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SHPG > SEC Filings for SHPG > Form 10-K on 25-Feb-2013All Recent SEC Filings

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Form 10-K for SHIRE PLC


25-Feb-2013

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 plc is a leading specialty biopharmaceutical company that focuses on meeting the needs of the specialist physician. The Company has grown through acquisition, completing a series of major transactions that have brought therapeutic, geographic and pipeline growth and diversification. The Company will continue to evaluate companies, products and pipeline opportunities that offer a good strategic fit and have the potential to deliver demonstrable value to all of the Company's stakeholders: patients, physicians, policy makers, payors, investors and employees.

Shire's vision is to imagine and lead the future of healthcare for people with life-altering conditions, creating value for society. The Company will execute on its vision through its strategy and business model. For further details of Shire's strategy refer to Part I ITEM 1: Business of this Annual Report on Form 10-K.

Shire focuses on treatments and services for symptomatic conditions in areas of high medical need, so patients experience a noticeable and ongoing improvement in their lives. Through deep understanding of patients' needs, the Company develops and provides healthcare in the areas of:

Behavioral Health and Gastro Intestinal conditions;

Rare Genetic Diseases; and

Regenerative Medicine;

as well as other symptomatic conditions treated by specialist physicians. 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:

94% (2011: 93%) of total revenues are derived from product sales, of which 64%
(2011: 66%) are within SP, 32% (2011: 31%) are within HGT and 4% (2011: 3%) are within RM; and

5% of total revenues are derived from royalties (2011: 6%).

The markets 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 excise 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 payors 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 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 the Company's HGT business, together with the acquisitions of New River Pharmaceuticals in 2007 (which brought full rights to ADHD product VYVANSE), Jerini AG ("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 NV ("Movetis") in 2010 (which brought EU rights to RESOLOR). The acquisition of ABH in 2011 (which subsequently became RM), and FerroKin Biosciences in 2012 (which brought a new hematology drug to the SP portfolio) provided Shire with platforms to increase its presence in Europe and the rest of the world ("RoW"), thereby working towards diversifying the risk associated with reliance on one geographic market. In 2012 the SP and HGT businesses derived 15% and 75%, respectively, of their product sales from outside of the US. Currently all RM product sales are generated in the US. 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;

approval of ELVANSE/TYVENSE in certain countries in the EU for treatment of ADHD in children;

filing in 2012 of an application to expand the label of FIRAZYR in the EU to include the treatment of attacks of ACE-inhibitor induced Angioedema;

filing in 2012 of an application in Europe for the VPRIV label to be updated with data regarding the impact of VPRIV on certain parameters of bone disease in Type 1 Gaucher patients;

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

continued roll-out of DFU in Canada and RESOLOR in the EU.

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 five years. In this time several products have received regulatory approval including: in the US, INTUNIV in 2009, VPRIV in 2010, and FIRAZYR in 2011; in the EU, VPRIV in 2010 and ELVANSE/TYVENSE in 2012; in Canada, VYVANSE in 2010 and DERMAGRAFT in 2012.

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 2012 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 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 products may enter the market. Companies selling generic products often do not need to complete extensive clinical studies when they seek registration of a generic or biosimilar product and accordingly, they are generally able to sell the Company's products 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, in June 2012 the FDA reached a decision on the Citizen Petition for ADDERALL XR which was filed in October 2005. The FDA also approved an ANDA for a generic version of ADDERALL XR. Sales of AXR decreased in 2012 due to the launch of a new generic product.

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 17, "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 which offer a good strategic fit and have the potential to deliver demonstrable value to all of the Company's stakeholders.

Recent mergers or acquisitions

In 2012 Shire acquired FerroKin Biosciences Inc. which added SPD 602 to the SP business unit (SDP 602 is in Phase 2 for treatment of iron overload following numerous blood transfusions).

Through the acquisition of ABH in 2011 Shire obtained DERMAGRAFT, which is currently marketed in the US for the treatment of DFU, and established the RM business unit. In 2012 Shire acquired substantially all the assets and certain liabilities of Pervasis Therapeutics Inc., which added VASCUGEL (now SRM-003) to the RM business unit (SRM-003 is in Phase 2 development for acute vascular repair).

Through the acquisition of Movetis in 2010, Shire obtained RESOLOR, which is approved for the treatment of chronic constipation in women in the EU and Switzerland. In addition, in 2012 Shire acquired the rights to market RESOLOR in the US.

Collaboration and licensing activity

Shire has also entered into a number of collaboration and license agreements, including:

A collaboration and license agreement with Sangamo to develop therapeutics for hemophilia and other monogenic diseases based on Sangamo's ZFP technology in 2012;

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

A worldwide exclusive license from IGAN Biosciences, Inc. ("IGAN") to develop and commercialize protease-based therapeutics for the treatment of IgA nephropathy, a rare kidney disease.

Shionogi co-development and co-commercialization agreement for VYVANSE and INTUNIV in Japan.

Organization and Structure

Shire's internal financial reporting is in line with its business unit and management reporting structure. The Company has three business units and three reporting segments: SP, HGT and RM. During 2010, to support the Company's geographical expansion and diversification, Shire established an international commercial hub in Switzerland.

On January 23, 2013 Shire announced that it had decided to proceed with a collective dismissal and business closure at its site in Turnhout, Belgium. This decision follows the conclusion of an information and consultation process. Shire will continue to sell RESOLOR in Europe and the supply of RESOLOR for patients in Europe who rely on the medicine will not be affected. The collective dismissal and business closure of the Turnhout site is not expected to have a material impact on the Company's consolidated financial position and results of operations in future periods.


Results of operations for the years to December 31, 2012 and 2011

Financial highlights for the year to December 31, 2012 are as follows:

Product sales in 2012 were up 12% to $4,407 million (2011: $3,950 million). On a Constant Exchange Rate ("CER") 1 basis, which is a Non GAAP measure, product sales were up 13%.

Product sales excluding ADDERALL XR grew strongly and were up 16% particularly driven by growth from VYVANSE (up 28% to $1,030 million), VPRIV (up 20% to $307 million), INTUNIV (up 29% to $288 million) and FIRAZYR (up 252% to $116 million).

ADDERALL XR product sales were down 19% to $429 million primarily due to lower prescription volumes following the approval of a new generic version of ADDERALL XR in the second quarter of 2012. Reported product sales were also impacted by the accounting for the settlement of the Impax Laboratories, Inc. ("Impax") litigation (see ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K for further details).

Total revenues increased by 10% (up 12% on a Non GAAP CER basis) as the growth in product sales was partially offset by lower royalties and other revenues (down 12%), primarily ADDERALL XR royalties following the launch of a new generic competitor in the second quarter of 2012. The decline in ADDERALL XR royalties was partially offset by the recognition of one-time royalty income of $38 million following resolution of a disagreement with GSK and ViiV relating to royalty payments for 3TC and ZEFFIX.

Operating income in 2012 was down 14% to $949 million (2011: $1,109 million) primarily resulting from charges to impair intangible assets for RESOLOR in the EU ($198 million). The impairments were due to lower actual and projected performance for the product given the increasingly challenging European reimbursement environment. Operating income in 2012 was also impacted by a charge of $58 million in relation to the agreement in principle with the US Government to resolve a previously disclosed civil investigation. Further information about litigation proceedings can be found in ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K. Excluding these charges operating income in 2012 was up by 9%.

Diluted earnings per ordinary share decreased by 13% to $1.31 (2011: $1.51) primarily due to the lower operating income, partially offset by a lower effective tax rate of 18% (2011: 21%).

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 2012 product sales and revenues restated using 2011 average foreign exchange rates to 2011 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, 2012 were $1.59:1.00 and $1.29:1.00 (2011: $1.60:1.00 and $1.39:1.00).

Total revenues

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

Year to December 31,        2012          2011       Change
                             $'M           $'M            %
Product sales            4,406.7       3,950.2          +12 %
Royalties                  241.6         283.5          -15 %
Other revenues              32.9          29.7          +11 %
Total                    4,681.2       4,263.4          +10 %


Product sales

                                              Year to            Year to
                                         December 31,       December 31,       Product sales       Non-GAAP CER        US prescription        Exit market
                                                 2012               2011              growth             growth                growth1             share1
                                                  $'M                $'M                   %                  %                      %                  %
SP
Behavioral Health
VYVANSE                                       1,029.8              805.0                 +28                +28                    +17                 17
ADDERALL XR                                     429.0              532.8                 -19                -19                    -11                  5
INTUNIV                                         287.8              223.0                 +29                +29                    +34                  5
EQUASYM                                          29.2               19.9                 +47                +53                    n/a 2              n/a 2

GI
LIALDA / MEZAVANT                               399.9              372.1                  +7                 +8                     +5                 22
PENTASA                                         265.8              251.4                  +6                 +6                     -5                 14
RESOLOR                                          11.8                6.1                 +93                n/a                    n/a 3              n/a 3

General Products
FOSRENOL                                        172.0              166.9                  +3                 +6                    -19                  4
XAGRID                                           97.2               90.6                  +7                +14                    n/a 2              n/a 2
Other product sales                             112.4              147.8                 -24                -23                    n/a                n/a
                                              2,834.9            2,615.6                  +8
HGT
ELAPRASE                                        497.6              464.9                  +7                +11                    n/a 3              n/a 3
REPLAGAL                                        497.5              475.2                  +5                +10                    n/a 2              n/a 2
VPRIV                                           306.6              256.2                 +20                +23                    n/a 2              n/a 2
FIRAZYR                                         116.3               33.0                +252               +258                    n/a 2              n/a 2
                                              1,418.0            1,229.3                 +15

RM
DERMAGRAFT                                      153.8              105.3                 +46                +46 4                  n/a 2              n/a 2
Total RM product sales                          153.8              105.3                 +46
Total product sales                           4,406.7            3,950.2                 +12

(1) Data provided by IMS. Exit market share represents the average US market share in the month ended December 31, 2012.

(2) IMS NPA Data not available.

(3) Not sold in the US in the year to December 31, 2012.

(4) DERMAGRAFT was acquired by Shire on June 28, 2011 (sales growth above reflects full year 2012 sales compared to post acquisition sales for 2011).

Specialty Pharmaceuticals

VYVANSE - ADHD

VYVANSE product sales grew strongly (28%) in 2012 as a result of higher prescription demand, due to growth in US ADHD market (+9%) and VYVANSE's share of that market, and as a result of a price increase taken in 2012. These


positive factors, together with lower sales deductions in 2012, more than offset the effect of higher retailer destocking in 2012 compared to 2011 and some shipment slippage at the end of the fourth quarter.

Litigation proceedings regarding VYVANSE are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 17, "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 decreased (-19%) in 2012 as a result of lower US prescription demand following the introduction of a new generic competitor and the impact of the accounting for the legal settlement with Impax, which reduced reported product sales by $42 million in 2012, in addition to the effect of product destocking in 2012 compared to stocking in 2011 and, higher sales deductions. These negative factors were partially offset by the benefit of a price increase taken during 2012.

On February 7, 2013 Shire and Impax settled all litigation relating to Shire's contract to supply Impax with authorized generic ADDERALL XR. Under the terms of the settlement Shire will make a one-time cash payment to Impax of $48 million, which has been recorded as a liability at December 31, 2012. In accordance with US GAAP, as this represents a payment to a customer, the amount has been recorded in the Income Statement as a reduction in reported ADDERALL XR product sales and royalties ($42 million and $6 million respectively) in 2012.

Further information about litigation proceedings regarding ADDERALL XR, and the Impax settlement, can be found in ITEM 3: Legal Proceedings and Note 17, "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 29% compared to 2011, primarily driven by strong growth in US prescription demand (up 34% compared to 2011), together with price increases taken during 2012. These positive factors were partially offset by lower stocking in 2012 and higher sales deductions in 2012 compared to 2011.

Litigation proceedings relating to the Company's INTUNIV patents are in progress. For further information see ITEM 3: Legal Proceedings and Note 17, "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 (7%) in 2012 was primarily driven by higher market share in the US and a price increase taken since the fourth quarter of 2011, the effects of which were partially offset by product destocking in 2012 compared to a small amount of product stocking in 2011 and higher sales deductions in 2012. Growth in US net product sales was partially offset by the impact of lower priced imports into certain European markets.

Litigation proceedings regarding LIALDA/MEZAVANT are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

PENTASA - Ulcerative colitis

PENTASA product sales were up 6% as the benefit of price increases was partially offset by lower prescription demand, a small amount of destocking in 2012 and higher sales deductions as compared to 2011.

FOSRENOL - Hyperphosphatemia

Product sales of FOSRENOL in the US increased (3%) due to the effect of price increases in 2012 and lower sales deductions compared to 2011, which more than offset the decline in prescription demand. Product sales of FOSRENOL outside the US decreased marginally primarily because of the impact of unfavorable foreign exchange.

Litigation proceedings regarding Shire's FOSRENOL patents are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.


Human Genetic Therapies

ELAPRASE - Hunter syndrome

Reported ELAPRASE sales growth (7%) was driven by an increase in the number of patients on therapy. On a Non GAAP CER basis, ELAPRASE sales grew by 11% as reported sales were held back by unfavorable foreign exchange (amounting to approximately $20 million) primarily due to weaker European currencies in 2012 compared to 2011. The increase in ELAPRASE sales between the third quarter and fourth quarter of 2012 was partly driven by the timing of certain large orders from markets which order less frequently.

REPLAGAL - Fabry disease

Reported REPLAGAL sales growth (5%) was driven by an increase in the number of patients on therapy. On a Non GAAP CER basis, REPLAGAL sales grew by 10%, as reported sales were impacted by unfavorable foreign exchange (amounting to approximately $26 million), primarily due to weaker European currencies in 2012 compared to 2011. The reduction in REPLAGAL sales between the third and fourth quarter of 2012 was partly driven by the timing of certain large orders from markets which order less frequently.

Litigation proceedings regarding REPLAGAL are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

VPRIV - Gaucher disease

Reported VPRIV sales growth (20%) was driven by an increase in the number of patients on therapy. On a Non GAAP CER basis, VPRIV sales increased by 23% as reported sales were also held back by unfavorable foreign exchange (amounting to approximately $8 million).

FIRAZYR - HAE

Reported FIRAZYR sales growth (252%) was driven largely by the first full year of sales in the US market, following launch of FIRAZYR in the market in fourth quarter of 2011.

Regenerative Medicine

DERMAGRAFT - DFU

DERMAGRAFT product sales were up 46%(1) compared to sales reported by Shire subsequent to acquisition in 2011. On a full year basis, sales for DERMAGRAFT were down 21% reflecting the impact of an ongoing restructuring of the RM sales and marketing organization and the implementation of a new commercial model, all of which is expected to position DERMAGRAFT for future sales growth.

1. Shire acquired DERMAGRAFT through its acquisition of ABH on June 28, 2011 and reported revenues from DERMAGRAFT of $105.3m relating to the post acquisition period in 2011.

Royalties

                        Year to            Year to
                   December 31,       December 31,
                           2012               2011       Change
                            $'M                $'M            %
3TC and ZEFFIX             91.6               82.7          +11 %
ADDERALL XR                70.3              107.1          -34 %
. . .
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