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SHPG > SEC Filings for SHPG > Form 10-K on 23-Feb-2012All Recent SEC Filings

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Form 10-K for SHIRE PLC


23-Feb-2012

Annual Report


ITEM 7: Management's discussion and analysis of financial condition and results
of operations

The following discussion should be read in conjunction with the Company's consolidated financial statements contained in Part IV in this Annual Report on Form 10-K.

Overview

Shire's strategic goal is to be the world's leading specialty biopharmaceutical Company that focuses on meeting the needs of the specialist physician. Shire focuses its business on ADHD, GI diseases, HGT and RM, as well as opportunities in other therapeutic areas to the extent they arise through acquisitions. Shire's in-licensing and acquisition efforts are focused on products in specialist markets with strong intellectual property protection or other forms of market exclusivity and global rights. Shire believes that a carefully selected and balanced portfolio of products with strategically aligned and relatively small-scale sales forces will deliver strong results.

Substantially all of the Company's revenues, expenditures and net assets are attributable to the R&D, manufacture, sale and distribution of pharmaceutical products within three reportable segments: SP, HGT and RM. The Company also earns royalties (where Shire has out-licensed products to third parties) which are recorded as revenues.

Revenues are derived primarily from two sources - sales of the Company's own products and royalties:

93% (2010: 90%) of total revenues are derived from product sales, of which 66%
(2010: 71%) are within SP, 31% (2010: 29%) are within HGT and 3% (2010: nil) are within RM; and

6% of total revenues are derived from royalties (2010: 9%).

The market in which the Company conducts its business are highly competitive and highly regulated.

There is increasing legislation both in the US and the rest of the world which is placing downward pressure on the net pricing of pharmaceutical products and medical devices. For example the US government passed healthcare reform legislation in 2010 which included an increase in Medicaid rebate rates and extended Medicaid rebates to those products provided through Medicaid managed care organizations. The legislation also imposed annual fees to be paid by both pharmaceutical manufacturers (from 2011) and medical device companies (from 2013). The impact of these recent changes to US healthcare legislation, and other healthcare reforms in the rest of the world, has not to date had a material impact on the Company's results of operations.

The health care industry is also experiencing:

pressure from governments and healthcare providers to keep prices low while increasing access to drugs;

increasing challenges from third party payers for products to have demonstrable clinical benefit, with pricing and reimbursement approval becoming increasingly linked to a product's clinical effectiveness and impact on overall costs of patient care;

increased R&D costs, because development programs are typically larger and take longer to get approval from regulators;

challenges to existing patents from generic manufacturers;

governments and healthcare systems favoring earlier entry of low cost generic drugs; and

higher marketing costs, due to increased competition for market share.

Shire's strategy to become the world's leading specialty biopharmaceutical company has been developed to address these industry-wide competitive pressures. This strategy has resulted in a series of initiatives in the following areas:

Markets

Historically, Shire's portfolio of approved products has been heavily weighted towards the North American market. The acquisition in 2005 of TKT and the consequent establishment of our HGT business, together with the acquisitions of Jerini in 2008 (which brought the HAE product FIRAZYR), EQUASYM in 2009 (which facilitated Shire's immediate access to the European ADHD market) and Movetis in 2010 (which brought EU rights to RESOLOR and further developed our GI pipeline), provided Shire with platforms to increase its presence in Europe and the RoW, thereby working towards diversifying the risk associated with reliance on one geographic market.

In 2011 the SP and HGT businesses derived 15% and 80%, respectively, of their product sales from outside of the US. Currently all RM product sales are generated in the US. Shire's long-term mission is to increase the value of product sales from (i) outside of the US and (ii) outside of US, UK, Germany, France, Italy, Spain and Canada. Shire has made significant progress towards geographic diversification with additional development and commercialization activities in


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2011. In addition, Shire has ongoing commercialization and late-stage development activities, which are expected to further supplement the diversification of revenues in the future, including the following:

continued launch of VYVANSE in Brazil (marketed as VENVANSE) and the potential approval and launch of VYVANSE in Mexico;

filing in 2011 of an MAA for VYVANSE (to be marketed as VENVANSE) in certain countries in the EU to support registration for treatment of ADHD in children;

INTUNIV Phase 3 clinical program to support submission of an MAA in the EU;

continued roll-out of VPRIV in certain EU and Latin American countries;

continued roll-out of FIRAZYR in certain European and Latin American countries;

the LIALDA/MEZAVANT diverticulitis Phase 3 program; and

continued roll-out of RESOLOR in the EU and the Rest of the World ("RoW").

R&D

Over the last five years Shire has focused its R&D efforts on products in its core therapeutic areas and concentrated its resources on obtaining regulatory approval for later-stage pipeline products within these core therapeutic areas. In addition to continued efforts in its late stage pipeline for the ADHD, GI, HGT and RM therapeutic areas, Shire has also progressed work on an earlier stage pipeline.

Evidence of the successful progression of the late stage pipeline can be seen in the granting of approval and associated launches of the Company's products over the last seven years. Since January 2005, several products have received regulatory approval including: in the US, ELAPRASE in 2006, LIALDA and VYVANSE in 2007, INTUNIV in 2009, VPRIV in 2010, and FIRAZYR in 2011; in the EU, FOSRENOL in 2005, ELAPRASE and MEZAVANT in 2007, and VPRIV in 2010; in Canada,
VYVANSE in 2010.

Shire's strategy is focused on the development of product candidates that have a lower risk profile. As Shire further expanded its earlier phase pipeline, R&D costs in 2011 included expenditure on several pre-clinical to Phase 3 studies for products in development as well as Phase 3(b) and Phase 4 studies to support recently launched products in the SP and HGT businesses, together with the development of new projects in both the SP, HGT and RM businesses. For a discussion of the Company's current development projects see ITEM 1: Business.

Patents and Market Exclusivity

The loss or expiration of patent protection or regulatory exclusivity with respect to any of the Company's major products could have a material adverse effect on the Company's revenues, financial condition and results of operations, as generic manufacturers may enter the market. Generic manufacturers often do not need to complete extensive clinical studies when they seek registration of a copy product and accordingly, they are generally able to sell the Company's drugs at a much lower price.

As expected, in 2009 Teva and Impax commenced commercial shipments of their authorized generic versions of ADDERALL XR, which led to lower sales of branded ADDERALL XR compared to the period prior to the authorized generic launch. As discussed in ITEM 1: Business, the FDA has not yet reached a decision on the Citizen Petition for ADDERALL XR which was filed in October 2005. An FDA decision which does not require generic follow-on products to complete successful bio-equivalence or additional clinical testing could lead to increased generic competition for ADDERALL XR in addition to the authorized generic versions which already exist. In 2011 authorized generic and generic versions of the Company's CARBATROL and REMINYL products, respectively were launched, which led to lower sales of these branded products compared to the period before loss of exclusivity.

Shire is engaged in various legal proceedings with generic manufacturers with respect to its VYVANSE, INTUNIV, FOSRENOL, LIALDA and ADDERALL XR patents. For more detail of current patent litigation, see ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

Business Development

Shire seeks to focus its business development activity on the acquisition and in-licensing of products and projects which have the benefit of long-term patent protection and/or data exclusivity, other forms of market exclusivity and/or barriers to entry.

Through the acquisition of ABH in 2011 Shire obtained DERMAGRAFT, which is currently marketed in the US for the treatment of DFU. Through the acquisition of Movetis in 2010, Shire obtained the recently launched RESOLOR, a promising GI pipeline and world-class R&D talent. In addition, in early 2012 Shire acquired the rights to market RESOLOR


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in the US. In 2010 Shire also acquired an exclusive license in markets outside of North America for the ActRIIB class of molecules being developed by Acceleron. The collaboration with Acceleron will initially focus on further developing HGT-4510 (also called ACE-031) for the treatment of patients with DMD.

In 2009, Shire acquired the worldwide rights (excluding the US, Canada and Barbados) to EQUASYM and EQUASYM XL from UCB and entered into a research collaboration with Santaris Pharma A/S ("Santaris") for the development of its Locked Nucleic Acid ("LNA") drug platform technology.

Organization and Structure

In the third quarter of 2011, following the acquisition of ABH, an organizational realignment was carried out. Following this re-organization the Company now has three business units and three reporting segments: SP, HGT and RM (which currently comprises only the ABH business).

During 2010, to support the Company's mission to increase the proportion of product sales generated outside of the US, Shire established an international commercial hub in Switzerland.


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Results of operations for the years to December 31, 2011 and 2010

Financial highlights for the year to December 31, 2011 are as follows:

Product sales in 2011 were up 26% to $3,950 million (2010: $3,128 million). On a constant exchange rate ("CER")1 basis, which is a Non GAAP measure, product sales were up 24%.

Product sales growth was generated from across the portfolio, particularly VYVANSE (up 27% to $805 million), ADDERALL XR (up 48% to $533 million), REPLAGAL (up 35% to $475 million), ELAPRASE (up 15% to $465 million), LIALDA/MEZAVANT (up 27% to $372 million) and VPRIV (up 79% to $256 million). Product sales in 2011 also benefited from $105 million of DERMAGRAFT sales made subsequent to the acquisition of ABH.

Total revenues in 2011 exceeded $4 billion for the first time, increasing by 23% (Non GAAP CER: up 21%) to $4,263 million (2010: $3,471 million). The strong product sales growth more than offset decreased royalties and other revenues, down 9% due to lower 3TC and ZEFFIX royalties.

Operating income was up 40% to $1,109 million (2010: $794 million), as total revenues grew at a faster rate than R&D and SG&A expenditure. Operating income in 2010 included impairment charges recorded on the divestment of DAYTRANA and an up-front payment of $45 million to Acceleron.

Diluted earnings per ordinary share were up 43% to 150.9c (2010: 105.3c) due to higher operating income and a lower effective tax rate in 2011 of 21% (2010: 24%).

1. The Company's management analyzes product sales and revenue growth for certain products sold in markets outside of the US on a constant exchange rate ("CER") basis, so that product sales and revenue growth can be considered excluding movements in foreign exchange rates. Product sales and revenue growth on a CER basis is a Non-GAAP financial measure ("Non-GAAP CER"), computed by comparing 2011 product sales and revenues restated using 2010 average foreign exchange rates to 2010 actual product sales and revenues. This Non-GAAP financial measure is used by Shire's management, and is considered to provide useful information to investors about the Company's results of operations, because it facilitates an evaluation of the Company's year on year performance on a comparable basis. Average exchange rates for the year to December 31, 2011 were $1.60:1.00 and $1.39:1.00 (2010:
$1.55:1.00 and $1.33:1.00).

Total revenues

The following table provides an analysis of the Company's total revenues by source:

Year to December 31,        2011          2010      Change
                             $'M           $'M           %
Product sales            3,950.2       3,128.2         +26 %
Royalties                  283.5         328.1         -14 %
Other revenues              29.7          14.8        +101 %
Total                    4,263.4       3,471.1         +23 %


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Product sales

                                              Year to            Year to
                                         December 31,       December 31,       Product sales        Non-GAAP CER        US prescription        Exit market
                                                 2011               2010              growth              growth                growth1             share1
                                                  $'M                $'M                   %                   %                      %                  %
SP
ADHD
VYVANSE                                         805.0              634.2                 +27                 +27                    +21                 17
ADDERALL XR                                     532.8              360.8                 +48                 +47                    +11                  7
INTUNIV                                         223.0              165.9                 +34                 +34                    +78                  4
EQUASYM                                          19.9               22.0                 -10                 -14                    n/a 2              n/a 2
DAYTRANA                                            -               49.4                 n/a 4               n/a 4                  n/a 4              n/a

GI
LIALDA / MEZAVANT                               372.1              293.4                 +27                 +26                     +9                 21
PENTASA                                         251.4              235.9                  +7                  +7                     -2                 14
RESOLOR                                           6.1                0.3                 n/a                 n/a                    n/a 3              n/a 3

General Products
FOSRENOL                                        166.9              182.1                  -8                 -11                    -16                  5
XAGRID                                           90.6               87.3                  +4                  -1                    n/a                n/a 2
CARBATROL                                        52.3               82.3                 -36                 -36                    -30                 10
Other product sales                              95.5              105.6                 -10                 -13                    n/a                n/a
                                              2,615.6            2,219.2                 +18
HGT
REPLAGAL                                        475.2              351.3                 +35                 +30                    n/a 3              n/a 3
ELAPRASE                                        464.9              403.6                 +15                 +12                    n/a 2              n/a 2
VPRIV                                           256.2              143.0                 +79                 +76                    n/a 2              n/a 2
FIRAZYR                                          33.0               11.1                +197                +188                    n/a 2              n/a 2
                                              1,229.3              909.0                 +35

RM
DERMAGRAFT                                      105.3                  -                 n/a                 n/a 5                  n/a 2              n/a 2
Total RM product sales                          105.3                  -                 n/a
Total product sales                           3,950.2            3,128.2                 +26

(1) Data provided by IMS Health National Prescription Audit ("IMS NPA"). Exit market share represents the average US market share in the month ended December 31, 2011.

(2) IMS NPA Data not available.

(3) Not sold in the US in the year to December 31, 2011.

(4) The Company divested DAYTRANA to Noven effective October 1, 2010.

(5) DERMAGRAFT was acquired by Shire on June 28, 2011.

Specialty Pharmaceuticals

VYVANSE - ADHD

VYVANSE product sales grew strongly in 2011 as a result of higher prescription demand, due to an increase in VYVANSE's market share and growth in US ADHD market (10%), and the effect of a price increase taken in 2011. These factors more than offset the effect of de-stocking and higher sales deductions in 2011 compared to 2010.


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Litigation proceedings regarding VYVANSE are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K

ADDERALL XR - ADHD

ADDERALL XR product sales grew by 48%, or $172 million, principally as a result of lower sales deductions as a percentage of branded gross product sales, increases in US prescription demand (in line with growth in the US ADHD market) and a price increase taken during 2011.

Sales deductions in 2011 represented 57% of branded gross product sales (2010:
65% of branded gross product sales). The decrease in sales deductions was primarily due to the lowering of our estimate of inventory in the US retail pipeline and the related sales deduction reserve in the third quarter of 2011 (representing 2% of gross product sales in 2011) and the mix of customer sales affecting the rebate calculation. The eight percentage point decrease in sales deductions (as a percentage of branded gross product sales) contributed $85 million to ADDERALL XR's net product sales in 2011. ADDERALL XR sales deductions in 2012 are expected to be in the range of 60-65%.

There are potentially different interpretations as to how shipments of authorized generic ADDERALL XR to Teva and Impax should be included in the Medicaid rebate calculation. Since authorized generic launch in 2009 the Company has recorded its accrual for Medicaid rebates based on its best estimate of the rebate payable, consistent with the Company's interpretation of the Medicaid rebate legislation. Shire believes that its interpretation of the Medicaid rebate legislation is reasonable and correct. Additionally, from October 1, 2010 forward, provisions of the 2010 Affordable Care Act provide further clarity, in a manner consistent with the Company's interpretation, as to how shipments of authorized generics from that date should be included in the Medicaid rebate calculation.

The CMS could disagree with Shire's interpretation of the Medicaid rebate legislation for shipments of authorized generic products prior to October 1, 2010. CMS could require Shire to apply an alternative interpretation of the Medicaid rebate legislation and request that Shire pays up to $212 million above the recorded liability. However, Shire believes it has a strong legal basis supporting its interpretation of the Medicaid rebate legislation, and that there would be a strong basis to limit any additional payment to a level approximating the full, un-rebated cost to the States of ADDERALL XR (equivalent to approximately $134 million above the recorded liability), and to initiate litigation to recover any amount paid in excess of the recorded liability. The result of any such litigation cannot be predicted.

Litigation proceedings regarding ADDERALL XR are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

INTUNIV - ADHD

INTUNIV product sales were up 34% compared to 2010, primarily driven by significant growth in US prescription demand together with a price increase taken during 2011. These positive factors were offset by lower stocking and higher sales deductions in 2011 compared to 2010, and the effect of the inclusion of launch stocking shipments within reported 2010 product sales.

Litigation proceedings relating to the Company's INTUNIV patents are in progress. For further information see ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

LIALDA/MEZAVANT - Ulcerative colitis

The growth in product sales for LIALDA/MEZAVANT in 2011 was primarily driven by higher US prescription demand following increases in US market share, a price increase taken since the fourth quarter of 2010 and the effect of stocking in 2011 compared to de-stocking in 2010.

Litigation proceedings regarding LIALDA/MEZAVANT are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

PENTASA - Ulcerative colitis

Product sales of PENTASA continued to grow despite lower US prescription demand, due to the impact of a price increase taken during 2011.


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FOSRENOL - Hyperphosphatemia

Product sales of FOSRENOL outside the US decreased marginally primarily because of mandatory price reductions that were imposed in several key markets. Product sales of FOSRENOL in the US decreased due to lower US prescription demand and higher sales deductions compared to 2010, which more than offset a 2011 price increase.

Litigation proceedings regarding Shire's FOSRENOL patents are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

Human Genetic Therapies

REPLAGAL - Fabry disease

The 35% growth (30% on a Non GAAP CER basis) in REPLAGAL product sales was driven by the treatment of new patients, being both nave patients and switches from patients being treated with FABRAZYME. Reported REPLAGAL sales also benefited from favorable foreign exchange, due to the weaker US dollar over the course of 2011 compared to 2010.

Litigation proceedings regarding REPLAGAL are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

ELAPRASE - Hunter syndrome

Product sales for ELAPRASE increased as a result of increased patients on therapy across all regions in which ELAPRASE is sold. Reported ELAPRASE sales also benefited from favorable foreign exchange.

VPRIV - Gaucher disease

VPRIV product sales growth was driven by the treatment of new patients, being both nave patients and patients switching from CEREZYME. Reported sales also benefited from favorable foreign exchange.

FIRAZYR - HAE

The significant growth rate in global product sales in 2011 follows the successful launch of FIRAZYR in the US in August 2011 and the approval for self-administration in the EU in March 2011.

Regenerative Medicine

DERMAGRAFT - DFU

DERMAGRAFT continues to see strong revenue growth in the US, up 33% for the full year 2011 compared to the full year 2010(1). The growth resulted from a combination of an expanding US diabetic population, continued adoption of DERMAGRAFT as a treatment for DFU, and the continued investment in marketing programs and additional sales representatives to market the product.

(1) Shire acquired DERMAGRAFT through its acquisition of ABH in June 2011.

Royalties

                       Year to           Year to
                  December 31,      December 31,
                          2011              2010      Change
                           $'M               $'M           %
ADDERALL XR              107.1             100.3         +7%
3TC and ZEFFIX            82.7             154.0        -46%
FOSRENOL                  46.5              26.8        +74%
Other                     47.2              47.0         <1%
Total                    283.5             328.1        -14%


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Royalty income decreased in 2011 compared to 2010 as lower royalties from 3TC and ZEFFIX more than offset higher royalty income from ADDERALL XR and FOSRENOL.

Royalty income from 3TC and ZEFFIX continues to be adversely impacted by increased competition from other products. Additionally, with effect from the second quarter of 2011, Shire has not recognized royalty income for 3TC and ZEFFIX for certain territories due to a disagreement between GSK and Shire about how the relevant royalty rates should be applied given the expiry dates of certain patents. GSK and Shire are holding discussions in order to seek to resolve the disagreement. In 2012 royalty terms for 3TC and ZEFFIX will begin to expire in most territories outside of the US, and in the US royalty terms for 3TC and ZEFFIX expire between 2014 and 2018. After expiry the Company will cease to receive royalties from GSK on sales of 3TC and ZEFFIX in those territories.

Cost of product sales

Cost of product sales increased to $588.1 million for the year to December 31, 2011 (15% of product sales), up from $463.4 million in the corresponding period in 2010 (15% of product sales).

Cost of product sales as a percentage of product sales stayed constant as the effect of slightly higher margins from existing products and lower costs incurred on the transfer of manufacturing from Owings Mills in 2011 were offset by the inclusion of DERMAGRAFT (including the unwind of the fair value adjustment for inventory acquired with ABH) and a write down of expired ELAPRASE unpurified bulk material which was not prioritised for purification as capacity . . .

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