources and therefore any credit risk associated with these
transactions is considered minimal.
Excess cash is invested in bank and building society term deposits and
commercial paper from a variety of companies with strong credit ratings. These
investments typically bear minimal risk.
R) RELATED PARTIES
Transactions with related parties are conducted on the same basis as they
would have been with unrelated parties.
Transactions between Group companies have not been disclosed since Group
accounts are prepared and include the results of all subsidiary undertakings.
S) 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.
2: BUSINESS COMBINATIONS AND REORGANISATIONS
YEAR ENDED DECEMBER 31, 1999
(a) Acquisition of Laboratoires Murat S.A., Fuisz Pharma GmbH & Co KG and
Istoria Farmaceutici S.p.A.
On October 22 1999, Shire completed the acquisition of all the assets and
liabilities of Laboratoires Murat S.A., Fuisz Pharma GmbH and the Cebutid
trademark for $33 million, including the costs of acquisition. The purchase
price consisted of $29.7 million in cash and the assumption of $3.3 million in
debt.
On November 17 1999, Shire completed the acquisition of all the assets and
liabilities of Istoria Farmaceutici S.p.A. for $6.5 million, including the costs
of acquisition. The purchase consideration was $6.5 million in cash.
The above transactions have provided Shire with marketing and distribution
operations in France, Germany and Italy respectively. Shire has accounted for
the acquisitions using purchase accounting.
F-14
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2: BUSINESS COMBINATIONS AND REORGANISATIONS (CONTINUED)
Total goodwill of $22.4 million will be amortized over a period of 20 years, the
expected economic life of the underlying assets acquired, on a straight line
basis and periodically reviewed for impairment in accordance with the Company's
accounting policy for purchased goodwill. The results of operations of these
acquired companies have been included in the consolidated results of the Company
since their respective dates of acquisition.
F-15
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2: BUSINESS COMBINATIONS AND REORGANISATIONS (CONTINUED)
The purchase price of $3.3 million for Laboratoires Murat S.A. was allocated
as follows:
<TABLE>
<CAPTION>
$'000
--------
<S> <C>
Property, plant and equipment............................... 19
Intangible assets........................................... 1,073
Current assets.............................................. 1,614
Accounts payable............................................ (1,292)
-------
Net assets acquired......................................... 1,414
Goodwill.................................................... 1,886
-------
Purchase consideration...................................... 3,300
-------
</TABLE>
$7.5 million was in respect of the Cebutid trademark.
The purchase price of $22.2 million for Fuisz Pharma GmbH was allocated as
follows:
<TABLE>
<CAPTION>
$'000
--------
<S> <C>
Property, plant and equipment............................... 23
Intangible assets........................................... 3,331
Current assets.............................................. 1,891
Accounts payable............................................ (1,108)
-------
Net assets acquired......................................... 4,137
Goodwill.................................................... 18,063
-------
Purchase consideration...................................... 22,200
-------
</TABLE>
The purchase price of $6.5 million for Istoria Farmaceutici S.p.A. was
allocated as follows:
<TABLE>
<CAPTION>
$'000
--------
<S> <C>
Property, plant and equipment............................... 166
Intangible assets........................................... 3,268
Current assets.............................................. 1,515
Accounts payable............................................ (897)
------
Net assets acquired......................................... 4,052
Goodwill.................................................... 2,448
------
Purchase consideration...................................... 6,500
------
</TABLE>
(b) Merger with Roberts Pharmaceutical Corporation
On December 23, the Company acquired 100% of the outstanding stock of
Roberts Pharmaceutical Corporation in exchange for 100,767,482 ordinary shares.
Roberts Pharmaceutical Corporation is an international pharmaceutical company
which licenses, acquires, develops and commercializes post-discovery drugs in
selected therapeutic categories.
This transaction was accounted for by the pooling of interests method.
Following consummation of the transaction, the Company has decided to
restructure the enlarged business and accordingly has recorded approximately
$97.1 million in non-recurring asset impairment and restructuring charges.
F-16
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2: BUSINESS COMBINATIONS AND REORGANISATIONS (CONTINUED)
The accompanying consolidated financial statements have been retroactively
restated to reflect the combined operations of Roberts Pharmaceutical
Corporation and Shire Pharmaceuticals Group plc as if the merger was consummated
on January 1, 1997.
(c) Dispositions
On January 13, 1999 Shire disposed of its Indianapolis manufacturing plant
for a net consideration after expenses of $1.5 million including a loan note of
$0.5 million. The net gain of $0.8 million is included in results of operations.
During November 1999, the Company sold the product Tigan for $6.4 million.
The Company incurred a loss on disposal of $5.8 million, which is included
within the results of operations.
(d) Pro forma information
The unaudited pro forma effect in 1999 and 1998 of significant acquisitions
if acquired on January 1, 1999 and January 1, 1998 respectively would have
resulted in revenues, income before extraordinary items, net income and per
share data as follows:
<TABLE>
<CAPTION>
1999 1998
$'000 $'000
-------- --------
<S> <C> <C>
REVENUES................................................ 417,948 330,346
(Loss)/income before extraordinary items................ (95,463) 19,039
Net (loss)/income....................................... (95,463) 19,039
Net (loss)/income per share--basic...................... $ (0.39) $ 0.08
Net (loss)/income per share--diluted.................... $ (0.39) $ 0.08
</TABLE>
Year ended December 31, 1998
There were no significant acquisitions or dispositions of businesses during
the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997
(a) Acquisition of Pharmavene, Inc.
On March 23, 1997 Shire completed the acquisition of Pharmavene, Inc.
("Pharmavene"), subsequently renamed Shire Laboratories, Inc., for approximately
$104 million, including the costs of acquisition. The purchase price consisted
of $27.2 million in cash, the issue of $60.5 million in shares, the issue of
$6.3 million in share options and contingent consideration of $10 million.
In connection with the acquisition, each outstanding share of Pharmavene
common stock was exchanged for Shire ordinary shares, resulting in the issuance
of 16,947,000 Shire ordinary shares valued at $60.5 million. Options granted by
Pharmavene prior to the acquisition date were converted into options to acquire
2,790,000 Shire ordinary shares. These options were valued in determination of
the purchase price of Pharmavene at $6.3 million.
The contingent consideration was payable to the former shareholders of
Pharmavene on approval of the drug Carbatrol by the F.D.A. On payment of the
contingent consideration in December 1997, the amount of $10 million was
capitalized as an intangible asset representing completed products.
F-17
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2: BUSINESS COMBINATIONS AND REORGANISATIONS (CONTINUED)
(a) Shire accounted for the acquisition of Pharmavene using purchase accounting.
The purchase price of $104 million was allocated as follows:
<TABLE>
<CAPTION>
$'000
--------
<S> <C>
Property, plant and equipment............................... 1,561
Intangible assets........................................... 11,065
Current assets.............................................. 14,002
Accounts payable............................................ (5,398)
In-process research and development......................... 82,774
-------
Purchase consideration...................................... 104,004
-------
</TABLE>
Included within acquired intangible assets is the value of the assembled
workforce of $1,065,000 which is being amortized on a straight line basis over a
period of 5 years. $10,000,000 is attributed to the value of completed products,
as disclosed above, and is being amortized on a straight line basis over
20 years.
As a result of the transaction, Shire incurred a charge for the year ended
December 31, 1997, representing the acquisition of in-process research and
development in accordance with SFAS No. 2. The acquired in-process research and
development charge of $82,774 represents the value of Pharmavene's products in
development at the date of acquisition. Technological feasibility of these
products was not established at the date of acquisition. These products were
considered to have no alternative future use other than the therapeutic
indications for which they were in development. The work remaining to complete
the development products involved continuing formulation activity, clinical
studies and the submission of regulatory filings to seek marketing approval. As
pharmaceutical products cannot be marketed without regulatory approvals, Shire
will not receive any benefits unless it receives such regulatory approval.
The results of operations of Shire Laboratories, Inc. have been included in
the consolidated results of the Company since the acquisition date of March 23,
1997.
(b) Acquisition of Richwood Pharmaceutical Company, Inc.
On August 22, 1997 the Company acquired all of the outstanding shares of
Richwood Pharmaceutical Company, Inc. ("Richwood"), subsequently renamed Shire
Richwood, Inc., a company involved in the development, manufacture and marketing
of pharmaceutical products. The consideration paid was $209 million, comprising
shares valued at $170.5 million, share options $21.7 million, cash of
$15.1 million and acquisition expenses of $1.7 million.
In connection with the acquisition, each outstanding share of Richwood
common stock was exchanged for Shire ordinary shares, resulting in the issuance
of 39,488,000 Shire ordinary shares valued at $170.5 million. Options granted by
Richwood prior to the acquisition date were converted into options to acquire
5,632,000 Shire ordinary shares. These options were valued in determination of
the purchase price at $21.7 million.
F-18
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2: BUSINESS COMBINATIONS AND REORGANISATIONS (CONTINUED)
Shire accounted for the acquisition of Richwood using purchase accounting.
The purchase price of $209 million was allocated as follows:
<TABLE>
<CAPTION>
$'000S
--------
<S> <C>
Property, plant and equipment
Intangible assets........................................... 2,275
Current assets.............................................. 198,445
Accounts payable............................................ 14,625
(6,434)
-------
Purchase consideration 208,911
-------
</TABLE>
The related acquired goodwill and other intangible assets of $198.4 million
are being amortized on a straight line basis over a period between 5 and
30 years as follows:
<TABLE>
<CAPTION>
$'000S
--------
<S> <C>
Completed products/technology............................... 176,006
Assembled workforce......................................... 2,819
Goodwill.................................................... 19,620
-------
198,445
-------
</TABLE>
Completed products and technology represent the portfolio of named
identifiable products and technologies owned and marketed by Shire
Richwood, Inc. at the time of acquisition.
The results of operations of Shire Richwood, Inc. have been included in the
consolidated results of the Company since the acquisition date of August 22,
1997.
3: CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Cash at bank and in hand.................................... 54,082 52,973
------ ------
</TABLE>
4: MARKETABLE SECURITIES AND OTHER CURRENT ASSET INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Marketable securities....................................... 44,003 36,062
Commercial paper............................................ 39,200 6,510
Institutional cash fund..................................... 1,141 29,154
------ ------
84,344 71,726
------ ------
</TABLE>
There are no restrictions on the sale of marketable securities and no
amounts have been pledged as collateral.
There have been no significant changes in market value subsequent to
December 31, 1999.
F-19
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4: MARKETABLE SECURITIES AND OTHER CURRENT ASSET INVESTMENTS (CONTINUED)
The Company recorded losses on sales of marketable securities during the
years ended December 31, 1999, 1998 and 1997 of $227,000, $30,000 and $18,000.
Unrealized holding gains and losses on available for sale marketable
securities, as disclosed in the Statement of Comprehensive Income, amounted to
$411,000 loss, $96,000 gain and $199,000 gain at December 31, 1999, 1998 and
1997 respectively.
Maturity dates of marketable securities held at December 31, 1999 primarily
ranged from 3 to 36 months.
5: ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Trade receivables................................... 55,953 64,857
Notes receivable.................................... 678 9,426
Other receivables................................... 2,387 2,339
------- -------
59,018 76,622
======= =======
</TABLE>
Trade receivables included above are stated net of a provision for doubtful
debts of $565,000; December 31, 1998: $577,000.
Included within other receivables at December 31, 1999 is $1,144,000 of
accrued royalty income. At December 31, 1998 other receivables included $669,000
in respect of product divestments and $923,000 of accrued royalty income.
Notes receivable are in respect of the divestment of certain products.
6: INVENTORY
Inventory consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Finished goods...................................... 26,573 19,990
Work-in-process..................................... 6,389 6,113
Raw materials....................................... 6,576 8,536
------- -------
39,538 34,639
======= =======
</TABLE>
F-20
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Prepaid expenses.................................... 6,621 4,286
Other current assets................................ 2,391 830
------ ------
9,012 5,116
====== ======
</TABLE>
Included within other current assets at December 31, 1999 is $1,098,000 in
respect of the current portion of deferred financing costs relating to the
$125,000,000 long term loan. The deferred financing costs are being amortized
over the five year term of the loan.
8: INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Investment in RiboGene Inc.......................... 2,604 10,000
----- ------
</TABLE>
The Company has an investment in the convertible preferred stock of
RiboGene, Inc., a drug discovery company targeting infectious diseases. The
shares have no voting rights. One-third of the preferred stock is convertible at
the option of the Company to common stock of RiboGene at each of the first three
anniversary dates of the investment. The investment is classified as held to
maturity.
In accordance with the Company's stated accounting policy, the cost of the
investment has been written down by $7,396,000 to $2,604,000 at December 31,
1999 as the Company considers the value of the investment to have suffered a
permanent diminution in value.
9: PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Land and buildings.................................. 25,498 29,767
Office furniture, fittings and equipment............ 14,527 12,253
Warehouse, laboratory and manufacturing equipment... 10,595 10,053
------ ------
50,620 52,073
Less: Accumulated depreciation...................... 13,136 9,391
------ ------
37,484 42,682
------ ------
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $4,243,000, $3,281,000 and $1,893,000 respectively.
F-21
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9: PROPERTY, PLANT & EQUIPMENT (CONTINUED)
Included within land and buildings at December 31, 1999 is $12 million
relating to the Company's Eatontown, New Jersey office facility classified as
available for sale. The asset is continuing to be depreciated.
10: INTANGIBLE ASSETS
Intangible assets comprise:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Intellectual property rights acquired............... 394,640 363,306
Goodwill arising on businesses acquired............. 238,897 223,776
------- -------
633,537 587,082
Less: Accumulated amortization...................... 75,603 49,923
------- -------
557,934 537,159
------- -------
</TABLE>
Included in intellectual property above is $35,000,000 for the purchase of
the worldwide rights to Agrylin during the year ended December 31, 1999, which
allows the Company to retain all rights to the product with no future royalty
liability.
Other significant additions to intellectual property during the year ended
December 31, 1999 were in respect of product rights for Lodine ($5,474,000) and
Fareston ($10,000,000), the Cebutid trademark purchased from Fuisz
Technologies Ltd ($7,500,000) and intellectual property relating to the
manufacture of Adderall ($11,800,000) acquired from Arenol Corporation.
During the year ended December 31, 1999 the Company disposed of the Tigan
product rights. The loss on sale of $5,825,000 is recorded in the statement of
operations.
Amortization expense for the years ended December 31, 1999, 1998 and 1997
was $24,355,000, $21,968,000 and $10,416,000 respectively.
F-22
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10: INTANGIBLE ASSETS (CONTINUED)
The movement on goodwill was as follows:
<TABLE>
<CAPTION>
COMPLETED ASSEMBLED GOODWILL/ DEFERRED
PRODUCTS WORKFORCE OTHER CONSIDERATION TOTAL
$'000 $'000 $'000 $'000 $'000
--------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
As of January 1, 1997..................... 4,222 170 1,355 -- 5,747
Arising on acquisitions................... 176,006 3,744 19,619 -- 199,369
Arising on deferred payment............... -- -- -- 10,142 10,142
Amortization charge....................... (3,355) (418) (137) (126) (4,036)
Foreign exchange.......................... 4,311 70 456 64 4,901
------- ----- ------ ------ -------
As of December 31, 1997................... 181,184 3,566 21,293 10,080 216,123
Adjustment to goodwill.................... -- -- 691 -- 691
Amortization charge....................... (9,091) (790) (704) (506) (11,091)
Foreign exchange.......................... 1,965 34 254 110 2,363
------- ----- ------ ------ -------
As of December 31, 1998................... 174,058 2,810 21,534 9,684 208,086
Arising on acquisitions................... -- -- 22,383 -- 22,383
Amortization charge....................... (9,021) (782) (871) (504) (11,178)
Foreign exchange.......................... (5,401) (86) (940) (301) (6,728)
------- ----- ------ ------ -------
As of December 31, 1999................... 159,636 1,942 42,106 8,879 212,563
------- ----- ------ ------ -------
</TABLE>
The weighted average amortizable life of goodwill at December 31, 1999, 1998
and 1997 was 21 years.
The additions to goodwill during the year ended December 31, 1999 arose on
the acquisition of Laboratoires Murat S.A., Fuisz Pharma GmbH & Co KG and
Istoria Farmaceutici S.p.A. from Fuisz Technologies Ltd. For further details see
Note 2(a).
11: OTHER NON CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Notes receivable.................................... 422 2,369
Other assets........................................ 6,214 2,465
----- -----
6,636 4,834
----- -----
</TABLE>
Included within other assets at December 31, 1999 is $4,393,000 in respect
of deferred financing costs. See Note 7 above for further details.
F-23
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12: ACCOUNTS AND NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Trade accounts payable.............................. 31,540 19,791
Accrued expenses.................................... 79,520 35,105
Notes payable....................................... 3,449 --
------- ------
114,509 54,896
------- ------
</TABLE>
The weighted average interest rate for notes payable at December 31, 1999
and 1998 was 6%. The notes payable are not secured and do not contain any
covenants.
13: CURRENT PORTION OF LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Current portion of notes payable.................... 9,573 11,178
Current portion of capital leases................... 35 1,173
------ ------
9,608 12,351
------ ------
</TABLE>
14: OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Income taxes payable................................ 6,727 3,134
Deferred tax liabilities............................ -- 244
Payable for termination of license agreement........ 806 832
Other accrued liabilities........................... 41,170 9,831
------ ------
48,703 14,041
------ ------
</TABLE>
Other accrued liabilities at December 31, 1999 primarily relate to
restructuring costs incurred as a result of the merger with Roberts
Pharmaceutical Corporation.
F-24
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15: LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Notes payable....................................... 135,887 137,917
Less: current installments.......................... (9,573) (11,178)
------- -------
126,314 126,739
------- -------
Capital leases payable.............................. 35 1,208
Less: current installments.......................... (35) (1,173)
------- -------
-- 35
------- -------
Total, less current installments.................. 126,314 126,774
------- -------
</TABLE>
Principal payments in each of the next five years and thereafter on
long-term debt outstanding at December 31, 1999 amount to:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
$'000
------------
<S> <C>
2000........................................................ 8,358
2001........................................................ 1,322
2002........................................................ 1,242
2003........................................................ --
2004........................................................ 125,000
Thereafter.................................................. --
-------
135,922
=======
</TABLE>
The weighted average borrowing rate for the year ended December 31, 1999 was
7% (1998: 7%).
$125 MILLION FIVE YEAR TERM LOAN
The Company entered into a $125,000,000 five year term loan with DLJ Capital
Funding, Inc. on November 19, 1999. This loan replaced an existing $125,000,000
loan facility in the name of Roberts Pharmaceutical Corporation that had been
taken out to finance the acquisition of Pentasa in 1998. The new loan is in the
name of the parent company, Shire Pharmaceuticals Group plc. The applicable
interest rate ranges between 0.5 per cent and 1.5 per cent over the higher of
the prime rate of DLJ Capital Funding, Inc. or the Federal Funds Rate plus 0.5
per cent or between 1.5 per cent and 2.5 per cent over the London Interbank
Overnight Rate (as adjusted in accordance with the loan agreement), in each case
depending on Company's credit rating.
All obligations under the facility are jointly and severally guaranteed by
the Company and by its subsidiaries and is initially secured by all material
property owned by the Company and its subsidiaries and the capital stock of the
subsidiaries. If the Company's credit rating reaches specified levels, the
facility will not be secured. The facility contains covenants and maintenance
tests that require the Company to maintain a minimum net worth, a specified
leverage ratio and a specified coverage ratio. At December 31, 1999 the Company
satisfied the aforementioned covenants and maintenance tests.
F-25
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15: LONG-TERM DEBT (CONTINUED)
$11.8 MILLION UNSECURED CONVERTIBLE ZERO COUPON LOAN NOTE
The Company financed the purchase of intellectual property relating to the
manufacture of Adderall from Arenol Corporation by a total of $11.8 million in
loan notes. On March 5, 1999 the Company issued a $5,800,000 principal amount
Unsecured Convertible Zero Coupon Loan note due July 30, 2001 (the "First Loan
Note") and a $6,000,000 principal amount Unsecured Convertible Zero Coupon Loan
Note due July 30, 2004 (the "Second Loan Note"). Both loan notes are in the name
of the parent company, Shire Pharmaceuticals Group plc. The agreement provides
for the cancellation of certain specified amounts of the aggregate principal
amount of the First Loan Note and of such amounts of the Second Loan Note on
certain dates to the extent of certain indemnified losses or, to the extent that
such amounts of the First Loan Note or the Second Loan Note are not so canceled,
for their conversion into that number of Ordinary Shares equal to the amounts
not canceled divided by the product of (a) the lower of L3.565 (approximately
$5.75) of the midweek closing price of the Ordinary Shares on the London Stock
Exchange on the relevant date and (b) the exchange rate on the relevant date.
16: OTHER NON CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
$'000 $'000
------------ ------------
<S> <C> <C>
Payable for termination of license agreement........ 1,209 2,080
Other liabilities................................... 136 149
----- -----
1,345 2,229
----- -----
</TABLE>
17: FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each material class of financial instrument:
CASH AND CASH EQUIVALENTS--CARRYING AMOUNT APPROXIMATES FAIR VALUE DUE TO
THE SHORT-TERM NATURE OF THESE INSTRUMENTS.
MARKETABLE SECURITIES AND OTHER CURRENT ASSET INVESTMENTS--THE FAIR VALUE OF
MARKETABLE SECURITIES IS ESTIMATED BASED ON QUOTES OBTAINED FROM BROKERS.
ACCOUNTS RECEIVABLE--CARRYING AMOUNT APPROXIMATES FAIR VALUE DUE TO THE
SHORT-TERM NATURE OF THESE INSTRUMENTS.
ACCOUNTS AND NOTES PAYABLE--carrying amount approximates fair value due to
the short-term nature of these instruments.
LONG TERM DEBT--the fair value of long term debt is estimated based on the
discounted future cash flows using currently available interest rates.
F-26
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17: FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and corresponding fair values of financial instruments
at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------
CARRYING
AMOUNT FAIR VALUE
-------- ----------
$'000 $'000
<S> <C> <C>
Financial assets:
Cash and cash equivalents.............................. 54,082 54,082
Marketable securities and other current asset
investments.......................................... 84,344 83,933
Financial liabilities:
Accounts and notes payable............................. 114,509 114,487
Long--term debt........................................ 135,922 135,922
------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------
CARRYING
AMOUNT FAIR VALUE
-------- ----------
$'000 $'000
<S> <C> <C>
Financial assets:
Cash and cash equivalents.............................. 52,973 53,196
Marketable securities and other current asset
investments.......................................... 71,726 71,822
Financial liabilities:
Accounts and notes payable............................. 54,896 54,896
Long--term debt........................................ 139,125 138,992
------- -------
</TABLE>
The carrying amounts in the table are included in the consolidated balance
sheet under the indicated captions.
F-27
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18: LEASES AND OTHER COMMITMENTS
(A) LEASES
The Company leases facilities, motor vehicles and certain office equipment
under operating leases. The Company's commitments under the non-cancelable
portion of all operating leases for the next five years and thereafter as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
$'000
<S> <C>
2000........................................................ 4,274
2001........................................................ 3,391
2002........................................................ 2,707
2003........................................................ 1,632
2004........................................................ 726
Thereafter.................................................. 600
------
13,330
======
</TABLE>
Lease and rental expense included in selling, general and administrative
expenses in the accompanying statements of operations amounts to approximately
$3,155,000, $1,555,000 and $1,201,000 for the fiscal years ended December 31,
1999, 1998 and 1997 respectively.
(B) OTHER COMMITMENTS
In accordance with several product acquisitions and licensing agreements,
and subject to certain cancellation rights reserved by the Company, the Company
may be required to make minimum payments related to Noroxin, Sampatrilat and the
Lilly Compounds totaling $21.0 million; and purchase ProAmatine inventory in the
amount of $74.6 million through 2004. The Noroxin payments may be triggered if
minimum sales levels are not met and the ProAmatine payments may be triggered if
minimum sales purchases are not made. The Sampatrilat and Lilly payments are
milestone payments due on reaching certain stages in the development of the
compounds. The following schedule details the minimum payments which may be
required in each of the next four fiscal years, assuming the previously
discussed triggering events occur:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
$'000
<S> <C>
2000........................................................ 5,000
2001........................................................ 2,000
2002........................................................ 2,000
2003........................................................ 12,000
------
21,000
======
</TABLE>
F-28
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18: LEASES AND OTHER COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
PROAMATINE INVENTORY 1999
- -------------------- ------------
$'000
<S> <C>
2000........................................................ 26,808
2001........................................................ 11,943
2002........................................................ 11,943
2003........................................................ 11,943
2004........................................................ 11,943
------
74,580
======
</TABLE>
Upon successful completion of the development of these products, approval by
the FDA, and subsequent marketing of these products, royalties will be in the
range of 7% to 10% of product sales with a weighted average royalty of
approximately 7%. The duration of these royalties is the earlier of 15 years or
patent expiration.
In June 1997, the Company concluded agreements with MacFarlan Smith Ltd.
("MS") and Janssen Pharmaceuticals NV for the procurement of daffodils by MS on
behalf of Shire and Janssen and the extraction from those bulbs of galantamine
for use in the production of Reminyl for commercial launch of the product. Under
these arrangements, MS arranges for the production, planting and harvesting of
daffodil bulbs in sufficient quantities to provide the worldwide launch stock
for the product and has constructed a plant to undertake the extraction of
galantamine with an agreed maximum plant cost of L7 million (approximately $11.2
million). Reciprocal arrangements have been concluded with Janssen, which will
bear the entire cost other than a proportion relative to the supply of bulbs and
product for sale by Shire in the U.K. and Ireland.
These arrangements may be terminated by Shire and Janssen subject to the
payment by Shire and Janssen to MS of certain sums due to MS in respect of
outstanding bulb orders and its capital expenditure.
(C) CONTINGENT LIABILITIES
Until April 1998, Shire Richwood Inc. ("SRI") distributed products
containing phentermine, a prescription drug approved in the U.S. as a single
agent for short term use in obesity. Contrary to the approved labelling of these
products, physicians in the U.S. co-prescribed phentermine with fenfluramine or
dexfenfluramine for management of obesity. This combination was popularly known
as the "fen/phen" diet. In mid 1997, following concerns raised about cardiac
valvular side effects alleged to be associated with this diet regime, the
fenfluramine and dexfenfluramine elements of the "fen/ phen" diet were withdrawn
from the U.S. market. Although SRI has ceased to distribute phentermine, the
drug remains both approved and available in the U.S. SRI and a number of other
pharmaceutical companies are being sued for damages for personal injury and
medical monitoring arising from phentermine used either alone or in combination.
Through approximately March 2000 SRI was named as a defendant in approximately
3,500 lawsuits and had been dismissed from approximately 500 of these cases.
There are approximately 2,400 additional cases pending dismissal as of
March 16, 2000. In only 127 cases pending was it alleged in the complaint or
subsequent discovery that the plaintiff had used SRI's particular product and
SRI has been dismissed from 29 of these cases as well. Although there have been
reports of substantial jury awards and settlements in respect of fenfluramine
and/or
F-29
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18: LEASES AND OTHER COMMITMENTS (CONTINUED)
dexfenfluramine, to date Shire is not aware of any jury awards made against, or
any settlements made by, any phentermine defendant. Shire denies liability on a
number of grounds including lack of scientific evidence that phentermine,
properly prescribed, causes the alleged side effects and that SRI did not
promote phentermine for long term combined use as the "fen/phen" diet.
Accordingly, Shire intends to defend vigorously any and all claims made against
the Group in respect of phentermine and believes that a liability is neither
probable nor quantifiable at this stage of the litigation.
Pursuant to an unlimited indemnity from SRI's former contract manufacturer
of phentermine, EON Laboratories Inc. (EON), legal costs in respect of the
phentermine litigation have, to date, been met by EON's insurers. EON has
available, subject to Court sanction, a further $12 million of insurance to meet
the costs and liabilities of EON and each of its distributors including Shire.
EON is a subsidiary of Hexal GmbH, a manufacturer of generic pharmaceuticals
based in Germany with a reported turnover of approximately $400 million,
operations in an estimated 30 countries and approximately 500 employees. Hexal
does not publicly disclose more extensive details of its financial position. EON
has indicated to Shire that it will defend and indemnify Shire against costs and
liabilities. Although EON has not indicated to Shire an unwillingness or
inability to fund any uninsured losses, Shire is unable to determine EON's
ability to pay such losses. Shire also has access to a limited indemnity given
by the former shareholders of SRI for costs and liabilities related to the
phentermine litigation not met by insurance or other indemnity arising from
litigation filed prior to March 12, 1999. This indemnity is limited to the value
of 1,622,566 ordinary shares of Shire presently held by a third party in escrow
and is available on demand. As of March 24, 2000, based on a closing share price
of L10.60, the value of these shares amounted to approximately L17.2 million
(approximately $27.5 million). In addition, Shire has access to its own product
liability insurance up to a maximum of $3 million. At the present stage of the
litigation, Shire is unable to estimate the level of future legal costs after
taking into account any available product liability insurance and enforceable
indemnities. To the extent that any legal costs are not covered by insurance or
available indemnities, these will be expensed as incurred.
19: NET INCOME/(LOSS) PER SHARE
Basic net income/(loss) per share is based upon the income available to
common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings/(loss) per share is based upon
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.
F-30
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19: NET INCOME/(LOSS) PER SHARE (CONTINUED)
The following table sets forth the computation for basic and diluted net
income/(loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
$'000 $'000 $'000
<S> <C> <C> <C>
Numerator for basic and diluted net (loss)/income per
share............................................... (94,998) 20,572 (84,152)
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF NO. OF NO. OF
SHARES SHARES SHARES
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average number of shares (basic)............. 244,698,721 234,044,732 185,153,065
Effect of dilutive stock options...................... -- 8,761,678 --
----------- ----------- -----------
Weighted average number of shares (diluted)........... 244,698,721 242,806,410 185,153,065
----------- ----------- -----------
Basic net (loss)/income per share..................... $(0.39) $0.09 $(0.45)
Diluted net (loss)/income per share................... $(0.39) $0.08 $(0.45)
----------- ----------- -----------
</TABLE>
The calculation of weighted average number of shares for the year ended
December 31, 1999 does not include potentially dilutive securities, stock
options and convertible debt, because their inclusion would be anti-dilutive in
a loss making year.
The calculation for the year ended December 31, 1997 excludes potentially
dilutive stock options on the same basis.
F-31
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20: ANALYSIS OF REVENUE, OPERATING INCOME/(LOSS), ASSETS 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 or loss before
interest and income taxes. All inter-company items are eliminated. The
accounting policies of each reportable segment are the same as those of the
Group.
<TABLE>
<CAPTION>
REST OF
U.S. EUROPE WORLD TOTAL
$'000 $'000 $'000 $'000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Product sales............................................ 313,582 55,194 16,427 385,203
Licensing and development................................ 1,097 9,675 -- 10,772
Royalties................................................ -- 3,562 -- 3,562
Other revenues........................................... 517 -- 1,478 1,995
------- ------- ------ -------
Total revenue............................................ 315,196 68,431 17,905 401,532
Cost of sales............................................ 62,375 20,958 10,142 93,475
Research and development................................. 50,544 26,904 55 77,503
Selling, general and administrative...................... 108,682 55,986 6,718 171,386
Costs of restructuring................................... 93,603 3,529 -- 97,132
Merger transaction expenses.............................. 9,312 22,967 -- 32,279
Loss on sale of product rights........................... 5,825 -- -- 5,825
------- ------- ------ -------
Total operating expenses................................. 330,341 130,344 16,915 477,600
------- ------- ------ -------
Operating (loss)/income.................................. (15,145) (61,913) 990 (76,068)
------- ------- ------ -------
Total assets............................................. 547,762 313,113 27,801 888,676
Long-lived assets........................................ 348,946 231,560 15,825 596,331
------- ------- ------ -------
Capital expenditure on long-lived assets................. 64,450 8,143 1,397 73,990
YEAR ENDED DECEMBER 31, 1998
Product sales............................................ 226,988 50,261 14,536 291,785
Licensing and development................................ 622 11,199 -- 11,821
Royalties................................................ -- 3,697 -- 3,697
Other revenues........................................... 306 -- 1,375 1,681
------- ------- ------ -------
Total revenue............................................ 227,916 65,157 15,911 308,984
Cost of sales............................................ 67,889 19,378 7,746 95,013
Research and development................................. 27,556 31,647 50 59,253
Selling, general and administrative...................... 80,854 45,208 5,640 131,702
(Profit) on sale of product rights....................... (220) -- -- (220)
------- ------- ------ -------
Total operating expenses................................. 176,079 96,233 13,436 285,748
------- ------- ------ -------
Operating income/(loss).................................. 51,837 (31,076) 2,475 23,236
------- ------- ------ -------
Total assets............................................. 542,799 307,309 23,497 873,605
Long-lived assets........................................ 352,195 213,381 14,265 579,841
------- ------- ------ -------
Capital expenditure on long-lived assets................. 147,007 2,696 8,665 158,368
</TABLE>
F-32
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20: ANALYSIS OF REVENUE, OPERATING INCOME/(LOSS), ASSETS AND REPORTABLE SEGMENTS
(CONTINUED)
<TABLE>
<CAPTION>
REST OF
U.S. EUROPE WORLD TOTAL
$'000 $'000 $'000 $'000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Product sales............................................ 113,814 41,702 13,400 168,916
Licensing and development................................ 4,201 15,929 -- 20,130
Royalties................................................ -- 1,596 16 1,612
Other revenues........................................... -- -- 896 896
------- ------- ------ -------
Total revenue............................................ 118,015 59,227 14,312 191,554
Cost of sales............................................ 41,874 18,228 6,988 67,090
Research and development................................. 20,876 19,678 109 40,663
Selling, general and administrative...................... 52,538 29,211 4,806 86,555
In-process research and development...................... 83,087 -- -- 83,087
------- ------- ------ -------
Total operating expenses................................. 198,375 67,117 11,903 277,395
------- ------- ------ -------
Operating (loss)/income.................................. (80,360) (7,890) 2,409 (85,841)
------- ------- ------ -------
Total assets............................................. 351,573 288,643 24,734 664,950
Long-lived assets........................................ 205,500 239,956 6,960 452,416
------- ------- ------ -------
Capital expenditure on long-lived assets................. 24,826 2,542 7,064 34,432
</TABLE>
(d) Material customers
In the periods set out below, certain customers accounted for greater than
10 per cent of total revenue:
<TABLE>
<CAPTION>
(IN THOUSANDS OF
U.S. DOLLARS)
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Customer A........................................... 100,267 53,599 --
Customer B........................................... 54,498 31,387 --
Customer C........................................... 40,045 35,314 --
</TABLE>
21: OTHER CHARGES
YEAR ENDED DECEMBER 31, 1999
As a result of the acquisition of Roberts Pharmaceutical Corporation on
December 23, 1999, which was accounted for as a pooling of interests, the
Company recorded charges totaling $135.2 million pre-tax for asset impairments
($48.5 million), merger--related transaction expenses ($32.3 million),
restructuring ($43.6 million), loss on product dispositions ($5.8 million) and
other charges ($5.0 million). These charges are disclosed separately within
operating expenses in the Statement of Income.
The Company recorded an impairment charge of $34.2 million to adjust
intangible asset values, primarily product rights, to their estimated fair
value. These charges are consistent with the Company's accounting policy to
review periodically the carrying value of the intangibles and evaluate whether
there
F-33
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21: OTHER CHARGES (CONTINUED)
has been any impairment in the value of those intangibles as compared with
estimated undiscounted future cash flows relating to those intangibles. The
estimated fair value has been calculated using projected discounted cash flows
of the products. Other asset impairments are the write off of inventory held for
research and development work and duplicate equipment ($ 3.2 million),
adjustments to the carrying value of the RiboGene investment to market value at
December 31, 1999 ($ 7.6 million), and write down of notes receivable to their
estimated realizable value ($ 3.5 million).
The components of the restructuring charge were as follows:
<TABLE>
<CAPTION>
$ MILLIONS
----------
<S> <C>
Employee termination costs.................................. 37.9
Property.................................................... 5.7
43.6
</TABLE>
In December 1999, the decision was made to close the office facility in
Eatontown, New Jersey and consolidate the sales and marketing operations into
the existing facility in Florence, Kentucky and to transfer the research &
development activities to Shire's facility in Rockville, Maryland. Similarly,
Roberts' sales and marketing operation in the U.K. was combined with Shire's
established operation in Andover, Hampshire.
Shire has commenced negotiations with potential purchasers of the property
at Eatontown, which has been written down to its estimated fair value.
As a result of the restructuring, employees were notified of their
termination prior to December 31, 1999. As of December 31, 147 employees had
been terminated and the Company expects to complete the termination of the
remainder of the employees by April 30, 2000. Employee termination costs consist
of payments for severance, medical and other benefits, outplacement counseling,
acceleration of pension benefits and excise taxes.
YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1998 a gain of $220,000 was credited to
the income statement in respect of the disposition of certain products.
YEAR ENDED DECEMBER 31, 1997
As a result of the acquisition of Shire Laboratories, Inc. (formerly
Pharmavene, Inc.) in March 1997, Shire incurred a charge of $83,087,000
representing the acquisition of in-process research and development pursuant to
SFAS No. 2 (See Note 2).
22: RETIREMENT BENEFITS
The Company has a number of defined contribution retirement plans and one
defined benefit plan covering substantially all employees. For the defined
contribution retirement plans, the level of company contribution is fixed at a
set percentage of employee's pay. For the defined benefit plan, where benefits
are based on employees' years of service and average final remuneration, the
pension cost is established in accordance with the advice of independent
qualified actuaries based on valuations undertaken on varying dates.
F-34
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22: RETIREMENT BENEFITS (CONTINUED)
PERSONAL DEFINED CONTRIBUTION PENSION PLANS
Company contributions to personal defined contribution pension plans totaled
$1,558,000, $1,124,000, and $514,000 for the years ended December 31, 1999, 1998
and 1997 respectively, are were charged to operations as they became payable.
DEFINED BENEFIT PENSION PLANS
The Company operates a defined benefit Supplemental Executive Retirement
Plan (SERP) for certain U.S. employees, which was established in 1998. This plan
is available to former employees of Roberts Pharmaceutical Corporation who meet
certain age and service requirements. The plan requires mandatory contributions
based on employee contributions and makes discretionary contributions based on
employee compensation. The mandatory contributions to the plan in 1999 totaled
$429,000 (1998: $285,000). Estimated discretionary contributions of $306,000
were accrued in 1999 (1998: $226,000).
During 1999, as part of the restructuring of the Group following the merger
with Roberts Pharmaceutical Corporation, the SERP was closed to new members and
contributions have ceased being paid into the plan for existing members. As part
of this arrangement, the Company has paid a lump sum contribution into the plan
of $18 million, the result of which is that the Company has no future
liabilities under the plan.
23: INCOME TAXES
The (provision)/benefit for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal......................................... (14,007) (7,375) (619)
State and foreign............................... (1,556) 118 --
------- ------- ------
Total current..................................... (15,563) (7,257) (619)
------- ------- ------
Deferred
Federal......................................... (622) 3,808 (995)
State and foreign............................... 123 458 194
------- ------- ------
Total deferred.................................... (499) 4,266 (801)
------- ------- ------
(16,062) (2,991) (1,420)
------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Approximate net operating loss carryforwards
against future federal tax liabilities.......... 40,418 43,089 17,536
------- ------- ------
Approximate net operating loss carryforwards
against future state and foreign tax
liabilities..................................... 185,458 150,572 39,978
------- ------- ------
</TABLE>
F-35
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23: INCOME TAXES (CONTINUED)
The tax losses shown above have the following expiration dates:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
2005........................................................ 78,200
2006........................................................ 1,274
2007........................................................ 4,403
2008........................................................ 2,832
2009........................................................ 5,327
2010........................................................ 6,229
2011........................................................ 10,430
Available indefinitely...................................... 117,181
-------
225,876
=======
</TABLE>
A comparison of the (provision)/benefit for income taxes as reported to a
provision based on federal statutory rates and consolidated income before income
taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Benefit/(provision) at federal statutory rates..... 27,628 (8,247) 28,956
Adjusted for:
Permanent differences............................ (6,474) 18 (33,124)
State and foreign tax............................ (1,200) 1,300 (200)
Difference in taxation rates..................... -- -- (663)
Adjustment to prior year liabilities............. 4,004 -- 2,701
Goodwill amortization............................ (9,758) (4,232) (1,532)
Other............................................ (337) (464) (651)
Valuation allowance.............................. (29,925) 8,634 3,093
------- ------ -------
(Provision)/benefit for income taxes............... (16,062) (2,991) (1,420)
------- ------ -------
</TABLE>
F-36
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23: INCOME TAXES (CONTINUED)
An analysis of the deferred taxation asset is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Losses carried forward.............................. 39,411 36,078
Capitalized start up costs for tax purposes......... 3,259 --
Restructuring Reserve............................... 28,835 --
Other............................................... 1,568 7,497
Debt conversion..................................... -- 377
------- ------
73,073 43,952
Valuation allowance................................. (35,962) (6,037)
------- ------
37,111 37,915
Excess of tax value over book value of assets....... -- (305)
------- ------
Net deferred tax assets............................. 37,111 37,610
======= ======
</TABLE>
Valuation allowances against deferred tax assets have not been provided to
the extent that it is more likely than not that future income and tax planning
strategies will enable losses brought forward to be utilized.
The income (loss) before taxes by tax jurisdiction is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
$'000 $'000 $'000
-------- -------- --------
<S> <C> <C> <C>
U.S............................................... (33,924) 30,772 4,541
U.K............................................... (33,996) 5,763 (84,480)
Other............................................. (11,016) (13,172) (2,793)
------- ------- -------
(78,936) 23,363 (82,732)
======= ======= =======
</TABLE>
24: STOCK INCENTIVE PLANS
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans. In
the years ended December 31, 1999, 1998 and 1997 the Company recognized a charge
under APB25 of $11,933,000, $5,497,000 and $2,031,000 respectively. Had
compensation for stock options awarded under the plans been determined in
accordance with
F-37
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24: STOCK INCENTIVE PLANS (CONTINUED)
SFAS 123, the Company's net income/(loss) and per share data would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
$'000 $'000 $'000
-------- -------- --------
<S> <C> <C> <C>
Net income/(loss)
As reported...................................... (94,998) 20,572 (84,152)
Pro forma........................................ (106,246) 17,439 (89,847)
Income/(loss) per share
As reported--basic............................... $ (0.39) $ 0.09 $ (0.45)
As reported--diluted............................. $ (0.39) $ 0.08 $ (0.45)
Pro forma--basic................................. $ (0.43) $ 0.07 $ (0.49)
Pro forma--diluted............................... $ (0.43) $ 0.07 $ (0.49)
</TABLE>
The fair value of stock options used to compute pro forma net income/(loss) and
per share disclosures is the estimated present value at grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Risk free interest rate............ 4.67%-6.25% 4.55%-6.57% 5.17%-6.57%
Expected dividend yield............ 0% 0% 0%
Expected life...................... 4 years 4 years 4 years
Expected volatility................ 53.4% 53.2% 28.21%
</TABLE>
Directors and employees have been granted options over ordinary shares under
the following stock option plans: Shire Holdings Ltd Share Options Scheme ("SHL
Scheme"), the Imperial Pharmaceutical Services Ltd Employee Share Option Scheme
(Number One) ("SPC Scheme"), the Pharmavene 1991 Stock Option Plan ("SLI Plan"),
the Shire Pharmaceuticals Executive Share Option Scheme (Parts A and
B) ("Executive Scheme"), the Shire Pharmaceuticals Sharesave Scheme ("Sharesave
Scheme"), the Shire Pharmaceuticals Group plc Employee Stock Purchase Plan
("Stock Purchase Plan"), the Richwood Stock Options Plan ("Richwood Plan") and
the Roberts Stock Option Plans ("Roberts Plan").
No further options will be granted under the SHL Scheme, SPC Scheme, SLI
Plan, Richwood Plan or Roberts Plan. In a period of five years, not more than
five per cent of the issued share capital of the Company may be placed under
option under any employee share scheme. In a period of ten years, not more than
ten per cent of the issued share capital of the Company may be placed under
option under any employee share scheme. In addition, the following terms apply
to options that may be granted under the various plans:
Executive Scheme: up to five per cent of the issued ordinary share capital
of the Company, in any period of ten years, subject to a limit of 2.5 per cent
in the period of four years following adoption of the Scheme and a limit of
three per cent in any period of three calendar years.
Stock Purchase Plan: up to 21,000,000 ordinary shares.
F-38
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24: STOCK INCENTIVE PLANS (CONTINUED)
The Company has granted options through December 31, 1999 under the various
plans as follows:
<TABLE>
<CAPTION>
NUMBER OF EXPIRY PERIOD FROM
SCHEME OPTIONS DATE OF ISSUE VESTING PERIOD
- ------ --------- ------------------ -------------------
<S> <C> <C> <C>
SHL Scheme.................................. 964,280 7 years, or 3 1--3 years
months after end
of employment
SPC Scheme.................................. 48,000 7 years, or 6 2 years
months after end
of employment
SLI Plan.................................... 485,367 10 years Immediate on
acquisition by
Shire
Executive Scheme............................ 5,371,042 10 years 3 years, subject to
performance
criteria
Sharesave Scheme............................ 180,697 6 months after 3 or 5 years
vesting
Stock Purchase Plan......................... 218,950 Automatic exercise 27 months
Richwood Plan............................... 1,194,388 5 years Immediate on
acquisition by
Shire
Roberts Plan................................ 9,174,418 6 years Immediate on
acquisition by
Shire
</TABLE>
A summary of the status of the Company's stock option plans as of
December 31, 1999, 1998 and 1997 and the related transactions during the periods
then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
YEAR ENDED DECEMBER 31, 1999 PRICE $ SHARES
- ---------------------------- -------- ----------
<S> <C> <C>
Outstanding at beginning of period.......................... 3.38 20,784,312
Granted..................................................... 6.86 2,952,734
Exercised................................................... 2.37 (4,552,618)
Forfeited/expired........................................... 4.90 (1,547,286)
---- ----------
Outstanding at end of period................................ 4.39 17,637,142
---- ----------
Exercisable at end of period................................ 3.92 13,001,439
---- ----------
</TABLE>
F-39
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24: STOCK INCENTIVE PLANS (CONTINUED)
The weighted average grant-date fair value of options granted during the
year equates to the weighted average exercise price as options are granted at
market price.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
YEAR ENDED DECEMBER 31, 1998 PRICE $ SHARES
- ---------------------------- -------- ----------
<S> <C> <C>
Outstanding at beginning of period.......................... 2.30 21,002,886
Granted..................................................... 5.51 7,170,801
Exercised................................................... 1.32 (6,628,884)
Forfeited/expired........................................... 4.01 (760,491)
---- ----------
Outstanding at end of period................................ 3.38 20,784,312
---- ----------
Exercisable at end of period................................ 2.60 9,505,075
---- ----------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
YEAR ENDED DECEMBER 31, 1997 PRICE $ SHARES
- ---------------------------- -------- ----------
<S> <C> <C>
Outstanding at beginning of period.......................... 2.89 15,090,452
Granted..................................................... 1.54 8,491,081
Exercised................................................... 1.40 (1,596,314)
Forfeited/expired........................................... 3.25 (1,543,033)
---- ----------
Outstanding at end of period................................ 2.30 20,442,186
---- ----------
Exercisable at end of period................................ 1.85 13,269,619
---- ----------
</TABLE>
Options outstanding at December 31, 1999 have the following characteristics:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER OF AVERAGE EXERCISE PRICE NUMBER OF EXERCISE PRICE
OPTIONS EXERCISE REMAINING OF OPTIONS OPTIONS OF OPTIONS
OUTSTANDING PRICES LIFE OUTSTANDING EXERCISABLE EXERCISABLE
- --------------------- ------------------- --------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
864,249 $ 0.19-$0.83 1.1 $ 0.39 864,249 $0.39
1,827,786 $ 1.21-$1.73 3.5 $ 1.55 1,827,786 $1.55
932,612 $ 2.09-$3.06 3.7 $ 2.82 819,231 $2.83
5,433,152 $ 3.22-$4.38 3.4 $ 3.73 4,206,730 $3.64
7,225,437 $ 5.23-$6.75 5.1 $ 5.66 5,251,537 $5.71
1,247,650 $ 6.77-$7.69 5.9 $ 7.59 25,650 $7.14
106,256 $ 8.27-$11.56 5.2 $10.19 6,256 $8.27
---------- --- ------ ---------- -----
17,637,142 4.0 $ 4.39 13,001,439 $3.92
---------- --- ------ ---------- -----
</TABLE>
F-40
<PAGE>
SHIRE PHARMACEUTICALS GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24: STOCK INCENTIVE PLANS (CONTINUED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents summarized unaudited quarterly results for 1999
(in thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
$'000 $'000 $'000 $'000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues................................................. 95,252 96,107 105,784 104,389
Gross profit............................................. 71,741 76,878 79,381 80,057
Net income/(loss)........................................ 10,266 9,409 9,293 (123,966)
Basic net income per share............................... $0.04 $0.04 $0.04 ($0.49)
------ ------ ------- --------
Diluted net income per share............................. $0.04 $0.04 $0.04 ($0.49)
------ ------ ------- --------
</TABLE>
F-41
<PAGE>
SCEHDULE II
SHIRE PHARMACEUTICALS GROUP PLC
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CHARGED CHARGED BALANCE
BALANCE AT TO TO AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for uncollectables.......... 577 132 -- (144) 565
------ ----- ------ ------ ------
Allowance for return goods............ 9,324 6,892 -- (7,137) 9,079
</TABLE>
<TABLE>
<CAPTION>
CHARGED CHARGED BALANCE
BALANCE AT TO TO AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for uncollectables.......... 479 432 -- (334) 577
------ ----- ------ ------ ------
Allowance for return goods............ 10,003 6,367 (345) (6,701) 9,324
</TABLE>
<TABLE>
<CAPTION>
CHARGED CHARGED BALANCE
BALANCE AT TO TO AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowance for uncollectables.......... 1,441 158 -- (1,120) 479
------ ----- ------ ------ ------
Allowance for return goods............ 16,536 5,667 (3,000) (9,200) 10,003
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
*3.1 Memorandum and Articles of Association of Shire
*4.1 Form of Deposit Agreement among Shire, Morgan Guaranty Trust
Company of New York and Holders from time to time of Shire's
ADSs
*4.2 Form of Ordinary Share certificate
*4.3 Form of ADR certificate (included within Exhibit 4.1)
*+10.1 License Agreement between Shire and Nycomed Pharma AS dated
January 14, 1987, as amended
*10.2 License Agreement between Shire and Nycomed Pharma AS dated
May 25, 1992
*+10.3 Agreement by and between Shire and Nycomed Pharma AS dated
September 27, 1993
*+10.4 Trademark License Agreement between Shire and Nycomed Pharma
AS dated October 23, 1995
*+10.5 License Agreement between Shire and Novartis Parma A.G.
dated as of August 31, 1995
*+10.6 Agreement between Shire and MacFarlan Smith Limited dated
June 16, 1997
*+10.7 Extraction Agreement between Shire and MacFarlan Smith
Limited dated June 16, 1997
*+10.8 License Agreement between Shire and Johnson Matthey plc
dated February 2, 1996
*+10.9 License Agreement between Shire, Johnson Matthey plc and
Anormed Inc. dated as of December 15, 1997
*+10.10 License Agreement between Shire and Johnson Matthey plc
dated December 15, 1997
*+10.11 License Agreement between Shire and Synaptech Inc. dated
November 30, 1995
*+10.12 Agreement between Shire and Janssen Pharmaceutica N.V. dated
November 30, 1995
*+10.13 Global Co-Development, Know-how and Supply Agreement between
Shire and Janssen Pharmaceutica N.V. dated November 30, 1995
*+10.14 Pharmaceutical Formulation License Agreement between Shire
and Hyal Pharmaceutical Corporation dated as of March 1,
1995
*+10.15 Development and License Agreement between Shire and
NeuroSearch A/S dated February 5, 1998
*10.16 Agreement and Plan of Merger among Shire and Richwood
Pharmaceutical Company, Inc. dated as of August 1, 1997
*10.17 SHL Scheme
*10.18 SPC Scheme
*10.19 Executive Scheme
*10.20 Sharesave Scheme
*10.21 Employee Stock Purchase Plan
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------
<C> <S>
*10.22 Asset Purchase Agreement among Shire, Shire Supplies U.S.
LLC, Arenol Corporation, Richard Vorisek and Robert Jaeder
dated as of March 5, 1999
***+10.23 Amendment Agreement to Global Co-Development, Know-How and
Supply Agreement between Shire and Janssen Pharmaceutica
N.V. dated July 22, 1999
***10.24 Agreement and Plan of Merger by and among Shire
Pharmaceuticals Group plc, Ruby Acquisition Sub Inc. and
Roberts Pharmaceutical Corporation dated as of July 26, 1999
***10.25 Share Purchase Agreement among Fuisz International Limited,
Fuisz Technologies Ltd. and Shire Holdings Europe Limited
dated October 22, 1999
***21.1 List of subsidiaries
23.1 Consent of Arthur Andersen Chartered Accountants
23.2 Consent of Ernst & Young LLP
23.3 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference to the exhibits to Shire's Registration Statement
on Form F-1 (No. 333-8394).
** Incorporated by reference to Shire's Form 6-K filed on July 26, 1999.
*** Incorporated by reference to Shire's Registration Statement on Form F-4
(No. 333-90947)
+ Portions of this document, for which Shire has been granted confidential
treatment, have been redacted and filed separately with the Securities and
Exchange Commission.
E-2
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF ARTHUR ANDERSEN]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants we consent to the incorporation by
reference in the registration statement on Form S8 (File Nos. 333-09168 and
333-93543) of our report dated 29 February 2000, on our audits of the financial
statements of Shire Pharmaceuticals Group plc as of December 31, 1999, 1998 and
1997 and for the periods then ended, and to all references to our firm included
in this registration statement.
/s/ Arthur Andersen
Arthur Andersen
Abbots House
Abbey Street
Reading
RG1 3BD
30 March 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Shire Pharmaceutical
Group plc Registration Statement on Form S-8 No. 333-93543 of our report dated
February 16, 1999, included in the Annual Report on Form 10-K/A of Roberts
Pharmaceutical Corporation for the year ended December 31, 1998, and to the use
of our report with respect to the consolidated financial statements of Roberts
Pharmaceutical Corporation, as amended and not included herewith, in the Shire
Pharmaceutical Group plc Annual Report (Form 10-K) for the year ended
December 31, 1999.
Ernst & Young LLP
MetroPark, New Jersey
March 29, 2000
<PAGE>
EXHIBIT 23.3
[Letterhead of PricewaterhouseCoopers]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-09168 and 333-93543) of Shire
Pharmaceuticals Group plc of our report dated February 5, 1998, which appears in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 54,082
<SECURITIES> 84,344
<RECEIVABLES> 59,583
<ALLOWANCES> 565
<INVENTORY> 39,538
<CURRENT-ASSETS> 251,306
<PP&E> 50,620
<DEPRECIATION> 13,136
<TOTAL-ASSETS> 887,763
<CURRENT-LIABILITIES> 172,820
<BONDS> 126,314
0
0
<COMMON> 20,063
<OTHER-SE> 567,221
<TOTAL-LIABILITY-AND-EQUITY> 887,763
<SALES> 385,203
<TOTAL-REVENUES> 401,532
<CGS> 93,475
<TOTAL-COSTS> 342,352
<OTHER-EXPENSES> 135,236
<LOSS-PROVISION> (12)
<INTEREST-EXPENSE> (2,868)
<INCOME-PRETAX> (78,936)
<INCOME-TAX> (16,062)
<INCOME-CONTINUING> (94,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94,998)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
