ITEM 1. BUSINESS
General
Strategy
Business model
2015 and Recent Highlights
Financial information about operating segments
Sales and marketing
Manufacturing and distribution
Intellectual property
Competition
Government regulation
Regulatory Developments
Third party reimbursement and pricing
Responsibility
Employees
Available information
PART I
ITEM 1: Business
General
Shire plc and its subsidiaries (collectively referred to as either “Shire”, or the “Company”) is fast-becoming a leading biotech company, focusing on developing and marketing innovative medicines for patients with rare diseases and other select conditions.
The Company has grown both organically and through acquisition, completing a series of major transactions that have brought therapeutic, geographic and pipeline growth and diversification. The Company will continue to conduct its own research and development (“R&D”), focused on rare diseases, as well as evaluate companies, products and pipeline opportunities that offer a strategic fit and have the potential to deliver value to all of the Company’s stakeholders: patients, physicians, policy makers, payers, investors and employees.
Strategy
Shire’s purpose is to enable people with life altering conditions to lead better lives.
The Company aspires to be a leading global biotech delivering innovative medicines to patients with rare diseases and other specialty conditions. This is underpinned by four strategic drivers:
Growth:
· Optimize In-Line assets through commercial excellence
· Advance late-stage pipeline and launch new products
· Accelerate growth through the acquisition of assets in core / adjacent therapeutic areas (“TAs”)
Innovation:
· Invest to develop therapeutic advances for diseases with significant unmet need
· Expand rare diseases expertise through internal research and collaborations with external partners
· Extend the Company’s portfolio to new indications and TAs
Efficiency:
· Operate a lean and agile organization
· Maintain focus on profitability while investing for future growth
· Retain flexibility to reinvest in high-growth opportunities
People:
· Foster and reward a high performance culture
· Attract, develop and retain the best talent
· Live our values
Business model
In 2013 Shire integrated its operations into a simplified “One Shire” organization. The One Shire model has created a simple structure and a focused, efficient organization that is scalable for growth. The core elements of this model have been retained through multiple acquisitions since its original implementation.
Shire has commercial units that focus exclusively on the commercial execution of its marketed products (the “In-Line” group) in the areas of Hereditary Angioedema/Lysomal Storage Diseases (“HAE/LSD”), Neuroscience, Gastrointestinal (“GI”) and Internal Medicine, and in Ophthalmics to support the development of Shire’s ophthalmic pipeline candidates. This ensures that the Company provides innovative treatments, and services the needs of its customers and patients, as efficiently as possible.
Shire has a single R&D organization (the “Pipeline” group), and early stage research is focused primarily on rare diseases. This single structure is designed to ensure Shire explores and develops opportunities built upon its core capabilities, priority commercial units and TAs, and also seeks to explore related and emerging areas.
Growth is also fuelled by the acquisition of new companies, in-licensing and new product development opportunities through R&D partnerships. Shire’s global corporate development team searches for new technologies, innovative products and strategic partnerships. The team engages in conversations with scientists and entrepreneurs on a global basis, while collaborating with commercial and R&D experts throughout the Company.
Shire’s support functions, including Technical Operations, are unified across the business to run as efficiently and effectively as possible to support the In-Line and Pipeline activities.
Shire leads its business through the Executive Committee, with support from its In-Line Committee, Pipeline Committee and Corporate Committee, which comprise senior management from across functions and commercial units to support the In-Line products, Pipeline activities and other corporate and group related activity. The Executive Committee is responsible for ensuring the appropriate allocation of resources and focused decision making across the enterprise in the best interests of Shire’s patients, shareholders and other stakeholders.
2015 and Recent Highlights
See “Currently marketed products” and “Products under development” below for a full discussion of 2015 product, pipeline and business highlights, including:
Pipeline development:
·the launch in the US of NATPARA (parathyroid hormone for injection) as an adjunct to calcium and vitamin D to control hypocalcemia in patients with hypoparathyroidism (“HPT”);
·the announcement of OPUS-3 top-line Phase 3 Trial results for SHP606 (“lifitegrast”), which met primary and key secondary endpoints, significantly reducing patient-reported symptoms for Dry Eye Disease (“DED”);
·the new drug application (“NDA”) filing and US Food and Drug Administration (“FDA”) Priority Review designation for lifitegrast for the treatment of signs and symptoms of DED in adults;
·the re-submission of the NDA for lifitegrast with the FDA in response to the complete response letter (“CRL”) Shire received from the FDA on October 16, 2015 and to include the positive data from OPUS-3, with FDA acceptance of the Submission and a July 22, 2016 PDUFA date;
·the FDA fast track designation for CINRYZE (C1 esterase inhibitor [human]) for investigation in the treatment of Antibody Mediated Rejection (“AMR”) in patients receiving kidney transplants;
·the receipt of European Approval for INTUNIV (guanfacine hydrochloride prolonged release tablets) as a non-stimulant treatment of Attention Deficit Hyperactivity Disorder (“ADHD”) in children and adolescents 6 to 17 years old for whom stimulants are not suitable, not tolerated or have been shown to be ineffective;
·the announcement of FDA approval of VYVANSE (lisdexamfetamine dimesylate) Capsules (CII) for adults with moderate to severe Binge Eating Disorder (“BED”);
·the reporting of topline results in multiple Phase 2 studies for SHP625 in cholestatic liver disease; and
·the positive response from European Decentralised Procedure for ELVANSE Adult in adults with ADHD.
Geographical expansion:
·the expansion of Shire’s international reach, with Shire medicines now available in 72 countries around the world and a Shire operational presence in 50 countries.
Business development:
·the announcement of the proposed combination with Baxalta, which would create a global leader in rare diseases;
·the completion on January 22, 2016 of the acquisition of Dyax, expanding and extending Shire’s industry-leading Hereditary Angioedema (“HAE”) portfolio;
·the acquisition of NPS Pharmaceuticals, Inc. (“NPS Pharma”) as a further step in building a leading biotech focused on rare diseases;
·the acquisition of Meritage Pharma, Inc. (“Meritage Pharma”);
·the announcement of a new research agreement with the Foundation Fighting Blindness;
·the acquisition of Foresight Biotherapeutics Inc. (“Foresight”), to boost the Ophthalmics portfolio; and
·the announcement of research collaborations with Cincinnati Children’s Hospital and the University of Pittsburgh.
Other developments:
·the execution of an agreement with Sanquin Blood Supply, the manufacturer of CINRYZE, enabling Shire to attain enhanced CINRYZE manufacturing flexibility and capacity;
·the appointments of Jeffery Poulton, Sara Mathew and Olivier Bohuon to the Board of Directors;
·the appointment of Bill Mordan as General Counsel and Corporate Secretary;
·the announcement that David Kappler will step down as Deputy Chairman and Senior Independent Director of the Board of Directors, and that William Burns, Non-Executive Director and member of the Remuneration, Nomination and Science & Technology Committees, will be appointed Senior Independent Director; and
·the confirmation from the US Court of Appeals for the Federal Circuit (“CAFC”) that certain patents protecting VYVANSE (lisdexamfetamine dimesylate) patents are valid and infringed by several ANDA filers.
Financial information about operating segments
The Company comprises a single operating and reportable segment. This segment is engaged in the research, development, licensing, manufacturing, marketing, distribution and sale of innovative specialist medicines to meet significant unmet patient needs. Additional segment information is presented in Note 23 to the Company’s consolidated financial statements contained in ITEM 15: Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K.
Sales and marketing
At December 31, 2015 the Company employed 2,160 (2014: 2,151) sales and marketing staff to service its operations throughout the world, including its major markets in North America, Europe, Latin America, and Asia Pacific.
Currently marketed products
The table below lists the Company’s main marketed products at December 31, 2015 indicating the owner/licensor, disease area and the key territories in which Shire markets the product.
Products Disease area Owner/licensor
Key territories
Treatments for Neuroscience
VYVANSE/VENVANSE/
ELVANSE/TyVENSE/ELVANSE VUXEN/ADUVANZ (lisdexamfetamine dimesylate)
ADHD and BED Shire US, Europe, Canada and Brazil (1)
ADDERALL XR (mixed salts of a
single-entity amphetamine)
ADHD Shire US and Canada
INTUNIV (extended release
guanfacine)
ADHD Shire US, Europe and Canada
Treatments for GI diseases
LIALDA (mesalamine)/ MEZAVANT(mesalazine)
Ulcerative Colitis Nogra SpA US, Canada and Europe (2,3)
Pentasa (mesalamine) Ulcerative Colitis Shire US
Treatments for Rare Diseases
REPLAGAL (agalsidase alfa) Fabry disease Shire Europe, Latin America and Asia Pacific(4)
ELAPRASE (idursulfase) Hunter syndrome (Mucopolysaccharidosis Type II, MPS II) Shire Global(5)
VPRIV (velaglucerase alfa) Gaucher disease, Type 1 Shire Global
FIRAZYR (icatibant) HAE Shire Global
CINRYZE C1 esterase inhibitor [human] HAE Shire US and Europe
GATTEX/REVESTIVE Short Bowel Syndrome (“SBS”)
Shire
US, Europe and Canada(6)
NATPARA/NATPAR Control of hypocalcemia in patients with hypoparathyroidism
Shire
US
Treatments for diseases in Other therapeutic areas
Fosrenol (lanthanum carbonate) Hyperphosphatemia in end stage renal disease Shire US, Europe and Japan(2, 7)
(1) Marketed in Brazil as VENVANSE and in the EU as ELVANSE or TYVENSE.
(2) Marketed by distributors in certain other markets.
(3) Marketed in the US as LIALDA and in Europe as MEZAVANT XL or MEZAVANT.
(4) Marketed in Japan under license by Dainippon Sumitomo Pharma Co., Ltd.
(5) Marketed in Asia Pacific under license by Genzyme.
(6)Marketed in the US as GATTEX and in Europe and Canada as REVESTIVE.
(7) Marketed in Japan under license by Bayer Yakuhin Limited (“Bayer”).
Treatments for Neuroscience
ADHD is a chronic neurobehavioral disorder that manifests as a persistent pattern of inattention and/or hyperactivity-impulsivity that is more frequent and severe than is typically observed in individuals at a comparable level of development. Although there is no cure for ADHD, there are accepted treatments that have been demonstrated to improve symptoms. Standard treatments include educational approaches, psychological therapies that may include behavior modification, and/or medication.
The worldwide prevalence of ADHD is estimated at 5.3% (Am J Psych. 2007). In the US, the prevalence is estimated at approximately 12% in the paediatric population aged 3 to 17 years. The diagnosis rate is fairly high with approximately 61% of prevalent patients being diagnosed and 66% of these patients being treated with pharmacologic treatment.
In adults the prevalent rates tend to vary widely depending on the sampling scheme and methodology of the study, but the US adult prevalence is as high as 10.5% of the population aged 20 plus with less than a third being diagnosed. Of those diagnosed, slightly more than half receive pharmacologic treatment.
According to IMS Health National Prescription Audit (“IMS NPA”), a leading global provider of business intelligence for the pharmaceutical and healthcare industries, the US ADHD market was valued at approximately $9.6 billion for the twelve months ended December 2015; this represents an increase of approximately 8.1% from the twelve months ended December 2014.
The current market dynamics in the US present significant challenges as well as opportunities for growth. While the market continues to grow in volume, the growth rate is slowing. We expect this trend to continue given the lack of promoted products, increased generic entries and lack of product innovation in the near future. The increased genericization of the market will put increasing pressure on prices, particularly with multiple generic entrants for ADDERALL XR and CONCERTA. Cost pressures are not only driven by the generics but also by increased price sensitivity of customers - physicians may suggest generics anticipating cost concerns for their patients, patients are paying more for their healthcare costs every year, and with the current economic conditions their sensitivity has increased as well. While there are no major innovative product launches in the near future, we expect several new pediatric-friendly forms such as oral suspension, dissolving tablets, sprinkles, and chewables that are expected to launch putting more pressure on the pediatric market.
Within the US the overall ADHD market exists in two distinct parts, pediatric and adult, with different needs and market dynamics. The pediatric market is led by long-acting therapies, with CONCERTA the lead product followed closely by VYVANSE. This market also had a much higher branded share, almost 50%, though generics are growing. The pediatric market is growing, though more slowly than the overall market, and zero to 18 represents just under half of the existing overall ADHD market volume. The adult market is dominated by generics, with short-acting therapies and long acting therapies showing a basic 50/50 split. Growth rates in the adult market are very strong, particularly in the 25 plus age segment.
VYVANSE
VYVANSE is the first pro-drug stimulant for the treatment of ADHD, where the amino acid l-lysine is linked to d-amphetamine. VYVANSE is therapeutically inactive until metabolized in the body.
The FDA approved VYVANSE as a once-daily treatment for children aged 6 to 12 with ADHD in February 2007, for adults in April 2008 and for adolescents aged 13 to 17 in November 2010. In addition VYVANSE became the first drug in its class to be approved by the FDA for maintenance treatment, having been approved both as a maintenance treatment in adults with ADHD in January 2012, and as a maintenance treatment in pediatrics and adolescents aged 6 to 17 in April 2013. VYVANSE is available in the US in seven dosage strengths: 10mg, 20mg, 30mg, 40mg, 50mg, 60mg and 70mg.
VYVANSE was approved by Health Canada for the treatment of ADHD in pediatric patients aged 6 to 12 in February 2009, for adolescents and adults in November 2010, and was launched in Canada in January 2010 for pediatric patients and January 2011 for adolescents and adults.
VENVANSE was granted marketing authorization by ANVISA, the Brazilian health authority, for the treatment of ADHD in children aged 6 to12 and launched in May 2011 and launched for adolescents and adults in November 2013.
ELVANSE/TYVENSE received a positive outcome from the European Decentralised Procedure in December 2012. ELVANSE is indicated as part of a comprehensive treatment program for ADHD in children 6 years of age and over when response to previous methylphenidate treatment is considered clinically inadequate. The product has been approved and launched in eight countries through the European Decentralised Procedure (UK, Germany, Sweden, Spain, Norway, Finland, Denmark and Ireland). The product has also been approved and launched in Switzerland.
ELVANSE ADULT/ELVANSE VUXEN/ADUVANZ received a positive outcome from the European Decentralised Procedure in January 2015. ELVANSE ADULT is indicated as part of a comprehensive treatment programme for ADHD in adults taking into consideration the profile of the patient, including a thorough assessment of the severity and chronicity of the patient’s symptoms, the potential for abuse, misuse or diversion and clinical response to any previous pharmacotherapies for the treatment of ADHD. The product has been approved and launched in the UK, Sweden and Denmark. The product has also been approved and launched in Switzerland.
VYVANSE was also approved in the US in January 2015 as the first and only treatment of moderate to severe BED in adults. BED is defined as recurring episodes (more than once weekly), for at least 3 months, of consuming a large amount of food in a short time, compared with others. Patients feel a lack of control during a binge eating episode and marked distress over their eating. They typically experience shame and guilt, among other symptoms, about their binge eating and may conceal the symptoms. Unlike people with other eating disorders, adults with BED don’t routinely try to “undo” their excessive eating with extreme actions like purging or over-exercising. BED is the most common eating disorder in the US, affecting an estimated 2.8 million adults1, according to a national survey. BED occurs in both men and women and is more common than anorexia and bulimia combined. BED can occur in normal, overweight, and obese adults, and is seen across racial and ethnic groups.
Further information about litigation proceedings regarding VYVANSE can be found in ITEM 3: Legal Proceedings and Note 17, “Commitments and contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
1 Crossrow N, Russo LJ, Ming EE,, Witt EA, Victor TW, Wadden TA. Poster, APA 167th Annual Meeting, New York, NY, May 3 - 7, 2014
ADDERALL XR
ADDERALL XR is an extended release treatment for ADHD, which uses MICROTROL drug delivery technology and is designed to provide once-daily dosing. It is available in 5mg, 10mg, 15mg, 20mg, 25mg and 30mg capsules.
The FDA approved ADDERALL XR as a once-daily treatment for children aged 6 to 12 with ADHD in October 2001, for adults in August 2004 and for adolescents aged 13 to 17 in July 2005.
Teva Pharmaceutical Industries, Ltd. (“Teva”) and Impax Laboratories, Inc. (“Impax”) commenced commercial shipment of their authorized generic versions of ADDERALL XR in April and October 2009, respectively. Shire currently receives royalties from Impax’s sales of authorized generic ADDERALL XR. Shire’s supply obligations to Impax ended September 30, 2014. Shire has extended its supply agreement with Teva until September 30, 2016. From the third quarter of 2012 Shire also started receiving royalties from Actavis’ sales of its generic version of ADDERALL XR. In December 2013, Shire entered into an agreement with Sandoz Inc. (“Sandoz”) whereby Shire will supply Sandoz with an authorized generic version of ADDERALL XR no later than July 1, 2016. From the December 1, 2013 effective date of the agreement through the end of the agreement’s five-year supply term, Sandoz has agreed to exclusively sell the authorized generic version of ADDERALL XR supplied by Shire. Shire will receive a royalty on Sandoz's sales of the product.
In June 2012 the FDA stated that it will require that all abbreviated new drug applications (“ANDAs”) for ADDERALL XR will have to establish bioequivalence using partial area under the curve measurements at multiple time points post-dosing and for both d- and l-amphetamine. The FDA response is consistent with recent decisions on other long-acting ADHD products.
INTUNIV
INTUNIV is a selective alpha-2A receptor agonist indicated for the treatment of ADHD. Alpha-2A-adrenoceptors strengthen working memory networks by inhibiting cAMP-HCN channel signalling in the prefrontal cortex (Cell. 2007; 129:397-410). INTUNIV is non-scheduled and has no known potential for abuse or dependence.
The FDA approved INTUNIV as a once-daily monotherapy treatment of ADHD in children and adolescents aged 6 to 17 and as adjunctive therapy to stimulants in February 2011. It is available in 1mg, 2mg, 3mg and 4mg tablets. Actavis launched a generic version of INTUNIV on December 1, 2014. Additional generics were launched following Actavis’s generic exclusivity period on June 1, 2015.
INTUNIV XR was approved by Health Canada as monotherapy for the treatment of ADHD in children aged 6 to 12 years and as adjunctive therapy to psychostimulants for the treatment of ADHD in children, aged 6 to 12 years, with a sub-optimal response to psychostimulants in July 2013 and was launched in Canada in November 2013. The approval was extended to include adolescents aged 13 to 17 in September 2015, and was launched in January 2016.
In September 2015, the European Commission granted Marketing Authorisation for once-daily, non-stimulant INTUNIV (guanfacine hydrochloride prolonged release tablets) for the treatment ADHD in children and adolescents 6 to 17 years old for whom stimulants are not suitable, not tolerated or have been shown to be ineffective. INTUNIV has been launched in Germany, UK and Denmark.
Treatments for Ulcerative Colitis (“UC”)
UC was estimated to affect approximately 1.2 million patients in major markets (US and EU5) in 2010 according to Ulcerative Colitis: Decision Resources’ Market Forecast and Opportunity Analysis (May, 2012). UC is a serious chronic inflammatory disease of the colon in which part or all of the large intestine becomes inflamed and often ulcerated. Typically, patients go through periods of relapse and remission and can suffer from diarrhea, bleeding and abdominal pain. Once diagnosis is confirmed, patients are usually treated for life. The first line treatment for inflammatory bowel disease is mesalamine (5-aminosalicylic acid (“5-ASA”)) based products.
LIALDA/MEZAVANT
LIALDA is indicated in the US and Canada for the induction of remission in patients with mild to moderately active UC and for the maintenance of remission of UC. The addition of the indication for maintenance of remission of UC was approved by Health Canada in February 2011 and by the FDA in July 2011. LIALDA is the first and only FDA-approved once-daily oral formulation of mesalamine indicated for the induction and maintenance of remission. LIALDA contains the highest commercially available mesalamine dose per tablet (1.2g), so patients can take as few as two tablets once daily. In 2012, the FDA issued draft bioequivalence guidelines for orally-delivered delayed or extended-release mesalamine-based drugs (including LIALDA and PENTASA; see PENTASA section below).
LIALDA was approved by the FDA in January 2007 and was launched in the US in March 2007. Following approvals in other countries, at December 31, 2015, LIALDA/MEZAVANT was commercially available in 19 countries either directly or through distributor arrangements. LIALDA is marketed in certain territories outside the US by Shire under the trade name MEZAVANT and MEZAVANT XL.
Litigation proceedings relating to the Company’s LIALDA patents are in progress. For further information see ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
PENTASA
PENTASA controlled release capsules are marketed by Shire in the US and are indicated for the induction of remission and for the treatment of patients with mild to moderately active UC.
PENTASA is an ethylcellulose-coated, controlled release capsule formulation designed to release therapeutic quantities of mesalamine throughout the gastrointestinal tract. PENTASA is available in the US in 250mg and 500mg capsules.
In September 2012, the FDA issued draft bioequivalence guidelines for generic approvals of orally-delivered delayed or extended-release mesalamine-based drugs (including LIALDA and PENTASA).
Treatments for Rare Diseases
A rare disease is a life-threatening or chronically debilitating condition affecting a limited number of patients. It is defined as rare in Europe when fewer than 5 in 10,000 people are affected, and in the US when fewer than 200,000 people are affected (Aronson J. Br J Clin Pharmacol 2006). Although rare diseases affect only a small number of people, collectively they impact millions of patients and their families. Globally, an estimated 350 million people - almost five percent of the world’s population - are living with a rare disease (Global Genes. Rare diseases: facts and statistics). There are approximately 7,000 rare diseases identified, of which 80% are genetic (Engel PA. Journal of Rare Disorders 2013 / Global Genes. Rare diseases: facts and statistics).
Compared to widespread conditions that strike hundreds of millions of people, rare diseases can lack similar levels of interest amongst the general public and medical/research communities (Shire Impact Report). Many people with a rare disease continue to experience low quality of life, high levels of disability, and may be at risk of early death due to delay in diagnosis or misdiagnosis (EURODIS. The voice of 12,000 patients). Effective treatments are available for only about 1% of rare diseases (Rollet P. Orphanet J Rare Dis 2013). These untreated diseases impose very high societal, emotional and economic costs.
REPLAGAL
REPLAGAL is marketed for the treatment of Fabry disease outside of the US. Fabry disease is a rare, inherited genetic disorder resulting from a deficiency in the activity of the lysosomal enzyme alpha-galactosidase A, which is involved in the breakdown of fats. Although the signs and symptoms of Fabry disease vary widely from patient to patient, the most common include severe pain of the extremities, impaired kidney function which often progresses to kidney failure, early heart disease, stroke and disabling gastrointestinal symptoms. The disease is estimated to affect 1 in 27,000 people (Spada et al, 2006).
REPLAGAL is a fully human alpha-galactosidase A protein made in human cells that replaces the deficient alpha-galactosidase A with an active enzyme to ameliorate certain clinical manifestations of Fabry disease.
In August 2001, REPLAGAL was granted marketing authorization in the EU. At December 31, 2015 REPLAGAL was approved in 53 countries excluding the US.
ELAPRASE
ELAPRASE is a treatment for Hunter syndrome (also known as Mucopolysaccharidosis Type II or MPS II). Hunter syndrome is a rare, inherited genetic disorder mainly affecting males that interferes with the body's ability to break down and recycle waste substances called mucopolysaccharides, also known as glycosaminoglycans or GAGs. In patients with Hunter syndrome, cumulative build-up of GAGs in cells throughout the body interferes with the way certain tissues and organs function, leading to severe clinical complications and early mortality. The disease is estimated to affect approximately 1 in 162,000 males (Meikle et al, 1999).
ELAPRASE was approved by the FDA in July 2006 and granted marketing authorization by the European Medicines Agency (“EMA”) in January 2007 for the long term treatment of patients with Hunter syndrome. ELAPRASE has been granted orphan drug exclusivity by both the FDA and the EMA. ELAPRASE also benefits from the 12 years of data exclusivity from the date of grant of registration given to innovator biologics in the US under the Patient Protection and Affordable Care Act (“PPACA” or “ACA”).
ELAPRASE received approval from the Ministry of Health Labour and Welfare (“MHLW”) in Japan in October 2007. As part of an agreement with Genzyme, Genzyme manages the sales and distribution of ELAPRASE in Japan as well as certain other countries in the Asia Pacific region.
At December 31, 2015 ELAPRASE was approved in 64 countries.
VPRIV
VPRIV is a treatment for Type 1 Gaucher disease. Gaucher disease is a rare, inherited genetic disorder which results in a deficiency of the lysosomal enzyme beta-glucocerebrosidase. This enzymatic deficiency causes an accumulation of glucocerebroside, primarily in macrophages called Gaucher cells in the liver, spleen, bone marrow, and other organs. The accumulation of glucocerebrosidase in Gaucher cells in the liver and spleen leads to organomegaly. Presence of Gaucher cells in the bone marrow and spleen leads to clinically significant anemia and thrombocytopenia. The disease is estimated to affect 1 in 40,000 individuals, with a higher incidence in the Ashkenazi Jewish population (Sidransky et al, 2010, and National Gaucher Foundation).
VPRIV was approved by the FDA in February 2010 for the long term treatment of patients with Type 1 Gaucher disease. The EMA approved the marketing authorization for the use of VPRIV in August 2010. VPRIV has been granted orphan drug status in the EU with up to ten year’s market exclusivity from August 2010. VPRIV also benefits from the 12 years of data exclusivity in the US from the date of grant of registration given to innovator biologics under the ACA.
At December 31, 2015 VPRIV was approved in 51 countries.
FIRAZYR
FIRAZYR is a first-in-class peptide-based therapeutic developed for the symptomatic treatment of acute attacks of HAE. HAE is a debilitating and potentially life-threatening genetic disease characterized by unpredictable recurring swelling attacks in the hands, feet, face, larynx, or abdomen. The disease is estimated to affect approximately 1 in 50,000 individuals (Bowen et al, 2008).
In July 2008 the EMA granted marketing authorization throughout the EU for the use of FIRAZYR for the symptomatic treatment of acute attacks of HAE, and in February 2011 approved FIRAZYR for self-administration after training in subcutaneous injection technique by a healthcare professional. In August 2011 the FDA granted marketing approval for FIRAZYR in the US for treatment of acute attacks of HAE in adults aged 18 and older and, after injection training, patients may self-administer FIRAZYR. FIRAZYR has been granted orphan drug exclusivity by both the FDA and the EMA, providing it with up to 7 and 10 years market exclusivity in the US and EU, respectively, from the date of the grant of the relevant marketing authorization.
At December 31, 2015 FIRAZYR was approved in 44 countries.
CINRYZE
CINRYZE is a C1 esterase inhibitor therapy for routine prophylaxis against HAE, also known as C1 inhibitor (C1-INH) deficiency. CINRYZE is marketed and sold in the US for routine prophylaxis against HAE attacks in adolescent and adult patients with HAE. CINRYZE has been granted orphan drug exclusivity by the FDA, providing it with 12 years of data exclusivity from the date of grant of registration given to innovator biologics in the US under the ACA from October 2008. In June 2011, marketing authorization in the EU was granted for CINRYZE in adults and adolescents with HAE for routine prevention, pre-procedure prevention and acute treatment of angioedema attacks. The approval also includes a self-administration option for appropriately trained patients.
At December 31, 2015 CINRYZE was approved in 36 countries.
GATTEX/REVESTIVE
GATTEX / REVESTIVE (teduglutide [rDNA origin]) for injection is the first prescription medicine for the long-term treatment of adults with SBS who are dependent on parenteral support. SBS is a condition in which a large portion of the intestine has been removed by surgery. As a result, people can’t absorb enough nutrients or fluids from food and liquids to maintain good health. SBS can also be caused by disease or injury that prevents the small intestine from functioning properly despite normal length. To make up for the inadequate absorption, intravenous (“IV”) feeding (parenteral support) may be prescribed to help the patient stay healthy. In the US, approximately 6,000-7,000 SBS patients are dependent on parenteral support with a similar prevalence in Europe (NA HPEN Patient Registry. Oley Foundation.1994). GATTEX / REVESTIVE may help the remaining intestine absorb more nutrients and reduce the need for parenteral support. GATTEX was approved by the FDA in December 2012. REVESTIVE was approved in the EU in August 2012. At December 31, 2015 GATTEX / REVESTIVE was launched in the US, Canada, Sweden, Germany, Norway and France.
NATPARA/NATPAR
NATPARA (parathyroid hormone) for injection is indicated as an adjunct to calcium and vitamin D to control hypocalcemia in patients with HPT. HPT is a rare condition in which the parathyroid glands fail to produce sufficient amounts of parathyroid hormone (“PTH”) or where PTH lacks biologic activity. PTH plays a central role in a variety of critical physiological functions in the body. In patients with HPT, insufficient levels of PTH lead to many physiological abnormalities, including low serum calcium and an inability to convert native vitamin D into its active state to properly absorb dietary calcium. Acute symptoms of HPT are largely due to low serum calcium and range from muscle pain and tingling, to lack of focus or ability to concentrate, and anxiety and depression. In extreme cases, life-threatening events, such as arrhythmias and seizures, may occur. In the US, approximately 75,000
patients are diagnosed with HPT with 41,000 having moderate to severe disease with a similar prevalence in EU5 (France, Germany, UK, Italy and Spain). [J Bone Miner Res. 2013 Dec;28 (12):2570-6].
NATPARA was approved by the FDA in January 2015. NATPARA has been granted orphan drug exclusivity by the FDA. NATPARA also benefits from the 12 years of data exclusivity from the date of registration given to innovator biologics in the US under the ACA.
NATPARA carries a boxed warning that bone cancer (osteosarcoma) has been observed in rat studies with NATPARA. It is unknown whether NATPARA causes osteosarcoma in humans, but because of a potential risk of osteosarcoma, NATPARA is only recommended for use in patients whose hypocalcemia cannot be controlled on calcium supplementation and active forms of vitamin D, and for whom the potential benefits are considered to outweigh this potential risk. NATPARA is only available through a restricted program under a Risk Evaluation and Mitigation Strategy.
The MAA for NATPAR (parathyroid hormone (“rDNA”) has been validated by the EMA and is currently under review. The EMA granted orphan drug designation for NATPAR in January 2014.
Treatments for Other therapeutic areas
FOSRENOL
FOSRENOL is a phosphate binder that is indicated for use in patients with end-stage renal disease (stage 5) receiving dialysis and, from October 2009, is also indicated in the EU for the treatment of adult patients with Chronic kidney disease (“CKD”) who are not on dialysis with serum phosphate > 1.78 mmol/L (5.5 mg/dL) in which a low phosphate diet alone is insufficient to control serum phosphate levels. It is estimated that there are approximately 2 million patients worldwide with end-stage renal disease on dialysis (Nephrol Dial Transplant, 2005). In this condition the kidneys are unable to regulate the balance of phosphate in the body. If untreated, the blood phosphate levels can become elevated (hyperphosphatemia). The Kidney Disease Improving Global Outcomes (KDIGO) guidelines recommend that serum phosphate levels in CKD patients should be managed towards normal (Kidney International, 2009). FOSRENOL binds dietary phosphate in the gastrointestinal tract to prevent it from passing through the gut lining and, based upon this mechanism of action, phosphate absorption from the diet is decreased.
Formulated as a chewable tablet, FOSRENOL is available in 500mg, 750mg and 1,000mg dosage strengths. The FDA approved the 500mg dosage strength in 2004 and the 750mg and 1,000 mg dosage strengths were approved in 2005. In March 2009 FOSRENOL was launched in Japan. An oral powder formulation was approved and made available in certain European countries in 2012 and was approved in the US in 2014. At December 31, 2015 FOSRENOL was approved in 51 countries.
In addition, the Company has a number of other less material marketed products for the treatment of Neuroscience conditions (e.g., EQUASYM and BUCCOLAM), GI diseases (e.g., RESOLOR) and other TAs (e.g., PLENADREN).
Recently acquired product
Following completion of the acquisition of Dyax on January 22, 2016 Shire obtained KALBITOR.
KALBITOR
KALBITOR is a plasma kallikrein (“pKal”) inhibitor for the treatment of acute attacks of HAE in patients 12 years of age and older. It is administered subcutaneously. It is currently only available in the US. It was approved by the FDA in 2009.
Royalties received from other products
Cinacalcet HCI
Following the acquisition of NPS Pharma in February 2015, Shire receives royalties arising from NPS Pharma’s collaborations with Amgen Inc. (“Amgen”), Janssen Pharmaceuticals N.V. and Kyowa Hakko Kirin. Amgen markets cinacalcet HCI as SENSIPAR in the US and as MIMPARA in the EU; Janssen Pharmaceuticals N.V. markets tapentadol as Nucynta in the US; and Kyowa Hakko Kirin markets cinacalcet HCI as REGPARA in Japan, Hong Kong, Malaysia, Macau, Singapore and Taiwan. Shire is entitled to royalties from the relevant net sales of these products.
Antiviral products
The Company receives royalties on antiviral products based on certain of the Company’s patents licensed to GSK. These antiviral products are for Human Immunodeficiency Virus (“HIV”) and Hepatitis B virus. Royalty terms expired in most territories outside of the US during 2012. In the US, royalty terms expire at various periods through to 2018.
ADHD
ADDERALL XR
Shire receives royalties from Impax’s sales of its authorized generic version of ADDERALL XR. From the third quarter of 2012, Shire also started receiving royalties from Actavis’ sales of their generic version of ADDERALL XR.
INTUNIV
From December 1, 2014 Shire received royalties from Actavis’ sales of its generic version of INTUNIV, for 180 days from launch. Such sales required the payment of a royalty of 25% of gross profits to Shire during the 180 day period of Actavis’ exclusivity, from December 1, 2014 to May 21, 2015.
Hyperphosphatemia
FOSRENOL
The Company licensed the rights to FOSRENOL in Japan to Bayer in December 2003. Bayer launched FOSRENOL in Japan in March 2009. Shire receives royalties from Bayer’s sales of FOSRENOL in Japan. The Company has also received milestone payments from Bayer based on the achievement of certain sales thresholds and may receive further milestone payments in the future if certain sales thresholds are achieved.
In addition, the Company has licensed the rights to certain other products to third parties and receives royalties on third party sales.
Following the acquisition of Dyax on January 22, 2016 Shire has acquired rights to future milestones and royalties from Dyax’s Licensing and Research Funded Porftolio, including royalties arising from relevant net sales of Lilly’s CYRAMZA.
Products under development
The Company focuses its development resources on projects in a number of TAs, including rare diseases, neuroscience, ophthalmics, hematology and GI, and focuses its early development projects primarily on rare diseases. Total R&D expenditures (including impairment charges and depreciation) of $1,564.0 million, $1,067.5 million and $933.4 million were incurred in the years ended December 31, 2015, 2014 and 2013, respectively.
The table below lists the Company’s products in clinical development and registration as of December 31, 2015 by stage of development indicating the most advanced development status reached in major markets and the Company’s territorial rights in respect of each product candidate. If these product candidates are ultimately approved and marketed, they may benefit from patent and/or other forms of exclusivity, as described in more detail in the sections headed “Intellectual property” and “Government Regulation” in this ITEM 1. Some of the patents (or their analogous foreign patent applications or foreign granted patents) listed in the table on pages 24-26 of this ITEM 1 are potentially relevant to the corresponding development projects listed below. However as these product candidates remain in development and are subject to change as development progresses, the patents listed may not necessarily be representative of the scope of patent protection that may ultimately be available if each product candidate is approved and marketed.
Product Disease area Development status at December 31, 2015 The Company’s territorial rights
SHP606 DED Registration in US Global
NATPAR HPT Registration in EU Global
INTUNIV ADHD in children and adolescents Phase 3 in Japan (entered Phase 3 in Q2 2013) Global1
SHP465 Treatment of ADHD in
adults and pediatrics
Phase 3 in US (originally entered Phase 3 in 2005) US
FIRAZYR HAE Phase 3 in Japan (entered Phase 3 in Q1 2015) Global
SHP555 (prucalopride) Chronic constipation in
adults
Phase 3 ready in US US and EU
SHP609	 Hunter syndrome with
CNS symptoms Phase 2/3 (entered Phase 2/3 in Q4 2013) Global 2
SHP616 (CINRYZE-life cycle management and new uses) AMR Phase 3 (entered Phase 3 in Q1 2016) Global
SHP616 (CINRYZE-life cycle management and new uses) Subcutaneous
Formulation
Phase 3 (entered Phase 3 in Q1 2016)
Global
SHP616 (CINRYZE) Prophylaxis and acute treatment of angioedema
Phase 3 ready in Japan
Global
SHP620	 Treatment of
cytomegalovirus infection
(“CMV”) in transplant
patients
Phase 3 ready Global
SHP621 Treatment of adolescents and adults with Eosinophilic Esophagitis (“EoE”) Phase 3 (entered Phase 3
in Q1 2016)
Global
SHP633 (GATTEX)
Treatment of adults with SBS Phase 3 in Japan (entered
in Q4 2014)
Global
SHP640 Treatment of infectious conjunctivitis Phase 3 ready Global
SHP643 (formerly DX-2930) HAE Phase 3 (entered Phase 3 in Q1 2016) Global
LDX (lisdexamfetamine dimesylate) ADHD in children and adolescents
Phase 2/3 in Japan (entered Phase 3 in Q2 2013)
Global1
SHP616 (CINRYZE-life cycle
management and new uses) Acute Neuromyelitis
Optica (“NMO”)
Phase 2/3 ready Global
SHP607 Prevention of Retinopathy
of Prematurity (“ROP”) Phase 2 Global
SHP610 Sanfilippo A Syndrome
(MPS IIIA) Phase 2b Global2
SHP625 Treatment of cholestatic
liver diseases Phase 2 US and EU
SHP611 Metachromatic Leukodystrophy (“MLD”) Phase 1/2 Global
SHP622 Treatment of Friedreich’s Ataxia (“FA”) Phase 1b Global
SHP623 Prophylaxis treatment of angioedema Phase 1 Global
SHP626 Treatment of nonalcoholic steatohepatitis (“NASH”) Phase 1b Global
SHP627 Focal Segmental Glomerulosclerosis Phase 1 Global
SHP631 Treatment of both the
Central nervous system
(“CNS”) and somatic
manifestations in patients
with MPS II Phase 1 Global
(1)Under co-development with Shionogi in Japan as a result of a license and collaboration agreement.
(2)Genzyme has rights to manage marketing and distribution in Japan and certain other Asia Pacific countries under a license with Shire.
Products in registration as of December 31, 2015
SHP606 (lifitegrast) for the treatment of DED
On April 9, 2015 Shire announced that the FDA had accepted for filing and had granted a Priority Review designation for Shire’s NDA for lifitegrast for the treatment of signs and symptoms of DED in adults. In parallel to the NDA submission, Shire had initiated a Phase 3 safety and efficacy study (OPUS-3) in support of potential regulatory submissions. OPUS-3 was a multicenter, randomized, double-masked, placebo-controlled, parallel arm study with a 14 day open-label placebo screening run-in period followed by a 12 week randomized, masked treatment period with a primary efficacy endpoint in patients with dry eye, a recent history of artificial tear use within 30 days of study entry and an eye dryness score (“EDS”) = 40. On October 16, 2015 the FDA requested an additional clinical study and more information about product quality as part of a Complete Response Letter to Shire’s NDA. On October 27, 2015, Shire announced positive topline results from OPUS-3. In OPUS-3, Lifitegrast met the single primary endpoint for patient-reported symptoms of eye dryness (mean change in EDS from baseline to week 12) (treatment difference of 7.16 (95% CI), 3.04, 11.28; p=0.0007), and the key secondary endpoints of symptom improvement at Days 14 and 42 (treatment difference (95% CI) 7.85 (4.33, 11.37) and 9.32 (5.44, 13.20) respectively, (p<0.0001)). OPUS-3 also evaluated the safety and tolerability of lifitegrast based on occurrence of treatment-emergent adverse events. The safety and tolerability profile of lifitegrast in OPUS-3 was consistent with previous studies involving lifitegrast. Shire has incorporated this data into the resubmitted NDA which was filed on January 22, 2016. On February 4,
2016, Shire announced that the FDA acknowledged receipt of the resubmission of the NDA. The FDA determined that the submission is a complete response and has assigned a 6-month review period for the NDA and a PDUFA date of July 22, 2016.
NATPAR for the treatment of HPT
NATPAR (NATPARA in the US) is currently under review in Europe as an adjunct to calcium and vitamin D to control hypocalcemia in patients with HPT.
INTUNIV for the treatment of ADHD in Japan
Under a collaboration agreement, Shionogi and Shire will co-develop and sell treatments for ADHD in Japan, including INTUNIV. A Phase 3 clinical program to evaluate the efficacy and safety of INTUNIV in Japanese patients aged 6 to 17 has been completed and submission of the INTUNIV application for Marketing Authorisation Application in Japan occurred on January 27, 2016.
Products in clinical development as at December 31, 2015
Phase 3 and Phase 3-ready
SHP465 for the treatment of ADHD in adults
Shire’s NDA for SHP465 was previously submitted in 2006 to support the use of SHP465 as a longer-acting, once-daily treatment for ADHD in adults. With the growing adult ADHD population there is now a larger patient population and Shire expects a greater commercial need for this type of product than in 2006. SHP465 (mixed salts of a single entity amphetamine) capsules provide an extended-release of amphetamines to provide coverage of ADHD symptoms for adults. On April 7, 2015 Shire announced that it had reached an agreement with the FDA on a regulatory path for SHP465. As required by the FDA and for the purpose of approval of SHP465 for adult patients, Shire is conducting a Phase 3 study designed to evaluate the efficacy of SHP465 administered as a daily morning dose compared to a placebo in the treatment of children and adolescents (6-17 years of age inclusive) diagnosed with ADHD.
FIRAZYR for the treatment of HAE in Japan
Shire initiated a Phase 3 trial to evaluate the efficacy and safety of FIRAZYR for the acute treatment of angioedema of HAE in Japanese patients in 2015. Patient enrollment is currently ongoing.
SHP555 (prucalopride; marketed as RESOLOR in the EU) for the treatment of chronic constipation in the US
On January 10, 2012 Shire announced that it had acquired the rights to develop and market prucalopride in the US in an agreement with Janssen Pharmaceutica N.V. On June 3, 2015, Shire announced that prucalopride has been approved by the European Commission for use in adults for the symptomatic treatment of chronic constipation in whom laxatives fail to provide adequate relief. RESOLOR is approved for use in women in Europe, so the new variation extends the use of this treatment to male patients. Shire has discussed with the FDA the requirements for filing an NDA for prucalopride and is currently working towards fulfilling those requirements in anticipation of an NDA submission.
SHP609 for the treatment of Hunter syndrome with CNS symptoms
SHP609 is in development as an enzyme replacement therapy (“ERT”) delivered intrathecally for the treatment of Hunter syndrome patients with early cognitive impairment. Hunter syndrome is a Lysosomal Storage Disorder. In December 2014 the FDA granted SHP609 Fast Track designation. In addition, this product has been granted orphan drug designation in the US. The Company initiated a pivotal Phase 2/3 clinical trial in the fourth quarter of 2013 which is enrolling and an extension study is ongoing.
SHP616 (CINRYZE) for the treatment of AMR
A Phase 2 study for the treatment of AMR with SHP616 was completed in 18 patients. Shire has received FDA and EMA feedback and submitted an investigational new drug application (“IND”) in the second quarter of 2015. FDA granted Fast Track designation for SHP616 in October 2015 and Shire plans to initiate a Phase 3 study for the treatment of acute AMR in the first quarter of 2016.
SHP616 (CINRYZE) life cycle management
Shire is pursuing a subcutaneous formulation of CINRYZE for routine prophylaxis against HAE attacks in adolescent and adult patients. An IND was submitted in October, and Shire initiated a Phase 3 study in the first quarter of 2016.
SHP616 (CINRYZE) for routine prophylaxis against HAE attacks in adolescent and adult patients in Japan
CINRYZE is indicated in the US for prophylaxis and in the EU for both prophylaxis and acute treatment of angioedema attacks in adolescent and adult patients with HAE. Based on feedback from the Pharmaceutical and Medical Devices Agency (“PMDA”), a Clinical Trial Notification (“CTN”) was resubmitted and approved on October 2, 2014.
SHP620 (maribavir) for the treatment of CMV infection in transplant patients
SHP620 was acquired as part of the acquisition of ViroPharma. Shire has completed two Phase 2 studies in transplant recipients. The first trial was in first-line treatment of asymptomatic CMV viremia in transplant recipients and the results of this study showed that maribavir, at all doses, was at least as effective as valganciclovir in the reduction of circulating CMV to below the limits of assay detection (undetectable plasma CMV). The second study recently completed was for the treatment of resistant/refractory CMV infection/disease in transplant recipients. The purpose of this study was to evaluate the efficacy and safety of maribavir in patients with disease which is resistant or refractory to the standard of care CMV therapy (e.g., valganciclovir, foscarnet). This study showed that maribavir, at all doses, and was effective at lowering CMV to below the limits of assay detection. Approximately two-thirds of patients across the maribavir treatment groups achieved undetectable plasma CMV DNA (viral load) within 6 weeks. This product has been granted orphan drug designation in both the US and EU. In late June 2015 Shire conducted an end of Phase 2 meeting with the FDA and received further clarity on the path forward. Based upon this feedback and additional FDA feedback in November, Shire plans to progress the program into Phase 3 in 2016.
SHP621 Oral Budesonide Suspension (“OBS”), for the treatment of adolescents and adults with EoE
With the Meritage acquisition, Shire acquired the global rights to Meritage Pharma’s compound, OBS, for the treatment of adolescents and adults with EoE, a rare, chronic inflammatory GI disease. EoE is a chronic disease that is increasingly being diagnosed in children and adults, with an estimated prevalence in the US of approximately 181,000. It is characterized by inflammation and accumulation of a specific type of immune cell, called an eosinophil, in the esophagus. EoE patients may have persistent or relapsing symptoms related to esophageal dysfunction, which include dysphagia (difficulty swallowing) and food impaction.
OBS is a proprietary viscous oral formulation of budesonide that is designed to coat the esophagus where the drug can act locally. Budesonide is the active pharmaceutical ingredient in several products approved by the FDA, including products for the treatment of asthma, allergic rhinitis, ulcerative colitis and Crohn’s disease. Budesonide is a corticosteroid and has an established safety profile in those diseases. The FDA has granted orphan drug designation to OBS for the treatment of patients with EoE. Shire initiated a Phase 3 program for the treatment of adolescents and adults with EoE in January of 2016.
SHP633 (Gattex) for the treatment of short bowel syndrome (“SBS”) in Japan
With the acquisition of NPS Pharma, Shire acquired the global rights to Gattex an approved therapy in the US and Europe to treat adults with SBS who are dependent on parenteral support. A Phase 3 bridging study in adults was initiated in Japan in 2014 and is currently ongoing.
SHP640 for the treatment of infectious conjunctivitis
With the acquisition of Foresight on July 30, 2015, Shire acquired global rights to SHP640, a therapy in late-stage development for the treatment of infectious conjunctivitis, an ocular surface condition commonly referred to as pink eye. Foresight had completed a phase 2 proof-of-concept efficacy and safety clinical trial program for SHP640 which involved two studies in adenoviral conjunctivitis - one three-arm study and another two-arm pilot study. While the two-arm study showed a trend toward efficacy, there were too few subjects testing positive for a viral presence for the study to deliver meaningful results, and it was not statistically significant. In the three-arm study, patients treated with SHP640 showed a statistically significant improvement in rates of clinical cure and viral eradication compared to vehicle at Day 6. The Phase 2 clinical data formed the basis of a meeting with the FDA, in which Foresight discussed the path forward to conduct a phase 3 clinical development program for SHP640. Shire intends to initiate a Phase 3 program in the first quarter of 2017. If approved by regulatory agencies, SHP640 has the potential to become the first agent to treat both viral and bacterial conjunctivitis.
SHP643 (formerly DX-2930) for the treatment of HAE
SHP643 is a Phase 3 novel long-acting highly potent human monoclonal antibody inhibitor of pKal, which has patent protection and anticipated regulatory exclusivity beyond 2030. Proof of concept was demonstrated in a multi-center, randomized, double-blind, placebo-controlled, multiple ascending dose Phase 1B study in HAE patients, based on patients in 300mg, 400mg and placebo groups, who reported having at least two HAE attacks in the three months prior to study entry. Each patient received two treatments of SHP643 separated by 14 days. During the pre-specified, primary efficacy interval of six weeks (Day 8 to 50), the HAE attack rate was reduced by over 90% in the SHP643 combined 300mg and 400mg arms, with 0 attacks in the 300mg group (n=4; p < 0.0001) and 0.045 attacks per week in the 400 mg group (n=11; p=0.005), compared to 0.37 attacks per week in the placebo group (n=11). SHP643 was well tolerated at all dose levels with no evidence of dose-limiting toxicity up to 400 mg. The most common adverse events were HAE attacks, injection site pain, and headache, which were not appreciably higher in the SHP643 arms compared with placebo.
With a novel mechanism of action, the potential for more convenient dosing in an every other week or once monthly subcutaneous injectable form and the ability to significantly reduce HAE attacks, SHP643 has the potential to expand the market to patients currently not treated with prophylaxis therapy.
SHP643 has received Fast Track, Breakthrough Therapy, and Orphan Drug designations by the FDA and received orphan drug designation in the EU. Enrolment into Phase 3 clinical trials is anticipated to start in the first quarter of 2016.
LDX1 for the treatment of ADHD in Japan
Under a collaboration agreement, Shionogi and Shire will co-develop and sell ADHD products in Japan, including LDX. A Phase 2/3 clinical program to evaluate the efficacy and safety of LDX in Japanese patients aged 6 to 17 was initiated in the second quarter of 2013 and is ongoing.
1.Currently marketed as VYVANSE in the US and ELVANSE in certain countries in the EU for the treatment of ADHD
SHP616 (CINRYZE) new uses
In addition to initiating a Phase 3 study in AMR (discussed above), Shire is considering pursuing the development of Cinryze in Neuromyelitis Optica (“NMO”). Shire received feedback from the FDA in the second quarter of 2015 on NMO and is in the process of determining an optimal path forward which could lead to a Phase 2/3 clinical trial in 2016.
Phase 2
SHP607 for the prevention of ROP
SHP607 is in development as a protein replacement therapy for the prevention of ROP, a rare and potentially blinding eye disorder associated with premature birth. In December 2014 Shire received notification that SHP607 was granted Fast Track designation by the FDA. In addition, this product has been granted orphan drug designation in both the US and EU. A Phase 2 clinical trial completed enrollment in December of 2015.
SHP610 for Sanfilippo A syndrome (Mucopolysaccharidosis IIIA)
SHP610 is in development as an ERT delivered intrathecally for the treatment of Sanfilippo A syndrome, a Lysosomal Storage Disorder. The Company initiated a Phase 1/2 clinical trial in August 2010 which has now completed. Shire initiated a Phase 2b clinical trial for SHP610 which is now fully enrolled, which is designed to establish clinical proof of concept. An extension study is ongoing. The product has been granted orphan drug designation in the US and in the EU.
SHP625 for the treatment of cholestatic liver disease
SHP625 was acquired as part of the recent acquisition of Lumena Pharmaceuticals, Inc. (“Lumena”) Shire is currently conducting Phase 2 studies in the following indications: Alagille Syndrome (“ALGS”), Progressive Familial Intrahepatic Cholestasis (“PFIC”), and Primary Sclerosing Cholangitis (“PSC”). This product has been granted orphan drug designation both in the US and EU.
On April 9, 2015 Shire announced that the 13-week Phase 2 IMAGO trial of SHP625 did not meet the primary or secondary endpoints in the study of 20 pediatric patients with ALGS. Mean serum bile acid levels and pruritus at the end of the study were lower in both SHP625 and placebo treated groups as compared to baseline. However, a larger Phase 2 ITCH study in pediatric patients with ALGS is currently ongoing.
In late May 2015, Shire also received results from the CLARITY study, a 13 week, doubled blind, placebo-controlled Phase 2 study in combination with UDCA in PBC. SHP625 did not meet the primary endpoint as measured by change in pruritus or the secondary endpoint in level of liver disease as measured by the Alkaline Phosphatase (“ALP”). However, there was a significant reduction in mean serum bile acid levels versus placebo.
In June 2015, Shire received preliminary results from an interim analysis of the INDIGO study, a 72 week open label Phase 2 study in pediatric patients with PFIC. The interim analysis was based on the first 12 subjects who completed 13 weeks of treatment per protocol. SHP625 was well tolerated but there was no statistically significant reduction in mean serum bile levels from baseline. A change from baseline analysis was planned as there is no placebo treatment arm in this study. The changes from baseline for pruritus did reach statistical significance. Five of the 20 patients who received the drug experienced sustained decreases from baseline in serum bile acids ranging from 86 to 99% and also experienced marked reductions in pruritus as evidenced by absence of or only mild scratching at their last evaluation in this ongoing study. In this subset of patients where biomarkers of liver damage were elevated at baseline, as assessed by ALT and Total Bilirubin, these values were normalized during the study. In December 2015, updated PFIC interim data in 29 patients became available. While no new responders were identified, the five responders previously identified continued to experience sustained decreases in serum bile acids as well as marked reductions in pruritus benefits and normalization of liver parameters, in those patients who had elevated liver enzymes at baseline. Shire continues to analyze the totality of the data to determine an appropriate path forward.
Phase 1
SHP611 for the treatment of MLD
SHP611 is in development as recombinant human arylsulfatase A (“rASA”) delivered intrathecally every other week for the treatment of the late infantile form of MLD. This product has been granted orphan drug designation in the US and the EU. The Company initiated a 24 patient Phase 1/2 clinical trial in August 2012. The primary endpoint of this trial is to determine the safety of ascending doses of rASA over 40 weeks. The secondary endpoint focuses on decline in motor function as defined by change in baseline Gross Motor Function Measure (“GMFM-88”). Exploratory endpoints include change from baseline in cerebrospinal fluid sulfatide levels and change from baseline in the total MLD severity score based on brain Magnetic Resonance Imaging (“MRI”). The trial is currently ongoing, but top line interim results were available in late April 2015. Based upon interim data for the first 18 patients, SHP611 appeared to be well tolerated at all doses. In addition, while not statistically significant and despite a decline in GMFM-88 score across all doses, the highest dose caused a slower decline over the 40 week study period compared to the lower dose treatment groups. The higher dose group also showed encouraging data in reduced MLD MRI score and reductions of CSF sulfatide. Shire will continue to analyze these interim results and determine an optimal path forward in this development program.
SHP622 for the treatment of FA
SHP622 is in development for the treatment of Friedreich’s Ataxia and was acquired as part of the acquisition of ViroPharma. This product is a naturally occurring small molecular weight compound (indole-3-propionic acid) that prevents oxidative stress OX1 by a combination of hydroxyl radical scavenging activity and metal chelation. Phase 1 studies in healthy adults were completed in 2010. The drug was found to be generally well tolerated, and the pharmacokinetics revealed that the drug was rapidly absorbed and distributed in the body after oral administration. A Phase 1b trial of SHP622 in adults has been completed.
SHP623 for prophylactic treatment of HAE
SHP623 is a recombinant C1 inhibitor for the prophylactic treatment of HAE or other complement mediated diseases. SHP623 is intended to have a clinical profile similar to CINRYZE while providing manufacturing advantages and higher potency. In the fourth quarter of 2015, Shire received FDA approval of an IND to initiate a first-in-human study which is expected to be initiated in the first quarter of 2016.
SHP626 for the treatment of NASH
SHP626 was acquired as part of the acquisition of Lumena and is in development for the treatment of NASH, a common and often “silent” liver disease characterized by fat deposits in the liver and inflammation which can progress to significant fibrosis. A US IND was approved by the FDA in the fourth quarter of 2014, and a Phase 1b multiple dose trial has been completed.
SHP627 for the treatment of focal segmental glomerulosclerosis (“FSGS”)
On July 4, 2014 Shire completed its acquisition of Fibrotech Therapeutics Pty Ltd. (Fibrotech”), an Australian biopharmaceutical company developing a new class of orally available drugs with a novel mechanism of action which has the potential to address both the inflammatory and fibrotic components of disease processes. SHP627 has completed a Phase 1 study in healthy subjects and subjects with diabetic nephropathy. Additional IND enabling studies are being conducted. Phase 1 studies to determine optimal formulation and dose are expected to be initiated in 2016 followed by a Phase 2 study in FSGS patients in 2017.
SHP631 for the treatment of both the CNS and somatic manifestations in patients with MPS II
On July 23, 2014, Shire announced a worldwide licensing and collaboration agreement with ArmaGen Inc. (“Armagen”) for SHP631 (also known as AGT-182). SHP631 is an investigational enzyme replacement therapy for the potential treatment of both the central nervous system and somatic manifestations in patients with MPS II. SHP631 is designed to take advantage of the body’s natural system for transporting products across the blood brain barrier by using the same receptor that delivers insulin to the brain. SHP631 has received orphan drug designation from both the FDA and the EMA. In the second quarter of 2015, ArmaGen initiated a Phase 1 sequential, open-label, dose escalation, multi-dose study in adults with Hunter syndrome. At least two dose levels, assuming tolerability, are planned sequentially, and the trial is expected to deliver information on the possible effect of SHP631 on CSF levels of glycosaminoglycan substrate, which will be important in determining the next steps in clinical development.
Other development projects
A number of additional early development projects, focused on Rare Diseases, are underway in various stages of pre-clinical development.
Following the acquisition of Dyax on January 22, 2016 Shire acquired Dyax’s pipeline portfolio comprising SHP643 (formerly DX-2930) for the treatment of HAE, as outlined above, and a number of other programs at various stages of development. Shire is currently assessing the remainder of Dyax’s pipeline portfolio.
Manufacturing and distribution
Drug Substance & Active pharmaceutical ingredient (“API”) sourcing
The Company sources API from third party suppliers for VYVANSE, INTUNIV, ADDERALL XR, LIALDA, FOSRENOL, PENTASA, XAGRID, CINRYZE, FIRAZYR, BUCCOLAM, NATPARA, GATTEX. Shire has manufacturing capability for agalsidase alfa, idursulfase and velaglucerase alfa at its protein manufacturing plants in Cambridge, and Lexington, Massachusetts, US for REPLAGAL, ELAPRASE and VPRIV, respectively.
The Company currently has dual sources of API for VPRIV, VYVANSE, ADDERALL XR, LIALDA and PENTASA and is qualifying a second source for INTUNIV. The Company has two locations approved for the purification of REPLAGAL drug substance, and two locations approved for the cell culture of ELAPRASE drug substance. The Company manages the risks associated with reliance on single sources of API by carrying additional inventories or developing second sources of supply.
CINRYZE API is derived from human plasma sourced from commercial plasma suppliers. The sourcing of plasma and the production of products derived from plasma are regulated extensively by the FDA, the EMA and other medical product and health care regulatory agencies. Shire relies on a combination of sources for plasma including long term supply agreements and periodic “spot purchases” of plasma from third party plasma suppliers.
Finished Product Manufacturing
The Company sources its products: VYVANSE, INTUNIV, ADDERALL XR, LIALDA, PENTASA, FOSRENOL, EQUASYM, CINRYZE, and XAGRID from third party contract manufacturers. The finished products for: REPLAGAL, ELAPRASE, VPRIV, FIRAZYR, NATPARA, and GATTEX are manufactured by contract manufacturers specializing in aseptic fill-finish operations. BUCCOLAM is manufactured at a Shire plant in the UK.
The Company currently has dual sources for finished product manufacturing for ELAPRASE, REPLAGAL, VPRIV and VYVANSE and is developing a second source for the finished product manufacturing of LIALDA. The Company sources finished product for ADDERALL XR, FIRAZYR, FOSRENOL, INTUNIV, PENTASA, RESOLOR, NATPARA, GATTEX and VPRIV (in some markets) from a single contract manufacturer for each product. The Company manages the risks associated with reliance on single sources of production by carrying additional inventories.
Distribution
The Company’s US distribution center, which includes a large vault to house US Drug Enforcement Administration (“DEA”) regulated Schedule II products, is located in Kentucky. From there, the Company primarily distributes its products: VYVANSE, INTUNIV, ADDERALL XR, LIALDA, PENTASA, FOSRENOL and XAGRID to the US market through the three major wholesalers who have hub or distribution centers that stock Schedule II drugs in the US, providing access to nearly all pharmacies in the US.
The distribution and warehousing of products: REPLAGAL, ELAPRASE, VPRIV, NATPARA, GATTEX and FIRAZYR for the US market is contracted out to specialist third party contractors.
Outside of the US, physical distribution of Company’s products is either contracted out to third parties (where the Company has local operations) or facilitated via distribution agreements (where the Company does not have local operations).
Material customers
Shire’s three largest trade customers are AmerisourceBergen, McKesson Corp and Cardinal Health, Inc., which are based in the US. In 2015, these wholesale customers accounted for approximately 17%, 17% and 13% of product sales, respectively.
Intellectual Property
An important part of the Company’s business strategy is to protect its products and technologies through the use of patents and trademarks, to the extent available. The Company also relies on trade secrets, unpatented know-how, technological innovations and contractual arrangements with third parties to maintain and enhance its competitive position where it is unable to obtain patent protection or where marketed products are not covered by specific patents. The Company’s commercial success will depend, in part, upon its ability to obtain and enforce strong patents, to maintain trade secret protection, to operate without infringing the proprietary rights of others and to comply with the terms of licenses granted to it. The Company’s policy is to seek patent protection for proprietary technology whenever possible in the US, Canada, major European countries and Japan. Where practicable, the Company seeks patent protection in other countries on a selective basis. In all cases the Company endeavors to either obtain patent protection itself or support patent applications by its licensors. The markets for some of the Company’s currently marketed and potential future products, such as those for rare diseases, are small and where possible the Company has sought and will seek orphan drug designation for products directed to these markets which, if granted, provides regulatory exclusivity for 7 years in the US and 10 years in the EU from the date of product approval (see “Government Regulation” below).
In the regular course of business, the Company’s patents may be challenged by third parties. The Company is a party to litigation or other proceedings relating to intellectual property rights. Details of ongoing litigation are provided in ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements.
The degree of patent protection afforded to pharmaceutical inventions around the world is uncertain. If patents are granted to other parties that contain claims having a scope that is interpreted by the relevant authorities to cover any of the Company’s products or technologies, there can be no guarantee that the Company will be able to obtain licenses to such patents or make other arrangements at reasonable cost, if at all.
The existence, scope and duration of patent protection varies among the Company’s products and among the different countries where the Company’s products may be sold. They may also change over the course of time as patents are granted or expire, or become extended, modified or revoked. The following non-exhaustive list sets forth details of granted US and European Patent (“EP”) patents pertaining to the Company’s more significant revenue-generating products and certain products from which the Company receives a royalty, which are owned by or licensed to the Company and that are relevant to an understanding of the Company’s business taken as a whole. The listed EP patents do not necessarily have a corresponding national patent registered in each EU member state and the rights granted pursuant to an EP patent are enforceable only in the EU member state where the EP patent has been registered as a national patent. The expiration dates set forth below do not necessarily reflect changes to the patent term afforded by Patent Term Extensions in the United States, nor supplementary protection certificates (“SPCs”) which are available in many EU member states. The Company also holds patents in other jurisdictions, such as Canada and Japan and has patent applications pending in such jurisdictions, as well as in the US and the EU.
Granted US and EP Patents Expiration Date
ADDERALL XR
US 6,322,819
US RE 41148
US 6,605,300
US RE 42096
US 6,913,768
EP 1123087
EP 1542660
October 21, 2018
October 18, 2018
October 18, 2018
October 21, 2018
May 24, 2023
October 21, 2019
September 24, 2023
ELAPRASE US 5,932,211 September 3, 2019
FIRAZYR US 5,648,333 July 15, 2019
FOSRENOL
US 5,968,976
US 7,381,428
US 7,465,465
EP 0817639
October 26, 2018
August 26, 2024
August 26, 2024
March 19, 2016
INTUNIV
US 6,287,599
US 6,811,794
December 20, 2020
July 4, 2022
LIALDA/MEZAVANT
US 6,773,720
EP 1198226
EP 1183014
EP 1287822
June 8, 2020
June 8, 2020
June 9, 2020
June 8, 2020
REPLAGAL
US 6,458,574
EP 1538202
September 13, 2016
September 12, 2017
RESOLOR EP 807110 November 16, 2015
VPRIV
US 6,566,099
US 7,138,262
US 7,833,766
US 9,072,785
EP 1986612
EP2292256
EP1309340
September 12, 2017
July 6, 2022
May 14, 2029
February 6, 2027
February 6, 2027
August 18, 2020
August 18, 2020
VYVANSE
US 7,105,486
US 7,223,735
US 7,655,630
US 7,659,253
US 7,659,254
US 7,662,787
US 7,671,030
US 7,671,031
US 7,674,774
US 7,678,770
US 7,678,771
US 7,687,466
US 7,687,467
US 7,700,561
US 7,718,619
US 7,723,305
US 7,662,788
US 7,713,936
EP 1644019
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 28, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
February 24, 2023
June 1, 2024
GATTEX/REVESTIVE
US 5789379
US 7056886
US 7847061
US 9060992
EP 0906338
April 14, 2016
September 18, 2022
November 1, 2025
November 1, 2025
April 10, 2022
NATPARA/NATPAR
US 5496801
EP 1079803
December 23, 2016
April 23, 2021
KALBITOR
US 7,276,480
US 7,811,991
US 7,851,442
US 8,710,007
EP 2311432
EP 1941867
December 1, 2023
June 6, 2023
September 9, 2023
June 6, 2023
June 6, 2023
June 6, 2023
LAMIVUDINE: EPIVIR/EPIVIR-ZEFFIX/3TC US 6,180,639 July 30, 2018
Competition
Shire believes that competition in its markets is based on, among other things, product safety, efficacy, convenience of dosing, reliability, availability and price. Companies with more resources and larger R&D expenditures than Shire have a greater ability to acquire assets as well as fund the research and clinical trials necessary for regulatory applications, and consequently may have a better chance of obtaining approval of drugs that would then compete with Shire’s products. Other products now in use or being developed by others may be more effective or have fewer side effects than the Company’s current or future products. The market share data provided below is sourced from IMS Health. IMS information used in this document is an estimate derived from the use of information under license from the following IMS Health information service; IMS NPA weekly for the period January 17, 2014 to January 22, 2016. IMS expressly reserves all rights, including rights of copying, distribution and republication.
Markets for the treatment of Neuroscience diseases
ADHD market
Competition in the US ADHD market has increased with the launch of competing products in recent years, including authorized generic and generic versions of CONCERTA,RITALIN LA, ADDERALL XR, INTUNIV, FOCALIN XR, as well as non-stimulants STRATERRA and KAPVAY.
Shire’s share of the US ADHD prescription market in December 2015 was 16.7% (compared to 16.2% in December 2014). Overall the US ADHD prescription market grew by 5.8% in the year ended December 31, 2015 (compared to 4.8% in the same period in 2014).
Generic immediate release stimulants which constitute 33.5% of the ADHD market (IMS NPA, MAT December 2015) are showing strong growth in the US ADHD market, growing 10.6% in the 12 months ended December 2015 vs. the 12 months ended December 2014.
Shire’s key ADHD market is the US, with the Company having three products for the treatment of ADHD (VYVANSE, ADDERALL XR and INTUNIV). Shire also has ADHD products launched in Canada, Brazil, Australia, South Korea, Israel and selected EU markets. Further geographic expansion plans are underway, with VYVANSE approved in Mexico and a collaboration agreement with Shionogi to co-develop and sell VYVANSE and INTUNIV in Japan.
Key branded competitors in the US are stimulants CONCERTA (Janssen), APTENSIO XR (Rhodes), EVEKEO (Arbor) and QUILLIVANT (Pfizer), a liquid methylphenidate.
Key competitors in the European ADHD market are CONCERTA (Janssen-Cilag), RITALIN LA (Novartis), MEDIKINET (Medice and distributors) and STRATTERA (Lilly), depending upon the country. According to IMS Midas and GMD the EU 2015 market size was approximately $498 million (moving annual total (“MAT”) November 2015), with annual growth of 5.8% compared to the same period in 2014 of $470 million. During that same period VYVANSE grew by 100% ($51 million vs $26 million).
The Company is also aware of several clinical development programs underway by other pharmaceutical companies. Lilly, Targacept, Otsuka Pharmaceutical Co., Ltd., Purdue, Alcobra (in collaboration with Teva), Theravance, Euthymics, Neuroderm, Durect Pharma, Pfizer/Tris, Neos, Ironshore, and Supernus are seeking to develop additional treatment options for ADHD.
BED Market
VYVANSE is the only product approved in the US for the treatment of moderate to severe BED in adults. Medications that are used off-label to treat BED patients include Selective serotonin reuptake inhibitors (“SSRIs”) (Lexapro, Prozac), Serotonin-norepinephrine reuptake inhibitors (“SNRIs”) (Effexor XR, Cymbalta), anti-obesity drugs (Xenical, Belviq), and anticonvulsant Topamax. The Company is also aware of several clinical development programs underway by other pharmaceutical companies; Sunovion Pharmaceuticals, Takeda Pharmaceuticals, and Ironshore Pharmaceuticals/Highland Therapeutics are seeking to develop treatment options for BED.
Markets for the treatment of GI diseases
UC market
UC is a type of inflammatory bowel disease. The first-line treatments for patients with mild to moderate UC are formulations containing mesalamine (also known as 5-ASA). Shire defines the 5-ASA competitive set as the non-sulfasalazine, oral mesalamine and mesalamine pro-drug products.
Competitors vary across markets. Principal competitors in major markets include DELZICOL, ASACOL and ASACOL HD/ASACOL 800 (Allergan [formally Actavis], Tillots and various other licensees), APRISO (Valeant), PENTASA (marketed by Ferring Pharmaceutical, outside of the US only), SALOFALK (Dr. Falk) and CLAVERSAL (Faes Farma, Recordati S.p.A).
5-ASA products are generally protected by formulation patents only. In December 2007, several generic versions of Valeant’s COLAZAL (balsalazide) entered the US market, but no other generic versions of products in the oral 5-ASA competitive set have been introduced to the US market since that time. Generic mesalamine products are available in several European markets, but are not significant competitors in those markets. UCERIS (budesonide)
was approved by the FDA in January 2013 and represents an alternative to 5-ASA products for acute treatment (up to 8 weeks) of mild to moderate UC.
The Company is aware of other 5-ASA and non-ASA biologic treatments in development for UC.
Markets for the treatment of rare genetic diseases
REPLAGAL competes with Genzyme’s FABRAZYME in markets outside the US. Shire is aware of the development of certain compounds to treat Fabry disease by Amicus, Genzyme, Protalix, JCR Pharmaceuticals Co. Ltd, Isu-Abxis, Actelion and Greenovation.
VPRIV competes with two ERTs Genzyme’s CEREZYME (imiglucerase) and Pfizer / Protalix’s ELELYSO / UPLYSO (tagliglucerase) as well as two oral substrate reduction therapies Actelion’s ZAVESCA (miglustat) and Genzyme’s CERDELGA (eliglustat). A biosimilar to Cerezyme (ABCERTIN) has been launched by Isu Abxis in South Korea. Shire is aware of development programs in Gaucher by Protalix and Genzyme.
ELAPRASE is the only product licensed to treat Hunter syndrome in all the markets in which it is registered except South Korea and Mexico. Korean Green Cross Corporation was granted approval for HUNTERASE, an ERT to treat Hunter syndrome, in South Korea in 2012 and in Mexico in 2015.
FIRAZYR and KALBITOR compete in the US with BERINERT and Valeant’s RUCONEST (licensed from Pharming Group N.V.) for acute treatment of HAE. FIRAZYR competes in Europe with CSL Behring’s BERINERT P and Pharming Group N.V.’s RUCONEST. In other markets, FIRAZYR competes with BERINERT.
CINRYZE competes in US and non-US markets with generic androgens for prophylaxis of HAE. In non-US markets, CINRYZE is also indicated for acute treatment and short-term prophylaxis of HAE.
Shire is aware of a number of products in development for treatment and prophylaxis of HAE. These include a subcutaneous formulation of BERINERT, and an oral kalikrein inhibitor (Biocryst). In addition, a number of companies have molecules in discovery phase.
GATTEX competes in the US with EMD/Serono's ZORBTIVE (somatotropin) and Emmaus LifeSciences' NUTRESTORE (L-glutamine). REVESTIVE is the only product approved to treat SBS in Europe. Shire is aware of the development of certain compounds to treat SBS by Zealand Pharma and Naia Ltd.
NATPARA competes against calcium and vitamin D and occasionally Lilly’s Forteo (teriparatide, PTH1-34) prescribed off-label. Shire is aware of the development of compounds to treat hypoparathyroidism by EnteraBio and Chugai.
Government regulation
The clinical development, manufacturing and marketing of Shire’s products is subject to governmental regulation in the US, the EU and other territories. The Federal Food, Drug, and Cosmetic Act, the Prescription Drug Marketing Act and the Public Health Service Act in the US, and numerous directives and guidelines in the EU, govern the development, design, non-clinical and clinical research, testing, manufacture, safety, efficacy, labelling, packaging, storage, record keeping, premarket clearance or approval, adverse event reporting, advertising and promotion of the Company’s products. Product development and approval within these regulatory frameworks takes a number of years and involves the expenditure of substantial resources. Pharmaceutical and medical device manufacturers are also inspected regularly by the FDA.
In general, pharmaceutical and biotechnology products must undergo rigorous preclinical testing. Clinical trials for new products are typically conducted in three sequential phases that may overlap. In Phase 1, the initial introduction of the product into healthy human volunteers, the emphasis is on testing for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase 2 involves studies in a limited patient population to determine the initial efficacy of the product for specific targeted indications, to determine dosage tolerance and optimal dosage and to identify possible adverse side effects and safety risks. Once a product is found to be effective and to have an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken with a larger number of patients to provide enough data to statistically evaluate the efficacy and safety of the product and to evaluate more fully clinical outcomes. The failure to demonstrate adequately the quality, safety and efficacy of a product under development can delay or prevent regulatory approval of the product.
In order to gain marketing approval the Company must submit to the relevant regulatory authority for review information on the quality (chemistry, manufacturing and pharmaceutical) aspects of the product as well as the non-clinical and clinical data. The FDA undertakes this review for the US. In the EU the review may be undertaken by the following: (i) members of the EMA’s Committee for Medicinal Products for Human Use as part of a centralized procedure; (ii) an individual country's regulatory agency, followed by “mutual recognition” of this review by a number of other countries' agencies, depending on the process applicable to the product in question; or (iii) a competent member state’s regulatory agency through a decentralized procedure, an alternative authorization procedure to the “mutual recognition” procedure.
Approval can take several months to several years, or be denied. The approval process can be affected by a number of factors. For example, additional studies or clinical trials may be requested during the review and may delay marketing approval and involve unbudgeted costs. As a condition of approval, the regulatory agency will require post-marketing surveillance to monitor for adverse effects, and may require other additional studies as it deems appropriate. After approval for the initial indication, further clinical studies are usually necessary to gain approval for any additional indications. The terms of any approval, including labelling content, may be more restrictive than expected and could affect the marketability of a product.
As a condition of approval, the regulatory agency will require that the product continues to meet regulatory requirements as to quality, safety and efficacy and will require strict procedures to monitor and report any adverse effects. Where adverse effects occur or may occur, the regulatory agency may require additional studies or changes to the labelling (for example, application of a “black box” warning). Compelling new “adverse” data may result in a product approval being withdrawn at any stage following review by an agency and discussion with the Company.
Some jurisdictions, including the EU and the US, may designate products for disease treatment within a relatively small patient population as “orphan drugs”. Generally, if a product that has an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that applications to market the same product for the same indication may not be approved, except in limited circumstances, for a period of up to ten years in the EU and for up to seven years in the US. These laws are particularly pertinent to Shire’s rare disease products.
In the US, the Drug Price Competition and Patent Restoration Term Act of 1984, known as the US Hatch-Waxman Act, established a period of marketing exclusivity for brand-name drugs as well as abbreviated application procedures for generic versions of those drugs. Once the applicable exclusivity period for the brand-name drug has expired (which may range from 3-5 years), generic manufacturers may file with the FDA for approval to manufacture and market generic versions of the brand-name drug. Approval is sought by filing an Abbreviated New Drug Application (“ANDA”). As a substitute for conducting full-scale pre-clinical and clinical studies, the FDA can accept data establishing that the drug formulation, which is the subject of an abbreviated application, is bio-equivalent and has the same therapeutic effect as the previously approved drug, among other requirements. EU legislation also contains data exclusivity provisions. All medicinal products will be subject to an “8+2+1” exclusivity regime. A generic company may file a marketing authorization application for that product with the health authorities referencing the innovator’s data eight years after the innovator has received its first community authorization for a medicinal product. The generic company may not commercialize the product until after either 10 (8+2) or 11 years (8+2+1) have elapsed from the date of grant of the initial marketing authorization. The one-year extension is available if the innovator obtains an additional indication during the first eight years of the marketing authorization that is of significant advancement in clinical benefit. While the US Hatch-Waxman Act addresses the development and entrance of generic products, the ACA amended the Public Health Service Act to create an abbreviated
licensure pathway for biological products that are demonstrated to be “biosimilar” to or “interchangeable” with an FDA-licensed biological product. The Biologics Price Competition and Innovation Act of 2009 allow for approval of a biosimilar if data substantiates that the product is “highly similar” to an approved and existing biological product. Similar to a non-biologic product, an interchangeable biological product may be substituted for the reference product by a pharmacist without the intervention of the health care provider who prescribed the reference product.
In the US, the DEA regulates the national production and distribution of scheduled drugs (i.e. those drugs containing controlled substances) by allocating production quotas based, in part, upon the DEA’s view of national demand. As scheduled drugs, the production and distribution of Shire’s stimulant ADHD products (ADDERALL XR, VYVANSE and EQUASYM) are strictly controlled and supply of active ingredient is dependent on the DEA’s permitted annual quotas and its willingness to update those quotas to meet any shortage of drugs.
The branch of the FDA responsible for product marketing oversight routinely reviews company marketing practices and also may impose pre-clearance requirements on materials intended for use in marketing of approved drug products. Shire is also subject to various US federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Similar review and regulation of advertising and marketing practices exists in the other geographic areas where the company operates.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a company failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, such as issuing an FDA Form 483 notice of inspectional observations, a warning letter, an untitled letter, imposing civil money penalties, suspending or delaying issuance of approvals, requiring product recall, imposing a total or partial shutdown of production, withdrawal of approvals or clearances already granted, pursuing product seizures, consent decrees or other injunctive relief, or criminal prosecution through the Department of Justice. The FDA can also require a Company to repair, replace or refund the cost of products that the Company manufactured or distributed. Outside the US, regulatory agencies may exert a range of similar powers.
The Department of Health and Human Services (“HHS”) administers the Medicare and Medicaid programs, major government payers for the elderly and poor in the US, respectively. Shire is subject to various mandated discounts and rebates, as well as compliance requirements, in order to participate in these programs. HHS will be interpreting, implementing and enforcing manufacturers’ compliance with rebate payments, discounts and mandated price reporting changes under the Patient Protection and ACA.
Regulatory Developments
In the US various legislative proposals at the federal and state levels could bring about major changes in the affected health care systems. Some states have passed such legislation, and further federal and state proposals are possible. Such proposals and legislation include, and future proposals could include, price controls, patient access constraints to medicines, cost sharing through improved patient health outcomes, abbreviated licensure pathway for biosimilars and increases in required rebates or discounts. Similar initiatives exist in the EU. The Company cannot predict the outcome of such initiatives, but will work to maintain patient access to its products and to oppose price constraints. Additionally, legislation is being debated at the federal and state level in the US that could allow patient access to drugs approved in other countries - most notably Canada. This is generally referred to as drug re-importation. Although there is substantial opposition to this potential legislation within areas of the federal government, including the FDA, the Company cannot predict the outcome of such legislative activities. Several local US jurisdictions, including the King County of Washington State and Alameda, San Francisco and San Mateo Counties in California, have imposed drug-disposal responsibilities and fees on drug manufacturers. Depending on the outcome of court cases and the ability of other municipalities to pass similar ordinances, these additional costs of doing business in the US may extend to other localities. The US market is a litigious one, and several agencies, including the Office of Inspector General, Department of Justice and DEA have been stepping up their enforcement activities as part of the ACA, leading to the imposition of an increasing number of Corporate Integrity Agreements (CIA) with pharmaceutical and biotechnology companies as part of ultimate settlements (see reference to Shire’s CIA under Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K). Aggressive drug price actions taken in the US by various manufacturers over the last several years has precipitated a media maelstrom and reinvigorated a hypersensitive atmosphere regarding the cost of drugs charged by manufacturers. While it is unlikely that the US Federal government will or can implement price controls in the near or midterm time frame, multiple states have proposed price control legislation and transparency initiatives. Though several states have been unsuccessful with passing legislation (e.g., CA, NC, NY, OR, PA), there is a high probability that new legislation will be proposed in 2016. Both CA and OH are proposing referendums on their fall 2016 ballots that would prohibit state agencies from paying more than the lowest price for the same drug paid by the US Department of Veterans Affairs. Despite the attention on price increases, historically Shire has taken a responsible approach to price increases.
Similar regulatory and legislative considerations are encountered in Europe and other international markets where governments regulate pharmaceutical prices and patient reimbursement levels. The differing approach to price regulation has led to some parallel trade within the EU where Shire’s products are imported into markets with higher prices from markets with lower prices. Exploitation of price differences between countries in this way can adversely impact domestic sales in those markets with higher prices.
In July 2015, the House voted and passed its version of the 21st Century Cures Act, which includes language to amend the Social Security Act’s Section 1927(k)(1), the definition of Average Manufacturer Price (“AMP”). Specifically, section 4002 of the Cures Bill provides language to exclude from the primary manufacturer’s AMP the transfer sales of authorized generics (“AGs”) to secondary manufacturers. The ACA supported Shire and other primary manufacturer’s position of the inclusion of AG transfer sales in the primary manufacturer’s AMP by redefining “wholesaler” to include other manufacturers. However, the House version of the bill circumvents the “wholesaler” issue and explicitly excludes these sales from the AMP calculation. For any primary manufacturer that began including AG transfer sales in AMP since 2010, this reversal could mean a substantial rise in AMP, and an accompanying rise in Medicaid rebate liability. Survival of section 4002 depends on what provisions are included in the Senate version and potential edits post conference.
Third party reimbursement and pricing
·General. The Company’s revenue depends, in part, upon the price that third parties, such as health care providers and governmental organizations, reimburse on behalf of patients and physicians for the cost of the Company’s products or competitive products and treatments. These third party payers are increasingly challenging the pricing of drugs and medical devices through tougher contracting and seeking increased pharmaco-economic data in order to justify the pricing of products.
In the US:
·Commercial Managed Care. Commercial payers negotiate the pricing of products to control their costs, including the use of formularies to encourage members to utilize preferred products with favorable terms. Exclusion from a formulary, or a disfavored formulary position, can directly reduce product usage in the payer’s patient population and may negatively impact utilization in other payer plans as well. The consolidation of Pharmacy Benefits Managers (“PBMs”) may result in increased pricing pressure from the larger purchasing power of such consolidated entities. Whether manufacturers can continue to issue coupons for managed care members, without being removed from the plan’s formulary, will also affect utilization of a manufacturer’s drugs. Although the Secretary of HHS has approved the use of coupons for health exchange (“HIX”) plans, several groups are fighting the implementation of the guidance. Overall drug usage could increase due to the expansion of covered lives under the ACA albeit with greater rebate liability.
·Medicaid. Many of the Company’s products are reimbursed by Medicaid, a joint federal and state health insurance plan for the poor in the US. Medicaid mandates federal rebates from manufacturers for participation in the program. Many states outsource management of Medicaid benefits to third parties (“Managed Medicaid” or “MMC”), leaving it to them to negotiate commercial rebates and formulary position with manufacturers. Due to changes within the ACA, utilization adjudicated by commercial Managed Medicaid payers is also eligible for the mandated federal rebates, which were traditionally paid only on fee for service utilization. Other states manage their own formulary and require manufacturers to pay additional “state supplemental” rebates for positioning on its preferred drug list.
·Medicare. Medicare reimbursement rates to physicians for injectable drugs like Shire’s orphan drugs have been reduced from 106% of Average Sales Price (“ASP”) to approximately 104% of ASP, and may decrease further. The Centers for Medicare and Medicaid Services (“CMS”) are also increasingly bundling drug reimbursement into procedure costs, which can severely decrease the reimbursement rates to physicians for some manufacturers’ drugs, biologicals and medical devices. As part of the American Recovery and Reinvestment Act of 2009 (“ARRA”), Medicare reimbursement payments to eligible professionals who are not meaningful users of Certified Electronic Health Record (“EHR”) Technology will be reduced.
·ACA. The rate of implementation of the Medicaid expansion, HIX and Accountable Care Organizations (“ACO”) varies tremendously on a state-by-state basis. It is not possible to predict the overall increases in Medicaid, MMC and HIX business, and the cost for Shire specifically. Depending on HHS’ ability to rectify the HIX’s technology issues, and HHS’ flexibility with states asking for alternative approaches to Medicaid expansion, the ACA expansion in covered lives could be severely reduced.
·“Dual-eligibles” are those individuals that qualify for both Medicare and Medicaid. Although CMS has placed dual-eligibles under the coverage of Medicare Part D, there are several initiatives aimed at moving these individuals back under Medicaid, where their drug utilization would again be subjected to full Medicaid rebates.
On February 1, 2016, the CMS issued regulations implementing the Medicaid rebate provisions of the Affordable Care Act (the “Final Rule”). CMS’ interpretation of the rebates related to line extensions, and the Average Manufacturer Price (“AMP”) aspects of the Final Rule, could increase rebate costs. CMS’ proposed expansion of the Medicaid rebate program to US Territories (including Puerto Rico, US Virgin Islands, Guam, Northern Mariana Islands and Samoa) could also impact both the Company’s contracting strategies to some of these Territories and increase Shire’s Medicaid rebate and operational costs. CMS’ publication of its own pricing compendium, (“NADAC”), as well as AMP-based Federal Upper Limits (“FUL”) could affect
reimbursement to pharmacists for drugs, depending on the rate of each state’s adoption. The tax revenue aspects of the fiscal cliff in the Budget Control Act were not fully resolved via the Taxpayers Relief Act of 2012, and because of this and due to the budget climate in the US, government programs like Medicare, Medicaid and others could face additional spending cuts or changes which could affect government payer utilization or payment of Shire’s products.
In the EU and certain other territories, price controls and Health Technology Assessments for new, highly priced medicines are expected. Uncertainty exists about the pricing and reimbursement status of newly approved products in the EU. Germany, for example, has implemented the Act for the Restructuring of the Pharmaceutical Market in Statutory Health Insurance. This law essentially maintains free pricing for new chemical entities, but assesses the patient relative benefit of new drugs within six months of commercialization, in order to inform subsequent price negotiations. Prices of drugs bringing added patient benefit will qualify for price negotiation, while those with no added benefit will be subject to reference pricing (where price is determined by taking the lowest and/or average price of similar medicines in Germany). Criteria required to prove a drug’s benefit in Germany include; an improvement of health, reduction of illness duration, extension of survival, reduction of side effects or improvement of the quality of life. Third party reimbursement limits may reduce the demand for the Company’s products. The slow pace of the price applications process in some countries has delayed and, occasionally, prevented product launches. In some countries regional authorities are seeking to constrain drug prices and uptake. As such the Company’s estimated product launches may be delayed. The novelty of ADHD and behavioral drugs in the EU and other markets will require strong education and promotion efforts in order to gain acceptance and an economically viable reimbursement profile.
Responsibility
Corporate responsibility (“Responsibility”) is embedded at Shire and is a clear expectation of all employees as part of its culture. Individual performance reviews include an evaluation of how goals were achieved, not just that they were achieved. Responsibility is also reflected in how Shire operates as a “corporate citizen.” This commitment to Responsibility is supported by Shire’s Board of Directors, championed by the Chief Executive Officer and driven forward by Shire’s senior leaders.
In 2014, Shire conducted a materiality assessment with external stakeholders, including patient groups, physicians, investors, media and payers to obtain feedback on and prioritization of Shire’s most important areas of Responsibility. Findings showed that Access to Medicines, Disease Awareness and Transparency are the areas of primary importance to Shire’s stakeholders. These are the areas that have consequently received greatest focus in 2015.
A number of senior managers at Shire “sponsor” Responsibility areas, including the priority areas of Access to Medicines, Disease Awareness and Transparency but also areas such as the environment, health and safety, compliance and risk management, our people and the community. These sponsors are responsible for setting goals which support Shire’s overall strategy, and for ensuring progress is made against these goals. Responsibility objectives are reviewed quarterly, and Sponsors meet as a group twice a year to monitor progress. Shire’s Responsibility team facilitates the working groups, sponsors and communications.
Shire communicates regularly to employees about Responsibility. The Company also communicates regularly via a section on its website and intranet dedicated to information and ongoing updates on Shire’s work, initiatives and achievements that illustrate Shire’s commitment to Responsibility.
Employees
The Company’s employees are vital to its success. At December 31, 2015 the Company had 5,548 employees (2014: 5,016 employees).
Available information
The Company maintains a global internet site at www.shire.com. The Company makes available on its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Shire's reports filed with, or furnished to, the SEC are also available on the SEC's website at www.sec.gov in a document, and for Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, in an XBRL (Extensible Business Reporting Language) format. XBRL is an electronic coding language to create an interactive financial statement data over the internet. The information on the Company’s website is neither part of nor incorporated by reference in this Annual Report on Form 10-K.
ITEM 1A:
ITEM 1A: Risk Factors
The Company has adopted a risk management strategy designed to identify, assess and manage the significant risks that it faces. While the Company aims to identify and manage such risks, no risk management strategy can provide absolute assurance against any losses.
Set out below are the principal risk factors associated with the business that have been identified through the Company's risk management and internal control system. The Company believes that these risk factors apply equally and therefore all should be carefully considered before any investment is made in Shire.
The Company’s products may not be a commercial success
The commercial success of the Company’s marketed products and other new products that the Company may launch in the future, will depend on their approval and acceptance by physicians, patients and other key decision-makers, as well as the receipt of marketing approvals in different countries, the time taken to obtain such approvals, the scope of marketing approvals as reflected in the product labels, approval of reimbursement at commercially sustainable prices in those countries where price and reimbursement is negotiated, and safety, efficacy, convenience and cost-effectiveness of the product as compared to competitive products.
The Company’s revenues, financial condition or results of operations may be adversely affected if any or all of the following occur:
·if the Company’s products, or competitive products, are genericized;
·if the prices of the Company’s products suffer forced reductions or if prices of competitor products are reduced significantly;
·if there are unanticipated adverse events experienced with the Company’s products or those of a competitor’s product not seen in clinical trials that impact physicians’ willingness to prescribe the Company’s products;
·if issues arise from clinical trials being conducted for post-marketing purposes or for registration in another country which raise questions or concerns about a product;
·if the regulatory agencies in one country act in a way that raises concerns for regulatory agencies or for prescribers or patients in another country;
·if patients, payers or physicians favor other treatments over the Company’s products;
·if the Company’s products are subject to more stringent government regulation than competitor products;
·if patent protection or other forms of exclusivity are lost or curtailed, or if competitors are able to successfully challenge or circumvent the Company’s patents or other forms of exclusivity (See ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K for details of current litigation);
·if launches of the Company’s products in new markets are not successful;
·if the sizes of the patient populations for the Company’s products are less than expected; or
·if there are lawsuits filed against Shire, including but not limited to, product liability claims, consumer law claims, and payer or reimbursement litigation.
If the Company is unable to commercialize its products successfully, there may be a material adverse effect on the Company’s revenues, financial condition or results of operations.
Increased pricing pressures and limits on patient access as a result of governmental regulations and market developments may affect the Company’s future revenues, financial condition and results of operations
The Company’s product revenues are subject to increasing pressures from governmental initiatives to regulate or influence prices and access to customers. Regulations in the United States, the European Union and other jurisdictions mandating price controls or imposing constraints on patients’ ability to purchase Shire’s products
significantly impacts its business, and the Company’s financial condition and results of operations could be adversely affected in the future by changes in such regulations, practices or policies.
Regulatory measures that could have a material adverse effect on the Company include the imposition of government-approved drug pricing schedules, the use of drug formularies, prohibitions on direct-to-consumer advertising or drug marketing practices and caps or limits on the level of reimbursement provided to the Company by governmental reimbursement schemes for its products.
These pressures have also resulted in market developments, such as the consolidation of managed care organizations and private health insurers that have increased the relative bargaining power of institutional drug purchasers and enhanced their ability to negotiate discounts and extract other concessions in exchange for purchasing Shire’s products.
Such regulatory and market developments create downward pressures on the prices at which the Company can offer its products and on the level of reimbursement its treatments receive from health care providers, private health insurers and other organizations, such as health maintenance organizations and managed care organizations.
Additional factors affecting the Company’s ability to obtain and maintain adequate prices and levels of reimbursement for its products include:
·higher levels of controls on the use of the Company’s products and/or requirements for further price concessions mandated or negotiated by managed health care organizations or government authorities;
·legislative proposals to reform health care and government insurance programs in many of the Company's markets; and
·price controls, unsuccessful government tenders, or non-reimbursement of new medicines or new indications.
Moreover, the cost of treatment for some of the Company's products is high, particularly those which are used for the treatment of rare diseases. The Company may encounter difficulty in obtaining or maintaining satisfactory pricing and reimbursement for such products. The failure to obtain and maintain pricing and reimbursement at satisfactory levels for its products may adversely affect the Company’s revenues, financial condition or results of operations.
The Company depends on third parties to supply certain inputs and services critical to its operations including certain inputs, services and ingredients critical to its manufacturing processes
The Company relies on third-party suppliers, vendors and outsourcing partners to, among other things, research, develop, manufacture and commercialize its products, to provide certain key ingredients and manufacturing inputs and to manage certain sales, distribution, marketing, information technology, accounting, transaction-processing and other business services. While the Company depends on these third parties for multiple aspects of its product development, manufacturing, commercialization and business activities, it does not control these third parties directly.
As a result, there is a possibility these third parties may not complete activities on schedule or in accordance with the Company’s expectations, and their failure to meet certain contractual, regulatory or other obligations to Shire, or any disruption of Shire’s relationship with these third parties could delay or prevent the development, approval, manufacture or commercialization of the Company’s products, result in non-compliance with applicable laws and regulations, disrupt Shire’s operations, or result in reputational or other harm to the Company.
This outsourcing risk is of particular concern with respect to third-party suppliers of key manufacturing inputs of Shire’s drug products. Although the Company dual-sources certain key products and/or active ingredients, the Company currently relies on a single source for production of the final drug product for each of ADDERALL XR, CINRYZE, FIRAZYR, FOSRENOL, INTUNIV, LIALDA, PENTASA and NATPARA/NATPAR. The Company currently relies on a single active ingredient source for each of ELAPRASE, FIRAZYR, FOSRENOL, INTUNIV, REPLAGAL and GATTEX/REVESTIVE and also relies on limited third party sources to provide the donated human plasma necessary for the manufacture of CINRYZE. Following the completion of the acquisition of Dyax Corp on January 22, 2016 Shire acquired DX-2930, which currently relies on separate sole sources for both production of the final drug product and supply of the active ingredient for its Phase 3 trial. In addition, one of those drug substance sites has not been approved by the FDA and would need to be approved prior to commercial launch. Any failure by a single-source supplier to provide the Company with the required volumes on time or at all, or to provide products that do not meet regulatory requirements, could lead to significant delays in the production of Shire’s products, increases in operating costs, lost product sales, an interruption of research activities, or the delay of new product launches, all of which could have a material adverse effect on the Company’s revenues, financial condition or results of operations.
Any disruption to the supply chain for any of the Company’s products, or any difficulties or delays in the manufacturing, distribution and sale of its products may result in the Company being unable to continue marketing or developing a product, or may result in the Company being unable to do so on a commercially viable basis for some period of time
A disruption, delay or other difficulties in the manufacturing, distribution and sale of Shire’s products, or in the supply chain of any of its products, may have a material adverse effect on the Company and its revenues, financial condition and results of operations. Examples of such manufacturing and supply chain difficulties include, but are not limited to:
·regulatory or enforcement actions that result in shut-downs, delays in or withdrawal of regulatory approvals necessary to carry on manufacturing activities, product recalls and penalties or fines resulting in unanticipated costs in production, whether imposed directly on the Company or imposed indirectly through one or more of its third-party suppliers;
·the inability of the Company to increase its production capacity for certain drugs commensurate with market demand;
·the possibility that the supply of incoming materials may be delayed or become unavailable and that the quality of incoming materials may be substandard and not detected;
·the possibility that the Company may fail to maintain appropriate quality standards throughout its internal and third-party supply network, or to comply with current manufacturing best practices, rules or other applicable regulations;
·disruptions to supply chain continuity as a result of natural or man-made disasters at the Company’s facilities or at one or more of its third-party suppliers’ facilities; and
·failure to maintain the integrity of the Company’s supply chains against fraudulent and criminal acts, such as intentional product adulteration, diversion, theft, or counterfeiting activities.
Also, as noted above, the Company has also entered into many agreements with third parties for the provision of goods and services to enable it to manufacture its products. If these third parties are unable to manufacture products, or provide these goods and services, in each case in accordance with its respective contractual obligations, the Company’s ability to manage its manufacturing processes or to operate its business, including to continue the development or commercialization of its products as planned or on a commercial basis, may be adversely impacted.
The manufacture of the Company’s products is subject to extensive oversight by various regulatory agencies. Regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to significant delays, an increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches
Pharmaceutical and device manufacturing sites must be inspected and approved by regulatory agencies such as the FDA, and similar agencies in other countries. Active ingredients, excipients and packaging materials used in the manufacturing process must be obtained from sources approved by regulatory agencies.
The development, approval and manufacturing of the Company's products depend on the ability to procure ingredients and packaging materials from approved sources and for the manufacturing process to be conducted at approved sites. Changes of manufacturer or changes of source of ingredients or packaging materials must generally be approved by the regulatory agencies, which will involve testing and additional inspections to ensure compliance with the applicable regulatory agency’s regulations and standards. The need to qualify a new manufacturer or source of ingredients or packaging materials can take a significant amount of time. Should it become necessary to change a manufacturer or supplier of ingredients or packaging materials, or to qualify an additional supplier, the Company may not be able do so quickly, or at all, which could delay or disrupt the manufacturing process.
US-based manufacturers must be registered with the DEA and similar regulatory authorities in other countries if they handle controlled substances. Certain of the Company’s products, including ADDERALL XR and VYVANSE, contain ingredients which are controlled substances subject to quotas managed by the DEA. As a result, the Company’s procurement and production quotas may not be sufficient to meet commercial demand.
CINRYZE, ELAPRASE, REPLAGAL and VPRIV are manufactured using highly complex biological processes. The complexity of the manufacturing results in a number of risks, including the risk of microbial contamination. Additionally, CINRYZE is derived from human plasma, and is therefore subject to the risk of biological contamination inherent in plasma-derived products. The sole manufacturer of CINRYZE has received observations on Form 483 and a warning letter from the FDA identifying issues with respect to the manufacturing process for CINRYZE which
must be addressed to the satisfaction of the FDA. Any regulatory interventions, in relation to these, or any other issues, if they occur, may delay or disrupt the manufacture of the Company’s products.
The failure to obtain regulatory approvals promptly or at all and/or regulatory interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to significant delays, an increase in operating costs, lost product sales, an interruption of research activities, the delay of new product launches or constraints on manufacturing output, all of which could have a material adverse effect on the Company’s revenues, financial condition and results of operations.
The Company has a portfolio of products in various stages of research and development. The successful development of these products is highly uncertain and requires significant expenditures and time, and there is no guarantee that these products will receive regulatory approval
Products that initially appear promising in research or development may be delayed or fail to reach later stages of development as:
·preclinical or clinical tests may show the product to lack safety or efficacy;
·delays may be caused by slow enrollment in clinical studies; regulatory requirements for clinical trial drug supplies; extended length of time to achieve study endpoints; additional time requirements for data analysis or dossier preparation; time required for discussions with regulatory agencies, including regulatory agency requests for additional preclinical or clinical data; delays at regulatory agencies due to staffing or resource limitations; analysis of or changes to study design; unexpected safety, efficacy, or manufacturing issues; delays may arise from shared control with collaborative partners in the planning and execution of the product development, scaling of the manufacturing process, or getting approval for manufacturing;
·manufacturing issues, pricing or reimbursement issues, or other factors may render the product economically unviable;
·the proprietary rights of others and their competing products and technologies may prevent the product from being developed or commercialized; or
·submission of an application for regulatory approval of any of the Company’s product candidates may be subjected to lengthy review and ultimately rejected.
Success in preclinical and early clinical trials does not ensure that late stage clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that may delay, limit, or prevent regulatory approvals. The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority varies significantly and may be difficult to predict. Moreover, once an application is submitted, additional data may be sought by regulators or an application may be rejected. If the Company’s large-scale or late-stage clinical trials for a product are not successful, the Company will not recover its substantial investments in that product. The Company has a range of programs in or entering late stage clinical development. For example, an NDA for SHP606 for the treatment of signs and symptoms of adults with DED is currently in registration with the FDA and following the acquisition of Dyax in January 2016 the Company has acquired SHP643 (formerly DX-2930) for the treatment of HAE, which is in Phase 3.
In addition, even if the products receive regulatory approval, they remain subject to ongoing regulatory requirements, including, for example, obligations to conduct additional clinical trials or other non-clinical testing, changes to the product label (which could impact its marketability and prospects for commercial success), new or revised requirements for manufacturing, written notifications to physicians, or product recalls or withdrawals.
The actions of certain customers could affect the Company's ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely affect the Company’s revenues, financial conditions or results of operations
A considerable portion of the Company’s product sales are made to major pharmaceutical wholesale distributors, as well as to large pharmacies, in both the US and Europe. In 2015, for example, 47% of the Company's product sales were attributable to three customers in the US: AmerisourceBergen Drug Corp, McKesson Corp. and Cardinal Health, Inc. In the event of financial failure of any of these customers there could be a material adverse effect on the Company’s revenues, financial condition or results of operations. The Company’s revenues, financial condition or results of operations may also be affected by fluctuations in customer buying or distribution patterns. These fluctuations may result from seasonality, pricing, wholesaler inventory objectives, or other factors. A significant portion of the Company's revenues for certain products for treatment of rare diseases are concentrated within a
small number of customers. Changes in the buying patterns of those customers may have an adverse effect on the Company's revenues, financial condition or results of operations.
Failure to comply with laws and regulations governing the sales and marketing of its products could materially impact Shire’s revenues and profitability
The Company engages in various marketing, promotional and educational activities pertaining to, as well as the sale of, pharmaceutical products and medical devices in a number of jurisdictions around the world. The promotion, marketing and sale of pharmaceutical products and medical devices is highly regulated and the sales and marketing practices of market participants, such as the Company, have been subject to increasing supervision by governmental authorities, and Shire believes that this trend will continue.
In the United States, the Company’s sales and marketing activities are monitored by a number of regulatory authorities and law enforcement agencies, including the US Department of HHS, the FDA, the US Department of Justice, the SEC and the DEA. These authorities and agencies and their equivalents in countries outside the US have broad authority to investigate market participants for potential violations of laws relating to the sale, marketing and promotion of pharmaceutical products and medical devices, including the False Claims Act, the Anti-Kickback Statute and the Foreign Corrupt Practices Act, among others, for alleged improper conduct, including corrupt payments to government officials, improper payments to medical professionals, off-label marketing of pharmaceutical products and medical devices, and the submission of false claims for reimbursement by the federal government. Healthcare companies may also be subject to enforcement actions or prosecution for such improper conduct. Any inquiries or investigations into the operations of, or enforcement or other regulatory action against, the Company by such authorities could result in significant defense costs, fines, penalties and injunctive or administrative remedies, distract management to the detriment of the business, result in the exclusion of certain products, or the Company, from government reimbursement programs or subject the Company to regulatory controls or government monitoring of its activities in the future. The Company is also subject to certain ongoing investigations by governmental agencies. For further information, see ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
The Company’s products are subject to intense competition from generics
Shire faces significant competition from the manufacturers of generic drug products in all of its major markets. The introduction of lower-priced generics by the Company’s competitors or their successful efforts in aggressively commercializing and marketing their alternative drug products pose significant challenges to maintaining Shire’s market share, revenues and sales growth.
For example, since 2009, generic versions of ADDERALL XR have been marketed and, since 2014, generic versions of INTUNIV have been marketed in the United States. As a result, product sales of ADDERALL XR and INTUNIV have declined.
Factors which could cause further or more rapid declines in Shire’s product sales include:
·the loss or earlier than expected expiration of intellectual property rights or regulatory exclusivity periods with respect to the Company’s branded products;
·generic or authorized generic versions of these products capturing more of Shire’s branded market share than expected;
·lower prices and the actual or perceived greater effectiveness or safety of generic drug products relative to Shire’s branded products;
·the FDA approving additional ANDAs for generic versions of these products which, if launched, would further reduce branded market share or impact the amount of Shire’s authorized generic product sales;
·changes in reimbursement policies of third-party payers; or
·changes to the level of sales deductions for branded Shire products for private or public payers.
Should any of the above developments occur, the resulting generic competition could reduce sales and market share of Shire’s branded products and have a material adverse effect on the Company’s revenues, financial condition or results of operations.
Adverse outcomes in legal matters and other disputes, including the Company’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on the Company’s revenues, financial condition or results of operations
During the ordinary course of its business the Company may be involved in claims, disputes and litigation with third parties, employees, regulatory agencies, governmental authorities and other parties. The range of matters of a legal nature that might arise is extremely broad but could include, without limitation, intellectual property claims and disputes, product liability claims and disputes, regulatory litigation, contract claims and disputes, employment claims and disputes, and tax or other governmental agency audits and disputes.
Any unfavorable outcome in such matters could adversely impact the Company’s ability to develop or commercialize its products, adversely affect the profitability of existing products, subject the Company to significant defense costs, fines, penalties, audit findings and injunctive or administrative remedies, distract management to the detriment of the business, result in the exclusion of certain products, or the Company, from government reimbursement programs or subject the Company to regulatory controls or government monitoring of its activities in the future. Any such outcomes could have a material adverse effect on the Company’s revenue, financial condition or results of operations. For further information see ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
The Company faces intense competition for highly qualified personnel from other companies and organizations
The Company relies on recruiting and retaining highly skilled employees to meet its strategic objectives. The Company faces intense competition for highly qualified personnel and the supply of people with the requisite skills may be limited, generally or geographically. The range of skills required and the geographies in which they are required by the Company may also change over time as Shire’s business evolves. If the Company is unable to retain key personnel or attract new personnel with the requisite skills and experience, it could adversely affect the implementation of the Company’s strategic objectives and ultimately adversely impact the Company’s revenues, financial condition or results of operations.
Failure to successfully execute or attain strategic objectives from the Company’s acquisitions and growth strategy may adversely affect the Company’s financial condition and results of operations
The Company’s business depends to a significant extent on its ability to improve and expand its product pipeline through strategic acquisitions. Such improvements and expansions, however, are subject to the ability of the Company’s management to effectively identify appropriate strategic targets and effectuate the contemplated transactions, the availability and relative cost of acquisition opportunities as well as competition from other pharmaceutical companies seeking similar opportunities.
Moreover, even when such transactions are successfully executed, the Company may face subsequent difficulties in integrating the operations, infrastructure and personnel of acquired businesses and may experience unanticipated risks or liabilities that were not discovered, accurately disclosed or sufficiently assessed during the transactions’ due diligence process. Finally, even successfully acquired and integrated businesses may ultimately fail or fall short of achieving the Company’s strategic objectives for the transaction over the long term.
Any failures in the execution of a transaction, in the integration of an acquired business or in achieving the Company’s strategic objectives with respect to such acquisitions could result in slower growth, higher than expected costs, the recording of asset impairment charges and other actions which could adversely affect the Company’s business, financial condition and results of operations.
The Company has recently completed and is currently pursuing a number of strategic acquisitions. On February 21, 2015, Shire completed the acquisition of NPS Pharma for a total cash consideration of approximately $5.2 billion. On January 22, 2016 Shire also completed the acquisition of all the outstanding share capital of Dyax for a total upfront cash consideration of approximately $5.9 billion and a further approximately $0.6 billion in cash consideration contingent upon the approval of DX-2930 for the prophylactic treatment of HAE. Finally, on January 11, 2016 Shire announced a combination with Baxalta Incorporated had been agreed by both Boards.
These proposed and completed acquisitions as well as future acquisitions each entail various risks, which include but are not limited to:
·a proposed acquisition may not be consummated due to the occurrence of an event, change or other circumstances that gives rise to the termination of the applicable merger agreement;
·a governmental, regulatory, board, shareholder or other approval required for a proposed acquisition may not be obtained, or may be obtained subject to conditions that are not anticipated, or another condition to the closing of a proposed acquisition may not be satisfied, resulting in delays or ultimate failure of consummating a proposed acquisition;
·shareholders may initiate legal action to prevent or delay consummation of a proposed acquisition or to seek judicial reevaluation of a proposed acquisition’s consideration;
·a lengthy, uncertain process when pursuing a combination could disrupt relationships between Shire and a target company’s customers, suppliers and employees, distract Shire’s or a target’s management from operating its business, and could lead to additional and unanticipated costs;
·a target company may be unable to retain and hire key personnel and/or maintain its relationships with customers, suppliers and other business partners pending the consummation of the proposed acquisition by Shire;
·after the consummation of an acquisition, the Company may be unable to retain the acquired company’s key personnel, existing customers, suppliers and other business partners or attract new customers;
·the businesses of an acquired company may be otherwise disrupted by the acquisition, including increased costs and diversion of its respective management’s time and resources;
·failure to achieve the targeted growth and expected benefits of the acquisition if sales of an acquired company’s products are lower than anticipated, or these products cannot be successfully commercialized or cannot obtain necessary regulatory approvals;
·any integration of an acquired company into Shire could be complex and time-consuming, and difficulties in effectuating these integrations may lead to the combined companies not being able to realize the expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits in the timeframe anticipated, or at all;
·failure to successfully obtain regulatory approval of an acquired company’s late stage pipeline assets in a timely manner or at all, or to successfully commercialize such products after regulatory approval has been obtained;
·undiscovered or unanticipated risks and liabilities, including legal and compliance related liabilities, may emerge in connection with an acquisition, or may be higher than anticipated; and
·even after successfully completing an acquisition and integrating the acquired company’s businesses into Shire, the anticipated benefits of the combinations may ultimately prove less than anticipated.
A slowdown of global economic growth, or economic instability of countries in which the Company does business, could have negative consequences for the Company’s business and increase the risk of non-payment by the Company’s customers
Growth of the global pharmaceutical market has become increasingly tied to global economic growth. Accordingly a substantial and lasting slowdown of the global economy, or major national economies, could negatively affect growth in the markets in which the Company operates. Such a slowdown, or any resultant austerity measures adopted by governments in response to a slowdown, could result in national governments making significant cuts to their public spending, including national healthcare budgets, or reducing the level of reimbursement they are willing and able to provide to the Company for its products and, as a result, adversely affect the Company’s revenues, financial condition or results of operations.
A slowdown of a nation’s economy could also lead to financial difficulties for some of the Company’s significant customers, including national governments, and result in a greater risk of delayed orders or payments, defaults or non-payments of outstanding payment obligations by the Company’s customers in that country, which could adversely affect the Company’s revenues, financial condition or results of operations.
The Company is subject to evolving and complex tax laws, which may result in additional liabilities that may adversely affect the Company’s financial condition or results of operations
The Company is subject to evolving and complex tax laws in the jurisdictions in which it operates, and routinely obtains advice on matters, including the tax treatment of the break fee received in connection with the terminated offer for Shire by AbbVie Inc. (“AbbVie”) in 2014. Significant judgment is required in determining the Company’s tax
liabilities, and the Company’s tax returns are periodically examined by various tax authorities. The Company regularly assesses the likelihood of outcomes resulting from these examinations to determine the adequacy of its accrual for tax contingencies; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. In addition, the Company may be affected by changes in tax laws, including tax rate changes, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.
The failure of a strategic partner to develop and commercialize products could result in delays in development, approval or loss of revenue
The Company enters into strategic partnerships with other companies in areas such as product development, manufacturing, sales and marketing. In these partnerships, the Company is sometimes dependent on its partner to deliver results. While these partnerships are governed by contracts, the Company may not exercise direct control. If a partner fails to perform or experiences financial difficulties, the Company may suffer a delay in the development, a delay in the approval or a reduction in sales, or royalties of a product.
The failure to secure new products or compounds for development either through in-licensing, acquisition or internal research and development efforts, or the failure to realize expected benefits from acquisitions of businesses or products, may have an adverse impact on the Company's future results
The Company's future results will depend, to a significant extent, upon its ability to develop, in-license or acquire new products or compounds, or to acquire other businesses. The expected benefits from acquired products, compounds or businesses may not be realized or may require significantly greater resources and expenditure than originally anticipated. The failure to realize expected benefits from acquisitions of businesses or products including those resulting from integration into the Company, or the failure to develop, in-license or acquire new products or compounds on a commercially viable basis, could have a material adverse effect on the Company's revenues, financial condition or results of operations.
The Company may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business
The Company's success depends upon its ability and the ability of its partners and licensors to protect their intellectual property rights. Where possible, the Company's strategy is to register intellectual property rights, such as patents and trademarks. The Company also relies on various trade secrets, unpatented know-how and technological innovations and contractual arrangements with third parties to maintain its competitive position. The failure to obtain, maintain, enforce or defend such intellectual property rights, for any reason, could allow third parties to make competing products or impact the Company’s ability to develop, manufacture and market its own products on a commercially viable basis, or at all, which could have a material adverse effect on the Company's revenues, financial condition or results of operations.
The Company intends to enforce its patent rights vigorously and believes that its commercial partners, licensors and third party manufacturers intend to enforce vigorously those patent rights they have licensed to the Company. However, the Company’s patent rights, and patent rights that the Company has licensed, may not provide valid patent protection sufficiently broad to prevent any third party from developing, using or commercializing products that are similar or functionally equivalent to the Company's products or technologies. These patent rights may be challenged, revoked, invalidated, infringed or circumvented by third parties. Laws relating to such rights may in future also be changed or withdrawn.
Additionally, the Company's 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 the Company's products. The Company may need to obtain licenses for intellectual property rights from others and may not be able to obtain these licenses on commercially reasonable terms, if at all.
The Company also relies on trade secrets and other un-patented proprietary information, which it generally seeks to protect by confidentiality and nondisclosure agreements with its employees, consultants, advisors and partners. These agreements may not effectively prevent disclosure of confidential information and may not provide the Company with an adequate remedy in the event of unauthorized disclosure. In addition, if the Company's employees, scientific consultants or partners develop inventions or processes that may be applicable to the Company's products under development, such inventions and processes will not necessarily become the Company's property, but may remain the property of those persons or their employers.
The Company has filed applications to register various trademarks for use in connection with its products in various countries and also, with respect to certain products, relies on the trademarks of third parties. These trademarks may not afford adequate protection or the Company or the third parties may not have the financial resources to enforce their rights under these trademarks which may enable others to use the trademarks and dilute their value.
In the regular course of business, the Company is party to litigation or other proceedings relating to intellectual property rights. For details of current intellectual property litigation, See ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
The introduction of new products by competitors may impact future revenues
The pharmaceutical, biotechnology and device industries are highly competitive and are characterized by substantial investment in continuous product development and technological change. The Company faces significant competition from large pharmaceutical and biotechnology companies, many of whom have substantially greater resources than the Company. In addition, many of the Company’s competitors have more products and have operated longer in the fields in which the Company competes. A number of companies are pursuing the development of technologies which compete with the Company’s existing products or research programs. These competitors include specialized pharmaceutical firms and large pharmaceutical companies acting either independently or together with other pharmaceutical companies. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection and may establish collaborative arrangements for competitive products or programs. As a result of this competition the Company's products could be rendered obsolete or uneconomic or lose market share following the development of new products, new methods of treatment, or technological advances in manufacturing or production by competitors which could adversely affect the Company’s revenues, financial condition, and results of operations.
If a marketed product fails to work effectively or causes adverse side effects, this could result in damage to the Company's reputation, the withdrawal of the product and legal action against the Company
Unanticipated side effects or unfavorable publicity from complaints concerning any of the Company's products, or those of its competitors, could have an adverse effect on the Company's ability to obtain or maintain regulatory approvals or successfully market its products. The testing, manufacturing, marketing and sales of pharmaceutical products and medical devices entail a risk of product liability claims, product recalls, litigation and associated adverse publicity. The cost of defending against such claims is expensive even when the claims are not merited. A successful product liability claim against the Company could require the Company to pay a substantial monetary award. If, in the absence of adequate insurance coverage, the Company does not have sufficient financial resources to satisfy a liability resulting from such a claim or to fund the legal defense of such a claim, it could become insolvent. Product liability insurance coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms. Although the Company carries product liability insurance when available, this coverage may not be adequate. In addition, it cannot be certain that insurance coverage for present or future products will be available. Moreover, an adverse judgment in a product liability suit, even if insured or eventually overturned on appeal, could generate substantial negative publicity about the Company's products and business and inhibit or prevent commercialization of other products.
The Company is dependent on information technology and its systems and infrastructure face certain risks, including from service disruptions, the loss of sensitive or confidential information, cyber-attacks and other security breaches or data leakages that could have a material adverse effect on the Company’s revenues, financial condition or results of operations
The Company relies to a large extent upon sophisticated information technology systems to operate its businesses. In the ordinary course of business, the Company collects, stores and transmits large amounts of confidential information (including, but not limited to, personal information and intellectual property), and it is critical that the Company does so in a secure manner to maintain the confidentiality and integrity of such confidential information. The size and complexity of the Company’s information technology and information security systems, and those of third-party vendors with whom the Company contracts (and the large amounts of confidential information that is present on them), make such systems potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by the Company’s employees or vendors, or from attacks by malicious third parties.
The Company and its vendors’ sophisticated information technology operations are spread across multiple, sometimes inconsistent platforms, which pose difficulties in maintaining data integrity across systems. The ever-increasing use and evolution of technology, including cloud-based computing, creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in the Company’s systems. The Company and its vendors could also be susceptible to third party attacks on their information security systems, which attacks are of ever increasing levels of sophistication and are made by groups and individuals with a wide range of motives and expertise, including criminal groups, “hackers” and others. While the Company has taken steps to protect such information and invested heavily in information technology, there can be no assurance that these efforts will prevent service interruptions or security breaches in its systems, the loss of data or other confidential information due to a lack of redundant backup systems, or the unauthorized or inadvertent wrongful use or disclosure of confidential information that could adversely affect the Company’s business operations or result in the loss, dissemination, or misuse of critical or sensitive information.
A breach of the Company’s security measures or the accidental loss, inadvertent disclosure, unapproved dissemination, misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, fraud, trickery or other forms of deception, or for any other cause, could enable others to produce competing products, use the Company’s proprietary technology or information, and/or adversely affect the Company’s business position. Further, any such interruption, security breach, loss or disclosure of confidential information, could result in financial, legal, business, and reputational harm to the Company and could have a material adverse effect on the Company’s revenues, financial condition or results of operations.
In addition, legislators and/or regulators in countries in which the Company operates are increasingly adopting or revising privacy, information security and data protection laws, as well as focusing on increased privacy-related enforcement activity, that potentially could have a significant impact on the Company’s current and planned privacy, data protection and information security-related practices, its collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of its current or planned business activities.
Risks Related to the Proposed Merger with Baxalta Incorporated
Failure to consummate the merger as contemplated could negatively impact the price of the Company’s ordinary shares and ADSs and the future business and financial results of the Company and/or the combined company
The consummation of the merger of BearTracks, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”) within and into Baxalta, with Baxalta surviving the merger as a wholly-owned subsidiary of the Company (the “merger”) may be delayed, the merger may be consummated on terms different than those contemplated by the Agreement and Plan of Merger, dated as of January 11, 2016, as it may be amended from time to time, (the “merger agreement”) between the Company, Merger Sub and Baxalta, or the merger may not be consummated at all. Failure to consummate the merger would prevent the Company’s ordinary shareholders from realizing the anticipated benefits of the merger. The current market price of the Company’s ordinary shares and ADSs may reflect a market assumption that the merger will occur, and a failure to consummate the merger could result in a significant decline in the market price of the Company’s ordinary shares and ADSs and a negative perception of the Company generally. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger could also negatively impact the share price and future business and financial results of the Company and/or the combined company following the proposed merger.
There is no assurance that Shire and Baxalta will be able to obtain the required governmental and regulatory approvals to consummate the merger, which, if delayed or not granted, may delay or jeopardize the merger
The merger is conditioned on the expiration or termination of the applicable waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, merger control approval under the relevant merger control laws of the European Union and the consent of certain other merger control authorities and other governmental entities. The governmental and regulatory agencies from which Shire and Baxalta are seeking these approvals have broad discretion in administering the applicable governing regulations. As a condition to their approval of the transactions contemplated by the merger agreement, those agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company’s business. The required approvals may not be obtained or the required conditions to the merger may not be satisfied, or, even if the required approvals are obtained and the conditions to the consummation of the merger are satisfied, the terms, conditions and timing of such approvals are uncertain. Any delay in consummating the merger could cause Shire and/or the combined company not to realize some or all of the synergies that Shire expects to achieve if the merger is successfully consummated within the expected time frame.
The merger remains subject to additional conditions, some of which Shire and Baxalta cannot control, which could result in the merger not being consummated or being delayed, any of which could negatively impact the share price and future business and operating results of the Company and/or the combined company
The merger is subject to the satisfaction or waiver of other conditions in addition to the approval of governmental authorities described above, including, but not limited to, (i) the approval of the issuance of ordinary shares and ADSs by the Company’s ordinary shareholders; (ii) the adoption of the merger agreement by the stockholders of Baxalta; (iii) effectiveness of a registration statement on Form S-4 registering ordinary shares to be issued in the merger; (iv) the absence of any orders, injunctions or rulings, or laws that would have the effect of enjoining or preventing the consummation of the merger; (v) the approval of the United Kingdom Listing Authority (the “UKLA”) of a prospectus relating to the ordinary shares and a circular convening a meeting of Shire’s ordinary shareholders; (vi) approval from the NASDAQ Global Select Market to list the ADSs; (vii) approval of the UKLA and London Stock Exchange to list the ordinary shares; and (viii) Section 4.02 of the tax matters agreement dated as of June 30, 2015 (the “tax matters agreement”), by and between Baxter International Inc. (“Baxter”) and Baxalta, shall have been waived with respect to the closing of the merger, pursuant to the terms of the letter agreement, dated as of January 11, 2016 (the “letter agreement”), among the Company, Baxter and Baxalta, and each of the Company and Baxalta shall have received from Baxter a certificate, as described in the letter agreement, to the effect that the tax advisor to Baxter has furnished an opinion in substantially the same form and substance as the tax opinion delivered by such advisor on the date immediately prior to the signing of the merger agreement. Certain conditions to the merger may not be satisfied or, if they are, the timing of such satisfaction is uncertain. If any conditions to the merger are not satisfied or, where waiver is permitted by applicable law, not waived, the merger will not be consummated.
The merger is not subject to a financing condition. While Shire has secured an $18 billion fully underwritten bank facility of which $13 billion is available to finance the cash component of the per share merger consideration, certain customary conditions precedent to funding must be satisfied in order for the Company to utilize its bank facility, and if such conditions are not satisfied or if the Company’s lenders do not satisfy their funding commitment, the Company may be unable to obtain the funds necessary to consummate the merger.
If for any reason the merger is not completed or the closing of the merger is significantly delayed, the market price of the Company’s ordinary shares and ADSs and business and results of operations of the Company and/or the combined company may be adversely affected.
Lawsuits have been filed, and other lawsuits may be filed, against the Company and Baxalta and Baxalta’s board of directors challenging the merger, and an adverse ruling in any such lawsuit may delay or prevent the completion of the merger or result in an award of damages against the Company
Multiple putative class action complaints have been filed by purported Baxalta stockholders in connection with the merger. The complaints generally allege that the members of the Baxalta board breached their fiduciary duties to Baxalta stockholders by entering into the merger agreement and approving the merger, and that the Company, Baxalta and/or Merger Sub, aided and abetted such breaches of fiduciary duties. The complaints further allege that, among other things, the per share merger consideration undervalues Baxalta and certain provisions of the merger agreement inappropriately inhibit competing bids. The complaints seek, among other things, to enjoin the merger.
Additional lawsuits arising out of or relating to the merger agreement or the merger may be filed in the future. The results of complex legal proceedings are difficult to predict and could delay or prevent the completion of the merger. The existence of litigation relating to the merger could impact the likelihood of obtaining the stockholder approvals from either the Company or Baxalta. Moreover, the pending litigation is, and any future additional litigation could be, time consuming and expensive and could divert the Company’s management’s attention away from their regular business.
One of the conditions to completion of the merger is the absence of any law or judgment issued by any court or tribunal of competent jurisdiction that prevents, makes illegal or prohibits the closing of the merger. Accordingly, if a plaintiff is successful in obtaining a judgment prohibiting completion of the merger, then such judgment may prevent the merger from being completed, or from being completed within the expected time frame.
If the proposed merger is not completed, the Company will have incurred substantial costs that may adversely affect the Company’s financial results and operations
The Company has incurred and will continue to incur substantial costs in connection with the proposed merger with Baxalta. These costs are primarily associated with the fees of attorneys, accountants and financial advisors. In addition, the Company diverted significant management resources in an effort to complete the merger and are subject to restrictions contained in the merger agreement on the conduct of the Company’s business during the pendency of the merger. If the merger is not completed, the Company will have received little or no benefit in respect of such costs incurred.
The merger agreement restricts the Company’s ability to pursue alternatives to the merger, however, in specified circumstances, the Company may terminate the merger agreement to accept a superior proposal
Under the merger agreement, the Company has agreed not to (1) take certain actions to solicit proposals relating to alternative business combination transactions or (2) subject to certain exceptions, including the receipt of a “parent superior proposal” (as such term is defined in the merger agreement), enter into discussions or an agreement concerning, or provide confidential information in connection with, any proposals for alternative business combination transactions. However, in specified circumstances, the Company may terminate the merger agreement to enter into a definitive agreement with response to a “parent superior proposal” prior to obtaining approval of the merger from its stockholders.
Upon termination of the merger agreement in specified circumstances, the Company would be required to disburse a termination fee equal to $369 million to Baxalta and/or reimburse Baxalta for its merger-related expenses in an amount not to exceed $65 million, which expense reimbursement would be offset against any termination fee subsequently disbursed. Following the disbursement of the termination fee and/or reimbursement of merger-related expenses, the Company will, other than in certain circumstances, have no further obligation or liabilities to Baxalta. Such termination would deny the Company and its respective stockholders any benefits from the merger and could negatively impact market price of the Company’s ordinary shares and ADSs.
These provisions could discourage a third party that may have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if such third party were prepared to enter into a transaction that is more favorable to the Company or the Company’s ordinary shareholders than the merger.
In specified circumstances, Baxalta could terminate the merger agreement to accept an alternative proposal
Under the merger agreement, Baxalta may terminate the merger agreement to enter into a definitive agreement with respect to a “company superior proposal” (as such term is defined in the merger agreement) prior to obtaining approval of the merger from its ordinary shareholders. In such event, Baxalta would be obligated to disburse a termination fee equal to $369 million, but would have no further obligation or liabilities to the Company. Such termination would deny the Company and its stockholders any benefits from the merger and could negatively impact the price of the Company’s ordinary shares and ADSs.
Uncertainties associated with the merger may cause a loss of employees and may otherwise affect the future business and operations of Shire and the combined company
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company and, if the proposed combination with Baxalta is consummated, on the combined company following the merger. These consequent uncertainties may impair the Company’s, and following the closing of the merger, the combined company’s, ability to retain and motivate key personnel and could also cause customers, suppliers, licensees, partners and other business partners to defer entering into contracts with, making other decisions concerning, or seeking to change existing business relationships with the Company, and following the closing of the merger, the combined company. Because the Company depends on the experience and industry knowledge of their executives and other key personnel to execute their business plans, the combined company may be unable to meet its strategic objectives.
While the merger is pending, the Company may not be able to hire qualified personnel to replace any key employees that may depart to the same extent that they have been able to in the past. In addition, if the merger is not completed, the Company may also encounter challenges in hiring qualified personnel to replace key employees that may depart the Company subsequent to the merger announcement.
Risks Related to the Combined Company Following the Merger
The Company may not successfully integrate the businesses of Shire and Baxalta
If the merger is consummated, achieving the anticipated benefits of the proposed combination of Shire and Baxalta will depend in part upon whether the two companies integrate their businesses in an effective and efficient manner. The Company may not be able to accomplish this integration process successfully. The integration of businesses is complex and time-consuming. The difficulties that could be encountered include the following:
·integrating personnel, operations and systems, while maintaining focus on selling and promoting existing and newly acquired or produced products;
·coordinating geographically dispersed organizations;
·distraction of management and employees from operations;
·changes or conflicts in corporate culture;
·management’s inability to manage a substantial increase in the number of employees;
·management’s inability to train and integrate personnel, who may have limited experience with the respective companies’ business lines and products, and to deliver a consistent message regarding diseases treated by the combined company;
·retaining existing customers and attracting new customers;
·retaining existing employees and attracting new employees;
·maintaining business relationships; and
·inefficiencies associated with the integration and management of the operations of the combined company.
In addition, there will be integration costs and non-recurring transaction costs (such as fees paid to legal, financial, accounting and other advisors and other fees paid in connection with the merger) associated with the proposed merger, including costs associated with combining their operations and achieving the synergies the Company expects to obtain, and such costs may be significant.
An inability to realize the full extent of the anticipated benefits of the proposed combination of Shire and Baxalta, including estimated cost synergies, as well as any delays encountered in the integration process and realizing such benefits, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may materially adversely affect the value of the Company’s ordinary shares and ADSs after the consummation of the merger.
The Company will incur significant additional indebtedness in connection with the merger, which will decrease the combined company’s business flexibility and increase its interest expense. All of the Company’s debt obligations, and any future indebtedness the Company may incur, will have priority over the Company’s ordinary shares and ADSs with respect to payment in the event of a liquidation, dissolution or winding up
The Company has secured an $18 billion fully underwritten bank facility, of which $13 billion is available to finance the cash component of the per share merger consideration. The Company has announced that it intends to maintain an investment grade credit rating for the combined company, but one or more credit rating agencies may determine that the combined company’s credit rating is below investment grade, which could increase the combined company’s borrowing costs. The combined company’s indebtedness following consummation of the merger could have the effect, among other things, of reducing the combined company’s flexibility to respond to changing business and economic conditions as well as reducing funds available for capital expenditures, acquisitions, and creating competitive disadvantages for the combined company relative to other companies with lower indebtedness levels. The Company will also incur various costs and expenses associated with the debt financing.
The Company intends to refinance the bank facility through capital market debt issuances in due course. Its ability to refinance the indebtedness will depend on the condition of the capital markets and the combined company’s financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require the combined company to comply with more onerous covenants, which could further restrict business operations and such refinancing may not be available at all.
Moreover, the combined company may be required to raise substantial additional financing to fund capital expenditures and acquisitions. The combined company’s ability to arrange additional financing and the costs of that financing will depend on, among other factors, the combined company’s financial position and performance, as well as prevailing market conditions and other factors beyond Shire’s control.
In any liquidation, dissolution or winding up of Shire, the Company’s ordinary shares and ADSs would rank below all debt claims against Shire or any of its subsidiaries. In addition, any convertible or exchangeable securities or other equity securities that Shire may issue in the future may have rights, preferences and privileges more favorable than those of the Company’s ordinary shares and ADSs. As a result, holders of the Company’s ordinary shares and ADSs will not be entitled to receive any payment or other distribution of assets upon any liquidation or dissolution until after Shire’s obligations to its debt holders and holders of equity securities, which rank senior to the Company’s ordinary shares and ADSs, have been satisfied.
The merger could result in significant liability to Baxalta and the Company if the merger causes the spin-off of Baxalta from Baxter or a Later Distribution, as defined below, to be taxable
Under the letter agreement, from and after the closing of the merger, Baxalta agreed to indemnify, and the Company agreed to guarantee such indemnity to, Baxter and each of its affiliates and each of their respective officers, directors and employees against certain tax-related losses attributable to, or resulting from, in whole or in part, the merger. If the contribution of property by Baxter in one or more transfers to Baxalta in exchange for shares of Baxalta common stock, cash, and the assumption of certain liabilities, together with the distribution by Baxter on July 1, 2015 of approximately 80.5% of the shares of Baxalta common stock to shareholders of Baxter (the “spin-off”) and/or a Later Distribution, collectively, the “Baxter Transactions”, are determined to be taxable as a result, in whole or in part, of the merger (for example, if the merger is deemed to be part of a plan, or series of related transactions, that includes the Baxter Transactions), Baxter and its shareholders could incur significant tax liabilities, and under the tax matters agreement, and the letter agreement, Baxalta and the Company may be required to indemnify Baxter for any such tax liabilities. Baxter’s waiver of the provisions under the tax matters agreement restricting Baxalta’s ability to enter into and consummate the merger will not relieve Baxalta or the Company of its obligation to indemnify Baxter if the merger causes any of the Baxter Transactions to be taxable.
In connection with the signing of the merger agreement, the Company received an opinion from Cravath, Swaine & Moore LLP, tax counsel to the Company, to the effect that the merger will not cause Baxter’s contribution of assets to Baxalta, Baxter’s initial distribution of Baxalta shares on July 1, 2015, Baxter’s distribution of cash received from Baxalta to its creditors or a Later Distribution to fail to qualify as tax-free to Baxter and its shareholders under Sections 355, 361 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended. The merger is conditioned on the receipt by the Company at the time of the consummation of the merger of a tax opinion to the same effect.
The tax opinion referred to in the immediately preceding paragraph is based upon various factual representations and assumptions, as well as certain undertakings made by the Company, Baxter and Baxalta. If any of the factual representations or the assumptions in the tax opinion is untrue or incomplete in any material respect, an undertaking is not complied with or the facts upon which the tax opinion is based are materially different from the facts at the time of the merger, the opinion may not be valid. Moreover, opinions of counsel are not binding on the Internal Revenue Service (the “IRS”). As a result, the conclusions expressed in the tax opinion could be challenged by the IRS. None of the Company, Baxalta or Baxter has requested a ruling from the IRS regarding the impact of the merger on the tax treatment of the Baxter Transactions. Further, the tax opinion does not address all tax aspects of the spin-off, a Later Distribution and other related transactions and it is possible the Company may be obligated to indemnify Baxter despite the continuing validity of the tax opinion.
The Company’s indemnification obligations to Baxter and its subsidiaries, officers, directors and employees under the tax matters agreement and letter agreement are not limited in amount or subject to any cap. If Baxalta or the Company is required to indemnify Baxter and its subsidiaries and their respective officers, directors and employees under the circumstances set forth in the tax matters agreement, as supplemented by the letter agreement, it could have a material adverse effect on Baxalta and the Company.
In this annual report, references to the “Later Distributions” includes the following transactions that may be undertaken by Baxter: (i) any debt-for-equity exchange (and related underwritten offering) with respect to Baxalta shares, (ii) any offer to exchange Baxter shares for Baxalta shares, (iii) a contribution of Baxalta shares to Baxter’s U.S. pension fund, and/or (iv) a dividend of Baxalta shares to Baxter’s stockholders, in each case, that are undertaken prior to the earlier of any Baxalta or Company stockholder vote with respect to the merger and that are intended to be part of a plan that includes the spin-off.
Certain Baxalta agreements may contain change of control provisions that may be triggered by the merger that, if not waived, could cause the combined company to lose the benefit of such agreement and incur liabilities or replacement costs, which could have a material adverse effect on the combined company
Baxalta and its affiliates are each party to various agreements with third parties, including certain license agreements, business development-related agreements, production and distribution related agreements, bonding/financing facilities, contracts for the performance of services material to the operations of Baxalta and/or its affiliates, IT contracts, technology licenses and employment agreements that may contain change of control provisions that could be triggered upon the closing of the merger. Agreements with change of control provisions typically provide for or permit the termination of the agreement upon the occurrence of a change of control of one of the parties which can be waived by the relevant counterparties. In the event that there is such a contract or arrangement requiring a consent or waiver in relation the merger, there can be no assurance that such consent will be obtained at all or on favorable terms. If such a waiver is not obtained from any such counterparty, the combined company could lose the benefit of the underlying agreement and incur liabilities or replacement costs, which could have an adverse effect on the combined company.
Sales of the Company’s ordinary shares and/or ADSs in anticipation of the merger, and resales of such shares following the consummation of the merger, may adversely affect the market price of the Company’s ordinary shares and/or ADSs prior to, and following, the merger
Certain Baxalta stockholders, such as index funds or funds with concentration, geographic or other limitations on their permitted investments, may be required to sell ordinary shares or ADSs of Shire that they receive in the merger. Other Baxalta stockholders may already hold ordinary shares or ADSs of Shire and those stockholders may decide not to hold the shares that they receive in the merger. Such sales of ordinary shares or ADSs could adversely affect the market price of the Company’s ordinary shares and/or ADSs.
Upon consummation of the merger, the Company expects that it will issue up to approximately 311 million ordinary shares, based on the number of shares of Baxalta common stock outstanding as of December 31, 2015, in the aggregate In addition, the per share merger consideration represents a premium of approximately 37.5% to the unaffected share price of Baxalta common stock on August 3, 2015, the day prior to the public announcement of the Company’s initial offer for Baxalta, based on the closing price of the Company’s ADSs on January 8, 2016, which may cause significant arbitrage activity by investors seeking to take advantage of the price differential. This risk of dilution coupled with the possibility of merger arbitrage activity could result in downward pressure on the Company’s ordinary shares and ADSs and encourage third parties to engage in short sales of the Company’s shares.
In addition, these factors could also make it more difficult for the combined company to raise funds through future offerings of ordinary shares and ADSs. The issuance of ordinary shares and ADSs in the merger and the sale of additional ordinary shares or ADSs that may become eligible for sale in the public market from time to time upon exercise of options or the vesting of restricted securities will further dilute the combined company’s ordinary shares and/or ADSs. Moreover, the increase in the number of ordinary shares or ADSs, or an increase in the number of such shares outstanding following a future issuance, sale or transfer of such ordinary shares or ADSs by the Company or the possibility of such an issue, sale or transfer may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, the Company’s ordinary shares or ADSs.
The market price of the Company’s ordinary shares and ADSs may be adversely affected by reports of third-party analysts published in connection with the consummation of the merger
The trading market for the Company’s ordinary shares and ADSs depends in part on the research and reports that third-party securities analysts publish about Shire and its industry. In connection with the consummation of the merger, one or more of these analysts could downgrade the Company’s ordinary shares and ADSs or issue other negative commentary about Shire or its industry, which could cause the market price of the Company’s ordinary shares and ADSs to decline.
The market price of the Company’s ordinary shares and ADSs may be affected by factors different from those affecting the market price for shares of the Company’s ordinary shares and ADSs prior to the merger
If the merger is consummated, the risks associated with the combined company may affect the results of operations of the combined company and the market price of the Company’s ordinary shares and ADSs following the merger differently than they could affect the results of operations of Shire and the market price of its securities while it is a separate company. Additionally, the results of operations of the combined company may be affected by additional or different factors than those that currently affect the results of operations of Shire, including, but not limited to: complexities associated with managing the larger, more complex, combined business; integrating personnel from the two companies while maintaining focus on providing products and services; and potential performance shortfalls resulting from the diversion of management’s attention caused by integrating the companies’ operations.
ITEM 1B:
ITEM 1B: Unresolved Staff Comments
None.
ITEM 2:
ITEM 2: Properties
The following are the principal premises of the Company, as at December 31, 2015:
Location
Use
Approximate Square Footage
Owned or Leased
Dublin, Ireland
Office accommodation
34,000
Leased
Lexington,
Massachusetts, US
Office accommodation, laboratories and
manufacturing, warehousing and distribution facility
922,000
Owned and Leased
Chesterbrook, Pennsylvania, US
Office accommodation
291,000
Leased
Exton, Pennsylvania, US
Office accommodation
149,000
Leased
Basingstoke, UK
Office accommodation
127,000
Owned
Florence, Kentucky, US
Warehousing and distribution facility
96,000
Leased
North Reading, Massachusetts, US
Warehousing facility
91,700
Leased
Zug, Switzerland
Office accommodation
57,400
Leased
Cambridge, Massachusetts, US
Manufacturing facility/Warehousing/Office
63,500
Leased
Sao Paulo, Brazil
Office accommodation and Laboratory
27,400
Leased
At December 31, 2015 all of the above sites were utilized by the Company with the exception of the Exton site, which is expected to be occupied in the first half of 2016. The Company owns or leases premises in a number of other locations in a number of countries around the world.
ITEM 3:
ITEM 3: Legal Proceedings
The information required by this Item is incorporated herein by reference to Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements listed under ITEM 15: Exhibits and Financial Statement Schedules in this Annual Report on Form 10-K.
ITEM 4:
ITEM 4: Mine Safety Disclosures
Not applicable.
PART II
ITEM 5:
ITEM 5: Market for Registrant’s common equity, related stockholder matters and issuer purchases of equity securities
Ordinary Shares
The Company’s ordinary shares are traded on the London Stock Exchange (“LSE”).
The following table presents the high and low closing mid-market quotation per ordinary share of Shire as quoted in the Daily Official List of the LSE for the periods indicated.
The total number of record holders of ordinary shares of Shire on February 12, 2016 was 5,039. Since certain of the ordinary shares are held by broker nominees, the number of record holders may not be representative of the number of beneficial owners.
American Depositary Shares
American Depositary Shares (“ADSs”) each represent three ordinary shares of Shire. An ADS is evidenced by an American Depositary Receipt (“ADR”) issued by Citibank, N.A. as depositary, and is listed on the NASDAQ Global Select Market. On February 12, 2016 the proportion of ordinary shares represented by ADRs was 19% of the outstanding ordinary shares.
The following table presents the high and low market quotations for ADSs quoted on the NASDAQ Global Select Market for the periods indicated.
High $
per ADS
Low $
per ADS
Year to December 31, 2015
1st Quarter 253.64
205.66
2nd Quarter 260.15
226.90
3rd Quarter 268.08
197.88
4th Quarter 231.08
188.55
Year to December 31, 2014
1st Quarter 171.77
139.18
2nd Quarter 235.49
142.83
3rd Quarter 262.64
231.98
4th Quarter 262.71
170.49
The number of record holders of ADSs on February 12, 2016 was 2,161. Since certain of the ADSs are held by broker nominees, the number of record holders may not be representative of the number of beneficial owners.
Dividend policy
A first interim dividend for the six months to June 30, 2015 of 4.21 US cents (2.69 pence) per ordinary share, equivalent to 12.63 US cents per ADS, was paid in October 2015. The Board has resolved to pay a second interim dividend of 22.16 US cents (15.32 pence) per ordinary share equivalent to 66.48 US cents per ADS for the six months to December 31, 2015.
A first interim dividend for the six months to June 30, 2014 of 3.83 US cents (2.24 pence) per ordinary share, equivalent to 11.49 US cents per ADS, was paid in October 2014. A second interim dividend for the six months to December 31, 2014 of 19.09 US cents (12.51 pence) per ordinary share equivalent to 57.27 US cents per ADS, was paid in April 2015.
This is consistent with Shire’s stated policy of paying a dividend semi-annually, set in US cents per ordinary share. Typically, the first interim payment each year will be higher than the previous year’s first interim dividend. Dividend growth for the full year will be reviewed by the Board when the second interim dividend is determined. However there is no guarantee that dividends will be declared for any periods.
Income Access Share Arrangements
Pursuant to the Scheme of Arrangement (the “Scheme”) that became effective on May 23, 2008 Shire plc became the holding company of the former holding company of the Shire group, Shire Biopharmaceuticals Holdings (“Old Shire”). As a result of the Scheme, Shire has put in place income access arrangements which enable Shire ordinary shareholders, other than Shire ADS holders, to choose whether they receive their dividends from Shire plc, a company tax resident in the Republic of Ireland, or from Old Shire, a Shire group company tax resident in the UK.
Old Shire has issued one income access share to the Income Access Trust (the “IAS Trust”) which is held by the trustee of the IAS Trust (the “Trustee”). The mechanics of the arrangements are as follows:
i)If a dividend is announced or declared by Shire plc on its ordinary shares, an amount is paid by Old Shire by way of a dividend on the income access share to the Trustee, and such amount is paid by the Trustee to ordinary shareholders who have elected to receive dividends under these arrangements. The dividend which would otherwise be payable by Shire plc to its ordinary shareholders will be reduced by an amount equal to the amount paid to its ordinary shareholders by the Trustee.
ii)If the dividend paid on the income access share and on-paid by the Trustee to ordinary shareholders is less than the total amount of the dividend announced or declared by Shire plc on its ordinary shares, Shire plc will be obliged to pay a dividend on the relevant ordinary shares equivalent to the amount of the shortfall. In such a case, any dividend paid on the ordinary shares will generally be subject to Irish withholding tax at the rate of 20% or such lower rate as may be applicable under exemptions from withholding tax contained in Irish law.
iii)An ordinary shareholder is entitled to make an income access share election such that he/she will receive his/her dividends (which would otherwise be payable by Shire plc) under these arrangements from Old Shire. This can be done by submitting an IAS arrangement election form containing information on the participating shareholders as required by law.
The ADS Depositary has made an election on behalf of all holders of ADSs such that they will receive dividends from Old Shire under the income access share arrangements. Dividends paid by Old Shire under the income access share arrangements will not, under current legislation, be subject to any UK or Irish withholding taxes. If a holder of ADSs does not wish to receive dividends from Old Shire under the income access share arrangements, he/she must withdraw his/her ordinary shares from the ADS program prior to the dividend record date set by the ADS Depositary and request delivery of the Shire plc ordinary shares. This will enable him/her to receive dividends from Shire plc.
It is the expectation, although there can be no certainty, that Old Shire will distribute dividends on the income access share to the Trustee for the benefit of all ordinary shareholders who make an income access share election in an amount equal to what would have been such ordinary shareholders’ entitlement to dividends from Shire plc in the absence of the income access share election. If any dividend paid on the income access share and or paid to the ordinary shareholders is less than such ordinary shareholders’ entitlement to dividends from Shire plc in the absence of the income access share election, the dividend on the income access share will be allocated pro rata among the ordinary shareholders and Shire plc will pay the balance to these ordinary shareholders by way of dividend. In such circumstances, there will be no grossing up by Shire plc in respect of, and Old Shire and Shire plc will not compensate those ordinary shareholders for, any adverse consequences including any Irish withholding tax consequences.
Shire will be able to suspend or terminate these arrangements at any time, in which case the full Shire plc dividend will be paid directly by Shire plc to those ordinary shareholders (including the ADS Depositary) who have made an income access share election. In such circumstances, there will be no grossing up by Shire plc in respect of, and
Old Shire and Shire plc will not compensate those ordinary shareholders for, any adverse consequences including any Irish withholding tax consequences.
In the year ended December 31, 2015 Old Shire paid dividends totalling $127.7 million (2014: $112.8 million; 2013: $91.1 million) on the income access share to the Trustee in an amount equal to the dividend ordinary shareholders would have received from Shire plc.
Distributable Reserves
The payment of dividends by Shire plc is governed by Jersey law. Under Jersey law, Shire plc is entitled to fund payments of dividends from any source (other than a capital redemption reserve or nominal capital account). Prior to making any dividend payment, the Directors of Shire plc who authorize the payment of the dividend must make a solvency statement to the effect that Shire plc will be able to continue to carry on its business and discharge its liabilities as they fall due immediately after the payment is made and for the twelve month period following the making of the payment. Shire's future dividend policy will be dependent upon the amount of its net assets, its financial condition, the terms of its then-existing debt facilities and other relevant factors existing at the time.
For dividends paid by Old Shire on the income access share to the Trustee, the ability of Old Shire to pay dividends is determined under English law. As a matter of English law Old Shire can only pay dividends out of its distributable profits, which are the accumulated realized profits of Old Shire and not the consolidated group, 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.
Equity Compensation Plan Information
Equity compensation plan information is incorporated herein by reference to ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related Stock Holder Matters of this Form 10-K.
ITEM 6:
ITEM 6: Selected financial data
The selected consolidated financial data presented below as at December 31, 2015 and 2014 and for the years to December 31, 2015, 2014 and 2013 were derived from the audited consolidated financial statements of the Company, included herein.
The selected consolidated financial data presented below as at December 31, 2013, 2012 and 2011 and for the years to December 31, 2012 and 2011 were derived from the audited consolidated financial statements of the Company, which are not included herein.
The selected consolidated financial data should be read in conjunction with ITEM 7:
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 ITEM 15: Exhibits and Financial Statement Schedules in this Annual Report on Form 10-K.
Overview
The Company has grown both organically and through acquisition, completing a series of major transactions that have brought therapeutic, geographic and pipeline growth and diversification. The Company will continue to conduct its own research and development, focused on rare diseases, as well as evaluate companies, products and pipeline opportunities that offer a strategic fit and have the potential to deliver value to all of the Company’s stakeholders: patients, physicians, policy makers, payers, investors and employees.
The Company’s purpose is to enable people with life altering conditions to lead better lives. The Company will execute on its purpose through its strategy and business model. For further details of Shire’s strategy and business model, refer to ITEM 1: Business of this Annual Report on Form 10-K.
Through deep understanding of patients’ needs, the Company is able to:
·serve patients with high unmet needs in select, commercially attractive specialty TAs;
·drive optimum performance of its marketed products - to serve patients today;
·build its pipeline of innovative specialist treatments through both R&D and Corporate Development activities - to enable the Company to serve patients in the future.
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.
Company revenues, expenditures and net assets are attributable to the R&D, manufacture, sale and distribution of pharmaceutical products within one reportable segment. The Company also earns royalties (where Shire has out-licensed products to third parties) which are recorded as royalty revenues.
Revenues are derived primarily from two sources - sales of the Company’s own products and royalties:
·95% (2014: 97%) of total revenues are derived from product sales; and
·5% of total revenues are derived from royalties (2014: 3%).
The markets in which the Company conducts its business are intensely competitive and highly regulated.
The health-care industry is also experiencing:
·pressure from governments and healthcare providers to keep prices low while increasing access to drugs;
·increased discount liability due to the population of “baby boomers” covered under Medicare, specifically those beneficiaries receiving drug cost offset through the Medicare Part D Coverage Gap (the “Donut Hole”);
·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 has been developed to address these industry-wide competitive pressures. This strategy has resulted in a series of initiatives in the following areas:
Markets
Shire’s current portfolio of approved products focuses on the following markets: HAE/LSD, Neuroscience, and GI and Internal Medicine. Shire has also established an Ophthalmics commercial unit in preparedness for the commercialization of Shire’s ophthalmic pipeline candidates. In addition, Shire has a number of marketed products for other TAs from which it generates product revenues or royalties from third parties. In 2015 Shire derived approximately 45% of
product sales from rare disease products, 36% from Neuroscience products and 19% from GI and Internal Medicine products. Shire’s early stage research is primarily focused on rare diseases.
Shire has grown in part through acquisition which has brought therapeutic, geographic and pipeline growth and diversification. In 2015 Shire acquired NPS Pharma, Meritage Pharma and Foresight. On January 11, 2016, Shire announced that the boards of directors of Shire and Baxalta had reached an agreement under which Shire will combine with Baxalta. On January 22, 2016, Shire announced the closing of the acquisition of Dyax.
The acquisition of NPS Pharma added global rights to an innovative product portfolio with multiple growth catalysts, including GATTEX/REVESTIVE and NATPARA. The acquisition of Meritage Pharma provided global rights to OBS, a Phase 3 ready asset for the treatment of adolescents and adults with EoE, a rare, chronic inflammatory GI disease. This enhances Shire’s late-stage pipeline and builds upon the Company’s rare disease and GI commercial infrastructure and expertise. With the acquisition of Foresight Shire acquired the global rights to FST-100 (topical ophthalmic drops combining 0.6% povidone iodine (PVP-I) and 0.1% dexamethasone), a therapy in late-stage development for the treatment of infectious conjunctivitis, an ocular surface condition commonly referred to as pink eye. This acquisition further strengthens Shire’s late-stage pipeline, has a clear strategic fit with lifitegrast, which is in late-stage development for treatment of dry eye disease, and further demonstrates Shire’s commitment to building a leadership position in ophthalmics.
The acquisition of Dyax and their lead pipeline product, DX-2930, alongside Dyax’s currently marketed product KALBITOR, expands and extends Shire’s industry-leading HAE portfolio (FIRAZYR and CINRYZE), advancing its leadership position in rare diseases and enhancing the Company’s growth profile.
The proposed combination with Baxalta will enable Shire to become a global leader in rare diseases.
In 2015 Shire derived 27% (2014: 30%) of product sales from outside of 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:
·Launch of INTUNIV in the EU for children and adolescents and the submission of INTUNIV NDA in Japan.
·Continued launch of REVESTIVE across Europe
·Review of MAA for NATPAR in the EU.
R&D
In 2013 Shire combined the R&D organizations of its former divisions into a single One Shire R&D organization, focused around a prioritized portfolio of clinical development and research programs. Shire has focused its R&D efforts on five TAs: Neuroscience, GI/Metabolic Diseases, Renal/Fibrotic Diseases, Ophthalmic Diseases, and Diseases of the Complement Cascade. Shire concentrates its resources on obtaining regulatory approval for later-stage pipeline products within these therapeutic areas and focuses its early stage research activities in rare diseases.
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, FIRAZYR in 2011, VYVANSE for BED and NATPARA in 2015; in the EU, ELVANSE/TYVENSE for adults, INTUNIV for children and adolescents in 2015.
Shire’s management reviews direct costs for all R&D projects by development phase.
Shire’s R&D costs in 2015 and 2014 included expenditure on programs in all stages of development. The following table provides an analysis of the Company’s direct R&D spend categorized by development stage, based upon the development stage of each program as at December 31, 2015 and 2014:
Year to December 31,
$'M $'M
Early stage programs
Late stage programs
Currently marketed products
Total
In addition to the above, the Company recorded R&D employee costs of $303 million in 2015 (2014: $270 million) and other indirect R&D costs of $680 million (2014: $232 million), comprising depreciation and impairment charges.
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 or biosimilar 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, and are generally able to sell a generic version of 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 periods prior to the authorized generic launches.
In 2011 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.
In 2014 and 2015 generic versions of the Company’s INTUNIV product was launched, which led to lower sales of Shire’s INTUNIV product compared to the period before loss of exclusivity.
Shire is engaged in various legal proceedings with generic manufacturers with respect to its VYVANSE and LIALDA patents. For more detail of current patent litigation, see Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
Corporate Development
Shire focuses its corporate development activity on the acquisition and in-licensing of businesses, products or compounds which offer a strategic fit and have the potential to deliver demonstrable value to all of the Company’s stakeholders.
Recent mergers or acquisitions
On January 22, 2016 Shire completed the acquisition of Dyax which has expanded and extended Shire’s industry-leading HAE portfolio by adding the currently approved product, KALBITOR, SHP643 (formerly DX-2930), a Phase 3 program for the treatment of HAE as well as a number of other programs at various early stages of development.
On January 11, 2016 Shire announced that the boards of directors of Shire and Baxalta had reached an agreement under which Shire will combine with Baxalta, creating the global leader in the rare diseases. Under the agreement Baxalta shareholders are to receive $18.00 in cash and 0.1482 Shire ADS per Baxalta share. Closing of the transaction is subject to approval by Baxalta and Shire shareholders, certain regulatory approvals, redelivery of tax opinions delivered at signing and other customary closing conditions. For further details, see “Risks Related to the Proposed Merger with Baxalta Incorporated” under Item 1A and “The January 2016 Facilities Agreement” under Item 7’s Liquidity and Capital Resources discussion.
In 2015, Shire acquired:
·NPS Pharma which added global rights to an innovative product portfolio with multiple growth catalysts, including GATTEX/REVESTIVE with growing sales for the treatment of adults with SBS, a rare GI condition; and NATPARA/NATPAR, the only bioengineered hormone replacement therapy for use in the treatment of HPT, a rare endocrine disease;
·Meritage Pharma which provided Shire with worldwide rights to Meritage Pharma’s Phase 3-ready compound OBS for the potential treatment of adolescents and adults with EoE, a rare, chronic inflammatory GI disease; and
·Foresight which added global rights to SHP640, a Phase 3 ready therapy for the treatment of infectious conjunctivitis, an ocular surface condition commonly referred to as pink eye.
In 2014, Shire acquired:
·ViroPharma which added a leading marketed product for the prophylactic treatment of HAE, CINRYZE, as well as a number of other marketed products and a pipeline of product candidates in the rare disease area;
·Lumena which added global rights to two late stage pipeline assets: SHP625, in Phase 2 clinical development with potential orphan indications; and SHP626, in Phase 1b clinical development;
·Fibrotech which added global rights to SHP627 in Phase 1b, a new class of oral drug with a novel mechanism of action which has the potential to address both the inflammatory and fibrotic components of disease processes. In addition Shire has acquired rights to Fibrotech’s library of novel molecules including SHP628, which is in pre-clinical development; and
·BIKAM which added global rights to SHP630 in pre-clinical development, for the potential treatment of autosomal dominant retinitis pigmentosa (adRP).
In 2013, Shire acquired:
·SARcode Biosciences Inc. (“SARcode”) which added SHP606 to the Shire portfolio (SHP606 is currently in registration for the treatment of DED).
·Premacure which added SHP607 to the Shire portfolio (SHP607 is currently in Phase 3 for the prevention of ROP).
Collaboration and licensing activity
Shire has also entered into a number of collaboration and license agreements in recent years, including:
·A worldwide licensing and collaboration agreement with ArmaGen in 2014 to develop and commercialize AGT-182, an investigational ERT for the potential treatment of both the central nervous system and somatic manifestations in patients with Hunter syndrome;
·A collaboration and license agreement with Sangamo to develop ZFP Therapeutic clinical leads for Huntington's disease and a ZFP Therapeutic for one additional gene target; and
·An agreement with Shionogi in 2012 to co-develop and co-commercialize VYVANSE and INTUNIV in Japan.
Organization and Structure
In 2013 the Company integrated its operations into a simplified One Shire organization in order to drive future growth and innovation. Shire now comprises a single operating and reportable segment. For further details see ITEM 15: Exhibits and Financial Statements Schedules and Note 23 “Segmental reporting” to the consolidated financial statements set forth in this Annual Report on Form 10-K. As part of the One Shire reorganization, the Company undertook a review of all of its pipeline programs and identified those projects that fit with the Company’s new strategic direction and have an acceptable likelihood of success. Following that review and overall streamlining of the R&D organization, several clinical and pre-clinical projects were discontinued which resulted in the elimination of a significant number of R&D roles and functional roles that support R&D in Basingstoke, and some positions were re-located.
In addition the Company also relocated its international commercial hub from Nyon, Switzerland to Zug, Switzerland.
In 2014 certain aspects of the One Shire program were temporarily put on hold due to AbbVie’s offer for Shire, which was terminated in October 2014. Subsequent to the termination of AbbVie’s offer, Shire announced on November 10, 2014 its plans to relocate over 500 positions to Lexington, Massachusetts from its Chesterbrook, Pennsylvania, site and establish Lexington as the Company’s US operational headquarters in continuation of the One Shire efficiency program. This relocation streamlines business globally through two principal locations, Massachusetts and Switzerland, with support from regional and country-based offices around the world.
For further details see ITEM 15: Exhibits and Financial Statements Schedules and Note 4 “Reorganization costs” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
On October 22, 2013 Shire discontinued the construction of its new manufacturing facility in San Diego. Subsequently on January 16, 2014, the Company sold and transferred certain of the assets relating to the manufacturing, marketing, sale and distribution of DERMAGRAFT to Organogenesis Inc. For further information, see ITEM 15: Exhibits and Financial Statement Schedules and Note 8, “Results of discontinued operations” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
Results of operations for the years to December 31, 2015 and 2014
Financial highlights for the year to December 31, 2015 are as follows:
·Product sales excluding INTUNIV were up 10% (up 14% on a Non GAAP CER(1) basis), with growth driven by VYVANSE(2) (up 19% to $1,722 million), CINRYZE (up 23% to $618 million), LIALDA/MEZAVANT (up 8% to $684 million) and FIRAZYR (up 22% to $445 million). GATTEX/REVESTIVE and NATPARA acquired with NPS Pharma contributed 3 percentage points, or $166 million, of product sales growth.
Product sales growth in 2015 was held back, as expected, by 4 percentage points due to the foreign exchange headwinds from the strong US dollar, primarily affecting sales of ELAPRASE, REPLAGAL and VPRIV.
·Total product sales were up 5% on 2014 (up 9% on a Non GAAP CER basis) to $6,100 million (2014: $5,830 million). Total product sales were held back by significantly lower INTUNIV sales (down 80% to $65 million) following the introduction of generic competition from December 2014.
·Total revenues were up 7% to $6,417 million (2014: $6,022 million), due to our product sales growth and higher royalties and other revenues (up 65%), primarily $115 million of SENSIPAR royalties acquired with NPS Pharma.
·Operating income in 2015 was down 16% to $1,420 million (2014: $1,698 million), as higher total revenues in 2015 were offset by higher operating costs as we advance our pipeline, invest behind current and anticipated product launches and include NPS Pharma operating costs for the first time. Operating income in 2015 was held back by higher IPR&D impairment charges ($644 million in 2015 relating to SHP625 and SHP608), and higher intangible asset amortization charges following the acquisition of NPS Pharma, which were in part offset by a net credit from changes in the fair value of contingent consideration liabilities ($150 million).
·Diluted earnings per ordinary share from continuing operations decreased 62% to $2.20 (2014: $5.76) primarily as a result of comparison to strong diluted earnings per ordinary shares in 2014 which benefited from the $1,635 million break fee received following AbbVie’s terminated offer for Shire.
(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 2015 product sales and revenues restated using 2014 average foreign exchange rates to 2014 actual product sales and revenues. Average exchange rates for the year to December 31, 2015 were $1.53:£1.00 and $1.11:€1.00 (2014: $1.65:£1.00 and $1.33:€1.00).
(2) Lisdexamfetamine dimesylate (“LDX”) currently marketed as VYVANSE in the US and Canada, VENVANSE in Latin America and ELVANSE in certain territories in the EU for the treatment of ADHD and in the US for the treatment of moderate to severe BED.
Total revenues
The following table provides an analysis of the Company’s total revenues by source:
Year to December 31, Change
$'M $'M %
Product sales 6,099.9 5,830.4 +5%
Royalties 300.5 160.8 +87%
Other revenues 16.3 30.9 -47%
Total 6,416.7 6,022.1 +7%
Product sales
(1)On a CER basis, which is a Non GAAP measure, computed by comparing 2015 product sales and revenues restated using 2014 average foreign exchange rates to 2014 actual product sales and revenues. Average exchange rates for the year to December 31, 2015 were $1.53:£1.00 and $1.11:€1.00 (2014:$1.65:£1.00 and $1.33:€1.00).
(2)This information is an estimate derived from the use of information under license from the following IMS Health information service: IMS NPA weekly for the period January 17, 2014 to January 22, 2016. IMS expressly reserves all rights, including rights of copying, distribution and republication. Exit market share represents the average US market share in the month ended December 31, 2015.
(3)IMS NPA Data not available.
(4)Not sold in the US in the year to December 31, 2015.
VYVANSE - ADHD and BED
VYVANSE product sales grew strongly (up 19%) in 2015. Growth was driven by prescription growth in the US (up 8%), the benefit of price increases(1) and to a lesser extent the benefit of stocking in 2015 as compared to destocking in 2014 and growth from international markets. This growth was partially offset by higher sales deductions as a percentage of product sales in 2015 as compared to 2014.
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 and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
LIALDA/MEZAVANT - UC
The 8% growth in product sales for LIALDA/MEZAVANT in 2015 was primarily driven by higher prescription demand (up 10%) and, to a lesser extent, a price increase(1) taken at the beginning of 2015. The growth was partially offset by higher sales deductions as a percentage of sales in 2015 as compared to 2014 and, to a lesser extent, the impact of destocking in 2015 compared to stocking in 2014.
Litigation proceedings regarding LIALDA are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
CINRYZE - for the prophylactic treatment of HAE
CINRYZE sales were up 23% on 2014, primarily driven by strong growth in patients on therapy and, to a lesser extent, sales also benefited from a price increase(1) taken since 2014.
ELAPRASE - Hunter syndrome
ELAPRASE product sales were down 7% (up 4% on a Non GAAP CER basis) reflecting the negative impact of foreign exchange movements and to a lesser extent a lower average price due to pricing pressures and geographic mix. These negative factors were partially offset by higher volumes primarily due to an increase in the number of patients on therapy.
FIRAZYR - HAE
FIRAZYR product sales growth was up 22% compared to 2014, driven by a higher number of patients on therapy and, to a lesser extent, the effect of a price increase(1) in the US market.
REPLAGAL - Fabry disease
REPLAGAL sales were down 12% compared to 2014 (up 1% on a Non GAAP CER basis), as the benefit of more patients on therapy was more than offset by the negative impact of foreign exchange and to a lesser extent, pricing pressures.
ADDERALL XR - ADHD
ADDERALL XR product sales were down 5% in 2015, as growth in prescription demand (up 10%) was more than offset by higher sales deductions as a percentage of product sales in 2015 compared to 2014.
VPRIV - Gaucher disease
VPRIV product sales were down 7% (up 1% on a Non GAAP CER basis), as sales growth was negatively impacted by foreign exchange and the impact of new competition in the US market partially offset by higher utilization per patient.
PENTASA - UC
PENTASA product sales were up 6% as the benefit of price increases(1) was partially offset by higher sales deductions as a percentage of product sales and lower prescription demand in 2015 compared to 2014.
GATTEX -SBS
Shire acquired GATTEX/REVESTIVE through its acquisition of NPS Pharma on February 21, 2015, and recorded sales of $142 million in 2015 (up 51% on a pro-forma basis(2)).
INTUNIV - ADHD
INTUNIV product sales were down 80% compared to 2014, reflecting the impact of generic competitors since December 2014.
NATPARA - Hypoparathyroidism
Shire made NATPARA available on April 1, 2015, after acquiring the product through its acquisition of NPS Pharma, and following a strong US launch, sales of $24 million were recorded in 2015.
(1) The actual net effect of price increases on current period net sales compared to the comparative period is difficult to quantify due to the various managed care rebates, Medicaid discounts, other discount programs in which the Company participates and fee for service agreements with wholesalers customers.
(2) Sales prior to February 21, 2015 were recorded by NPS Pharma, prior to the acquisition by Shire.
Royalties
Year to Year to
December 31, December 31,
Change
$'M $'M %
SENSIPAR 114.5 - n/a
3TC and ZEFFIX 49.1 33.9 45%
FOSRENOL 46.1 51.4 -10%
INTUNIV 27.8 22.0 26%
ADDERALL XR 26.0 28.9 -10%
Other 37.0 24.6 50%
Total 300.5 160.8 87%
Royalty income increased by 87% in 2015 due primarily to the inclusion of royalty income receivable from Amgen Inc. for SENSIPAR (following the acquisition of NPS Pharma by Shire).
Cost of product sales from continuing operations
Cost of product sales decreased to $969.0 million for the year to December 31, 2015 (16% of product sales), down from $979.3 million in the corresponding period in 2014 (17% of product sales). Cost of product sales as a percentage of product sales was one percentage point lower compared to the same period in 2014, as the impact of the inclusion of lower margin products acquired with NPS Pharma was more than offset by lower charges on the unwind of fair value adjustments on acquired inventories.
For the year to December 31, 2015 cost of product sales included depreciation of $46.1 million (2014: $57.1 million).
R&D from continuing operations
R&D expenditure increased to $1,564.0 million for the year to December 31, 2015 (26% of product sales), compared to $1,067.5 million in the corresponding period in 2014 (18% of product sales). R&D expenditure in 2015 includes impairment charges of $467 million relating to the SHP625 IPR&D intangible asset, due to a lower probability of regulatory approval following trial results and revised commercial potential, and $176.7 million relating to the SHP608 IPR&D intangible asset, following preclinical toxicity findings. R&D expenditure in 2014 includes impairment charges of $190.3 million, primarily relating to the SHP602 IPR&D intangible asset of $166.0 million, following the Phase 2 trial being placed on clinical hold and $22.0 million relating to the SHP613 IPR&D intangible asset, following the decision to discontinue further development based on portfolio prioritization as well as unexpected challenges and complexities with the development program. Also included in 2014 R&D expenditure is a payment of $12.5 million in respect of in-licensed and acquired products. Excluding these costs, R&D expenditure in the year to December 31, 2015 increased by 6% or by $56 million, due to the inclusion of NPS Pharma costs since February 2015 and increased investment in existing pipeline programs, partially offset by lower spend on certain programs in 2014 which was not repeated in 2015.
R&D expenditure in the year to December 31, 2015 included depreciation of $21.7 million (2014: $24.5 million).
SG&A from continuing operations
SG&A expenditure increased to $2,341.2 million for the year to December 31, 2015 from $2,025.8 million. SG&A expenditure as a proportion of product sales also increased by three percentage points to 38% of product sales for the year to December 31, 2015 compared with 35% of product sales in the corresponding period in 2014, due to the inclusion of NPS Pharma’s SG&A costs, higher amortization of intangible assets acquired with NPS Pharma and increased sales and marketing spend supporting the launch of VYVANSE for the treatment of BED and the anticipated launch of lifitegrast for the treatment of DED.
For the year to December 31, 2015 SG&A included depreciation of $70.7 million (2014: $81.9 million) and amortization of $498.7 million (2014: $243.8 million).
Gain on sale of product rights
For the year to December 31, 2015 Shire recorded a net gain on sale of product rights of $14.7 million (2014: $88.2 million) due primarily to the re-measurement of the contingent consideration receivable relating to the divestment of DAYTRANA. In 2014 Shire additionally recorded a net gain on sale of product rights following the divestment of CALCICHEW, VANCOCIN, ESTRACE and EXPUTEX.
Reorganization costs
For the year to December 31, 2015 Shire recorded reorganization costs of $97.9 million (2014: $180.9 million) primarily related to the relocation of roles from Chesterbrook to Lexington. 2014 also included costs relating to the One Shire reorganization, which included termination benefits and other reorganization costs.
Integration and acquisition costs
For the year to December 31, 2015 Shire recorded net integration and acquisition costs of $39.8 million, representing acquisition and integration costs of $189.7 million, primarily related to NPS Pharma, ViroPharma, Baxalta and Dyax. These costs were offset by a net credit of $149.9 million on the change in fair value of contingent consideration liabilities, primarily relating to SHP625 (acquired with Lumena) and SHP608 (acquired with Lotus Tissue Repair, Inc.).
In 2014 Shire recorded integration and acquisition costs of $158.8 million, comprising acquisition and integration costs of $144.1 million, primarily related to ViroPharma, and a $14.7 million charge relating to the change in fair values of contingent consideration.
Interest expense
For the year to December 31, 2015 Shire incurred interest expense of $41.6 million (2014: $30.8 million). Interest expense in 2015 principally relates to interest and financing costs incurred on facilities drawn down in respect of the acquisition of NPS Pharma.
Taxation from continuing operations
The effective tax rate on income from continuing operations was 3% (2014: 2%).
The effective rate of tax on income from continuing operations in 2015 is low primarily due to the deferred tax accounting for acquisitions in higher tax territories, including the amortization and impairments of acquired intangible assets and changes in the fair values of contingent consideration liabilities, which do not reduce the Company’s cash tax liability. In addition, the effective rate of tax on income from continuing operations is reduced by increased R&D credits, the effect of the finalization of various tax returns and changes in profit mix including the benefit in higher tax territories of significant reorganization and integration costs.
The effective rate of tax on income from continuing operations in 2014 includes the receipt of the break fee from AbbVie and recognition of a net credit to income taxes of $235 million, following the settlement of certain tax positions with the Canadian revenue authorities in 2014. The Company has obtained advice that the break fee should not be taxable in Ireland. The Company has therefore concluded that no tax liability should arise and did not recognize a tax charge in the income statement in 2014. The relevant tax return was submitted on September 23, 2015.
Discontinued operations
The loss from discontinued operations for the year to December 31, 2015 was $34.1 million net of tax (2014: gain of $122.7 million) primarily relating to a change in estimate for onerous lease provisions.
2014 included a tax credit of $211.3 million primarily driven by a tax benefit arising following a reorganization of the Regenerative Medicine business undertaken in Q4 2014, associated with the divestment of the DERMAGRAFT business in Q1 2014. The gain was partially offset by costs associated with the divestment of the DERMAGRAFT business, including a loss on re-measurement of contingent consideration receivable from Organogenesis to its fair value.
Results of operations for the years to December 31, 2014 and 2013
Financial highlights for the year to December 31, 2014 are as follows:
·Product sales grew strongly in 2014, up 23% to $5,830 million (2013: $4,757 million). Product sales in 2014 included $538 million for products acquired with ViroPharma, primarily $503 million from CINRYZE. The inclusion of ViroPharma contributed 12 percentage points to reported product sales growth in the year.
Excluding products acquired with ViroPharma, product sales were up 11%. This growth was driven by VYVANSE (up 18% to $1,449 million), LIALDA/MEZAVANT (up 20% to $634 million), ELAPRASE (up 9% to $593 million), REPLAGAL (up 7% to $500 million), VPRIV (up 7% to $367 million), and FIRAZYR (up 55% to $364 million).
The strengthening of the US dollar during the fourth quarter of 2014 negatively affected the growth in product sales for a number of the Company’s products, notably ELAPRASE, REPLAGAL and VPRIV.
·Total revenues were up 22% to $6,022 million (2013: $4,934 million), due to the Company’s strong product sales growth and higher royalties and other revenues (up 8%). The higher royalty income included $22 million of INTUNIV royalties following generic entry in December and other revenues included the receipt of a $13 million milestone relating to FOSRENOL.
·Operating income from continuing operations in 2014 was down 2% to $1,698 million (2013: $1,734 million). Operating income from continuing operations includes $190 million of intangible asset impairment charges (2013: $20 million), integration and acquisition costs of $159 million (2013: a net credit of $134 million), One Shire reorganization costs of $181 million (2013: $88 million), and costs associated with AbbVie’s terminated offer for Shire of $96 million (2013: $nil). Excluding these items, operating income grew strongly in 2014, up 36%, due to higher total revenues (up 22%) and only a 9% increase in combined R&D and SG&A, demonstrating the Company’s focus on delivering efficient growth.
·Diluted earnings per ordinary share from continuing operations increased 127% to $5.55 (2013: $2.45) primarily due to the receipt of a $1,635 million break fee in relation to AbbVie’s terminated offer for Shire and a lower effective tax rate of 2% (2013: 16%), which was partially offset by the lower operating income.
Total revenues
The following table provides an analysis of the Company’s total revenues by source:
Year to December 31, Change
$'M $'M %
Product sales 5,830.4 4,757.5 +23
Royalties 160.8 153.7 +5
Other revenues 30.9 23.1 +34
Total 6,022.1 4,934.3 +22
Product sales
(1)This information is an estimate derived from the use of information under license from the following IMS Health information service: IMS NPA weekly for the period January 17, 2014 to January 22, 2016. IMS expressly reserves all rights, including rights of copying, distribution and republication. Data provided by IMS. Exit market share represents the average US market share in the month ended December 31, 2014.
(2)IMS NPA Data not available.
(3)Not sold in the US in the year to December 31, 2014.
(4)On a CER basis, which is a NON GAAP measure, computed by comparing 2014 product sales and revenues restated using 2013 average foreign exchange rates to 2013 actual product sales and revenues. Average exchange rates for the year to December 31, 2014 were $1.65:£1.00 and $1.33:€1.00 (2013: $1.56:£1.00 and $1.33:€1.00).
VYVANSE - ADHD
VYVANSE product sales grew strongly (up 18%) in 2014 primarily due to the benefit of price increases1 and to a lesser extent higher US prescription demand and growth in ex-US product sales. This growth was partially offset by a lower level of stocking in 2014 as compared to 2013.
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 and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
LIALDA/MEZAVANT - UC
The 20% growth in product sales for LIALDA/MEZAVANT in 2014 was primarily driven by higher prescription demand (up 25%) and to a lesser extent a price increase1 taken at the beginning of 2014. The growth was partially offset by a lower level of stocking and higher sales deductions as a percentage of sales in 2014 as compared to 2013.
Litigation proceedings regarding LIALDA are ongoing. Further information about this litigation can be found in ITEM 3: Legal Proceedings and Note 17, “Commitments and Contingencies, Legal and other proceedings” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
ELAPRASE - Hunter syndrome
ELAPRASE sales growth was up 9% (up 11% on a Non GAAP CER basis), driven by continued growth in the number of treated patients, especially in emerging markets. Sales growth was negatively affected by foreign exchange.
CINRYZE - for the prophylactic treatment of HAE
Shire acquired CINRYZE through its acquisition of ViroPharma on January 24, 2014. CINRYZE sales were $503 million in 2014, growing 30% on a pro-forma basis on 2013(2) primarily driven by more patients on therapy and to a lesser extent the impact of a price increase1 in the US and an increase in channel inventory.
REPLAGAL - Fabry disease
REPLAGAL sales were up 7% compared to 2013 (up 10% on a Non GAAP CER basis), driven primarily by higher unit sales as the Company continues to see an increase in the number of patients on therapy, with good growth in emerging markets and to a lesser extent in Europe. The benefit of the higher unit sales was partially offset by foreign exchange.
ADDERALL XR - ADHD
ADDERALL XR product sales were up 2% in 2014, as a result of higher prescription demand, partially offset by lower stocking in 2014 compared to 2013.
VPRIV - Gaucher disease
VPRIV sales were up 7% (up 8% on a Non GAAP CER basis), driven by a strong performance in the EU and US as the Company continues to add naïve patients and gain patients switching from other therapies. Sales growth was also negatively impacted by foreign exchange.
FIRAZYR - HAE
FIRAZYR sales growth was up 55% compared to 2013, driven by a higher number of patients on therapy and the effect of a price increase1 in the US market.
INTUNIV - ADHD
INTUNIV product sales were down 2% compared to 2013, reflecting the impact of generic competition from December 2014, which resulted in lower prescription demand, significantly higher sales deductions as a percentage of product sales and destocking as compared to a slight level of stocking in 2013. This was partially offset by price increases1 taken in 2014. The impact of generic competition saw INTUNIV market share fall to 2.3% at the end of 2014 from 4.6% at the beginning of the year.
PENTASA - UC
PENTASA product sales were up 3% as the benefit of price increases1 was partially offset by higher sales deductions and a lower prescription demand in 2014 compared to 2013.
1 The actual net effect of price increases on current period net sales compared to the comparative period is difficult to quantify due to the various managed care rebates, Medicaid discounts, other discount programs in which the Company participates and fee for service agreements with wholesalers customers.
2013 CINRYZE sales were recorded by ViroPharma, prior to the acquisition of ViroPharma by Shire.
Royalties
Year to December 31, Change
$'M $'M %
FOSRENOL 51.4 48.1 +7
3TC and ZEFFIX 33.9 46.7
ADDERALL XR 28.9 27.6 +5
INTUNIV 22.0 - n/a
Other 24.6 31.3
Total 160.8 153.7 +5
Shire has received royalty income from Actavis following INTUNIV generic competition from December 2014. Royalty income is based on 25% of Actavis’ gross profits from INTUNIV sales.
Cost of product sales from continuing operations
Cost of product sales increased to $979.3 million for the year to December 31, 2014 (17% of product sales), up from $670.8 million in the corresponding period in 2013 (14% of product sales). Cost of product sales as a percentage of product sales was three percentage points higher compared to the same period in 2013. In the year to December 31, 2014 Cost of product sales was impacted by loss and expiry provisions, the inclusion of lower margin CINRYZE acquired with ViroPharma and charges of $91.9 million on the unwind of the fair value adjustment on acquired ViroPharma inventories.
For the year to December 31, 2014 cost of product sales included depreciation of $57.1 million (2013: $37.5 million).
R&D from continuing operations
R&D expenditure increased to $1,067.5 million for the year to December 31, 2014 (18% of product sales), compared to $933.4 million in the corresponding period in 2013 (20% of product sales). R&D expenditure in 2014 includes impairment charges of $190.3 million, primarily relating to the SHP602 IPR&D intangible asset of $166.0 million, following the current Phase 2 trial being placed on clinical hold and $22.0 million relating to the SHP613 IPR&D intangible asset, following the decision to discontinue further development based on portfolio prioritization as well as unexpected challenges and complexities with the development program. Also included in 2014 R&D expenditure is a payment of $12.5 million in respect of in-licensed and acquired products. In 2013 R&D expenditure included impairment charges of $19.9 million related to IPR&D intangible assets acquired with Movetis N.V. Excluding these costs, R&D expenditure in the year to December 31, 2014 decreased by 5% or by $49 million, due to the completion/termination of several large Phase 3 programs which were ongoing during 2013, including new uses for LDX, the effect of portfolio prioritization decisions taken during 2013 and lower overheads due to the One Shire reorganization, partially offset by the inclusion of programs acquired with ViroPharma and Lumena, and increased spend on the SHP607 (prevention of ROP), SHP608 (DEB) and SHP606 (DED) programs.
R&D in the year to December 31, 2014 included depreciation of $24.5 million (2013: $23.3 million).
SG&A from continuing operations
SG&A expenditure increased to $2,025.8 million for the year to December 31, 2014 from $1,651.3 million, due to the inclusion of ViroPharma SG&A costs from January 24, 2014, higher intangible asset amortization, costs incurred in connection with AbbVie’s terminated offer for Shire and commercial spending in advance of anticipated product launches for certain products, which offset lower overheads following the One Shire reorganization. SG&A as a proportion of product sales remained constant at 35% of product sales for the year to December 31, 2014 compared with 35% of product sales in the corresponding period in 2013, as the Company continues to see benefits from the One Shire reorganization and the focus on operational discipline in the year to December 31, 2014.
For the year to December 31, 2014 SG&A included depreciation of $81.9 million (2013: $66.8 million) and amortization of $243.8 million (2013: $152.0 million).
Gain on sale of product rights from continuing operations
For the year to December 31, 2014 Shire recorded a net gain on sale of product rights of $88.2 million (2013: $15.9 million) following the divestment of CALCICHEW, VANCOCIN, ESTRACE and EXPUTEX. The net gain on sale of product rights also included the loss on re-measurement of the contingent consideration receivable relating to the divestment of DAYTRANA.
Reorganization costs from continuing operations
For the year to December 31, 2014 Shire recorded reorganization costs of $180.9 million (2013: $88.2 million) comprising costs relating to the One Shire reorganization, which included involuntary termination benefits and other termination costs. Amounts recorded in 2014 also include certain costs associated with moving more than 500 positions from Chesterbrook to Lexington, effected over 2015 and 2016.
Integration and acquisition costs from continuing operations
For the year to December 31, 2014 Shire recorded integration and acquisition costs of $158.8 million, comprising acquisition and integration costs of $144.1 million, primarily related to ViroPharma, and a $14.7 million charge relating to the change in fair value of contingent consideration liabilities.
In 2013 Shire recorded a net credit of $134.1 million in integration and acquisition costs primarily related to the change in fair values of contingent consideration liabilities offset by the costs of integrating SARcode, and Lotus Tissue Repair Inc..
Interest expense from continuing operations
For the year to December 31, 2014 Shire incurred interest expense of $30.8 million (2013: $38.1 million). Interest expense in 2014 principally relates to interest and financing costs incurred on facilities drawn down in respect of the acquisition of ViroPharma.
Receipt of Break Fee
On July 18, 2014, the Boards of AbbVie and Shire announced that they had agreed the terms of a recommended combination of Shire with AbbVie, subject to a number of conditions including approval by shareholders and regulators. On the same date Shire and AbbVie entered into a co-operation agreement in connection with the recommended combination. On October 16, 2014, the Board of AbbVie confirmed that it had withdrawn its recommendation of its offer for Shire as a result of the anticipated impact of a US Treasury Notice on the benefits that AbbVie expected from its offer. As AbbVie’s offer was conditional on the approval of its stockholders, and given
their Board’s decision to change its recommendation and to advise AbbVie’s stockholders to vote against the offer, there was no realistic prospect of satisfying this condition. Accordingly, Shire’s Board agreed with AbbVie to terminate the cooperation agreement on October 20, 2014. The Company entered into a termination agreement with AbbVie, pursuant to which AbbVie paid the break fee due under the cooperation agreement of approximately $1,635.4 million. The Company has obtained advice that the break fee should not be taxable in Ireland. The Company has therefore concluded that no tax liability should arise and had not recognized a tax charge in the income statement in 2014. However, this has not been agreed with the tax authorities.
Taxation from continuing operations
The effective tax rate on income from continuing operations was 2% (2013: 16%).
The effective rate of tax on income from continuing operations is lower than 2013 primarily due to the receipt of the break fee from AbbVie and recognition of a net credit to income taxes of $235 million, following the settlement of certain tax positions with the Canadian revenue authorities in 2014. The accounting treatment for tax purposes of the break fee is outlined in the immediately preceding paragraph. Excluding the effect of these two items the effective tax rate in 2014 would have been 17%.
Discontinued operations
The gain from discontinued operations for the year to December 31, 2014 was $122.7 million net of tax (2013: loss of $754.5 million). The gain from discontinued operations includes a tax credit of $211.3 million primarily driven by a tax benefit arising following a reorganization of the former RM business undertaken in the fourth quarter of 2014, associated with the divestment of the DERMAGRAFT business in the first quarter of 2014. This gain was partially offset by costs associated with the divestment of the DERMAGRAFT business, including a loss on re-measurement of contingent consideration receivable from Organogenesis to its fair value.
Financial condition at December 31, 2015 and 2014
Cash & cash equivalents
Cash and cash equivalents decreased by $ 2,846.9 million to $135.5 million at December 31, 2015 (December 31, 2014: $2,982.4 million), primarily due to the use of existing cash and cash equivalents to partially fund the acquisitions of NPS Pharma, Foresight and Meritage Pharma.
In the year to December 31, 2014 Cash and cash equivalents included the receipt of the $1,635 million break fee in relation to AbbVie’s terminated offer for Shire, the benefit of the $417 million repayment received from the Canadian revenue authorities and the net proceeds of $554.5 million from Shire’s line of credit and other borrowings. These inflows were offset by the cost of acquiring ViroPharma, Lumena and Fibrotech.
Accounts receivable, net
Accounts receivable, net increased by $166.1 million to $1,201.2 million at December 31, 2015 (December 31, 2014: $1,035.1 million), primarily due to the inclusion of NPS Pharma’s accounts receivable and an increase in revenue. Days sales outstanding slightly decreased to 42 days (December 31, 2014: 43 days).
Inventories
Inventories increased by $90.6 million to $635.4 million at December 31, 2015 (December 31, 2014: $544.8 million), primarily due to the inventories acquired as part of the acquisition of NPS Pharma and an increase in inventories of certain products following continued sales growth.
Goodwill
Goodwill increased by $ 1,672.9 million to $4,147.8 million at December 31, 2015 (December 31, 2014: $2,474.9 million), principally due to the acquisitions of NPS Pharma, Meritage Pharma and Foresight.
Other intangible assets, net
Other intangible assets increased by $ 4,238.9 million to $9,173.3 million at December 31, 2015 (December 31, 2014: $4,934.4 million), principally due to the intangible assets acquired with NPS Pharma, Meritage Pharma and Foresight, offset by IPR&D intangible asset impairment charges and intangible asset amortization.
Short term borrowings
Short term borrowings increased by $661.5 million to $1,511.5 million at December 31, 2015 (December 31, 2014: $850.0 million), reflecting the utilization of short term debt facilities to partially fund the acquisition of NPS Pharma and the recognition of secured non-recourse debt liabilities assumed as part of the NPS Pharma acquisition.
Other current liabilities
Other current liabilities decreased by $118.5 million to $144.0 million at December 31, 2015 (December 31, 2014: $262.5 million) principally due to the reduction in the fair value of contingent consideration payable associated with the SHP625 IPR&D intangible asset.
Non-current deferred tax liabilities
Non-current deferred tax liabilities increased by $995.3 million to $2,205.9 million at December 31, 2015 (December 31, 2014: $1,210.6 million) primarily due to deferred tax liabilities arising on intangible assets partially offset by deferred tax assets arising on tax attributes both acquired with NPS Pharma, Meritage Pharma and Foresight.
Other non-current liabilities
Other non-current liabilities increased by $62.1 million to $798.8 million at December 31, 2015 (December 31, 2014: $736.7 million) principally due to a change in estimate in respect of onerous lease liabilities and recognition of contingent consideration payable in respect of the Meritage Pharma acquisition, offset by a reduction in the fair value of contingent consideration payable associated with the SHP608 and SHP625 IPR&D intangible assets.
Liquidity and capital resources
General
The Company’s funding requirements depend on a number of factors, including the timing and extent of its development programs; corporate, business and product acquisitions; the level of resources required for the expansion of certain manufacturing and marketing capabilities as the product base expands; increases in accounts receivable and inventory which may arise with any increase in product sales; competitive and technological developments; the timing and cost of obtaining required regulatory approvals for new products; the timing and quantum of milestone payments on business combinations, in-licenses and collaborative projects; the timing and quantum of tax and dividend payments; the timing and quantum of purchases by the Employee Benefit Trust of Shire shares in the market to satisfy awards granted under Shire’s employee share plans; and the amount of cash generated from sales of Shire’s products and royalty receipts.
An important part of Shire’s business strategy is to protect its products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The Company intends to defend its intellectual property and as a result may need cash for funding the cost of litigation.
The Company finances its activities through cash generated from operating activities; credit facilities; private and public offerings of equity and debt securities; and the proceeds of asset or investment disposals.
Shire’s balance sheet includes $135.5 million of cash and cash equivalents at December 31, 2015.
Shire has a revolving credit facility of $2,100 million which matures in 2020, $750 million of which was utilized as at December 31, 2015.
In connection with the acquisitions of NPS Pharma and Dyax, and the proposed combination with Baxalta, Shire entered into a number of facility agreements in the year to December 31, 2015 and subsequently in 2016. The details of these facility agreements are presented below. Shire also assumed non-recourse secured debt obligations as part of the NPS Pharma acquisition with a carrying value of $81.4 million as at December 31, 2015. See Note 15, “Borrowings, PART IV, ITEM 15,” to the consolidated financial statements set forth in this Annual Report on Form 10-K.
In addition Shire has access to certain short-term uncommitted lines of credit which it utilizes from time to time to provide short-term flexibility in cash management. At December 31, 2015, these lines of credit were not utilized.
Revolving Credit Facilities Agreement
On December 12, 2014, Shire entered into a $2,100 million revolving credit facilities agreement (the “RCF”) with a number of financial institutions, for which Abbey National Treasury Services PLC (trading as Santander Global Banking and Markets), Bank of America Merrill Lynch International Limited, Barclays Bank PLC, Citigroup Global Markets Limited, Lloyds Bank PLC, The Royal Bank of Scotland PLC and Sumitomo Mitsui Banking Corporation acted as mandated lead arrangers and bookrunners and DNB Bank ASA, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Credit Suisse AG, London Branch, Deutsche Bank Luxembourg S.A., Goldman Sachs Bank USA, Mizuho Bank, Ltd. and Morgan Stanley Bank International Limited acted as arrangers. Shire is an original borrower and original guarantor under the RCF. Shire has agreed to act as guarantor for any of its subsidiaries that become additional borrowers under the RCF. As at December 31, 2015 the Company utilized $750 million of the RCF.
The RCF, which terminates on December 12, 2020, may be applied towards financing the general corporate purposes of Shire. The RCF incorporates a $250 million US dollar and euro swingline facility operating as a sub-limit thereof.
Interest on any loans made under the RCF is payable on the last day of each interest period, which may be one week or one, two, three or six months at the election of Shire, or as otherwise agreed with the lenders. The interest rate for the RCF is: LIBOR (or, in relation to any revolving loan in euro, EURIBOR); plus 0.30% per annum subject to change depending upon (i) the prevailing ratio of Net Debt to EBITDA (each as defined in the RCF) in respect of the most recently completed financial year or financial half year and (ii) the occurrence and continuation of an event of default in respect of the financial covenants or the failure to provide a compliance certificate.
Shire shall also pay (i) a commitment fee equal to 35% of the applicable margin on available commitments under the RCF for the availability period applicable thereto and (ii) a utilization fee equal to (a) 0.10% per year of the aggregate of all outstanding loans up to an aggregate base currency amount equal to $700 million, (b) 0.15% per year of the amount by which the aggregate base currency amount of all outstanding loans exceeds $700 million but is equal to or less than $1,400 million and (c) 0.30% per year of the amount by which the aggregate base currency amount of all outstanding loans exceeds $1,400 million.
The RCF includes customary representations and warranties, covenants and events of default, including requirements that Shire’s (i) ratio of Net Debt to EBITDA in respect of the most recently-ended 12-month relevant period (each as defined in the RCF) must not, at any time, exceed 3.5:1 except that, following an acquisition fulfilling certain criteria, Shire may on a once only basis elect to increase this ratio to (a) 5.5:1 for the relevant period in which the acquisition was completed (b) 5.0:1 in respect of the first relevant period following the relevant period in which
the acquisition was completed and (c) 4.5:1 in respect of the second relevant period following the relevant period in which the acquisition was completed, and (ii) ratio of EBITDA to Net Interest for the most recently-ended 12-month relevant period (each as defined in the RCF) must not be less than 4.0:1.
The RCF restricts, subject to certain exceptions, Shire’s ability to incur additional financial indebtedness, grant security over its assets or provide loans/grant credit. Further, any lender may require mandatory prepayment of its participation if there is a change of control of Shire, subject to certain exceptions for schemes of arrangement and analogous schemes.
Events of default under the RCF include, subject to customary grace periods and materiality thresholds: (i) non-payment of any amounts due under the finance documents (as defined in the RCF), (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults, under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of Shire as a whole, (vii) if it becomes unlawful for Shire (or any successor parent company) or any of their respective subsidiaries that are parties to the RCF to perform their obligations thereunder or (viii) if Shire (or any successor parent company) or any subsidiary thereof which is a party to the RCF repudiates such agreement or other finance document, among others.
The RCF is governed by English law.
Term Loan Facilities Agreement
January 2016 Facilities Agreement
On January 11, 2016, Shire (as original guarantor and original borrower), entered into, an $18.0 billion bridge facilities agreement with, among others, Barclays Bank PLC ("Barclays"), and Morgan Stanley Bank International Limited, acting as mandated lead arrangers and bookrunners (the “January 2016 Facilities Agreement”). The January 2016 Facilities Agreement comprises two credit facilities: (i) a $13.0 billion term loan facility which, subject to a one year extension option exercisable at Shire's option, matures on January 11, 2017 ("January 2016 Facility A") and (ii) a $5.0 billion revolving loan facility which, subject to a one year extension option exercisable at Shire's option, matures on January 11, 2017 ("January 2016 Facility B"). Shire has agreed to act as guarantor for any of its subsidiaries that become additional borrowers under the January 2016 Facilities Agreement. As of February 23, 2016, the January 2016 Facilities Agreement was undrawn.
January 2016 Facility A may be used to finance the cash consideration payable in respect of the proposed combination with Baxalta and certain costs related to the proposed combination. January 2016 Facility B may be used to finance the redemption of all or part of Baxalta’s senior notes upon completion of the proposed combination.
Interest on any loans made under the January 2016 Facilities Agreement will be payable on the last day of each interest period, which may be one week or one, two, three or six months, or as otherwise agreed with the lenders. The interest rate applicable to the January 2016 Facilities Agreement is LIBOR plus 1.25 percent per annum, increasing by: (i) 0.25 percent per annum on July 11, 2016 and on each subsequent date falling at three month intervals thereafter until (and excluding) April 11, 2017 and (ii) 0.50 percent per annum on April 11, 2017 and on each subsequent date falling at three month intervals thereafter.
Shire shall also pay a commitment fee on the available but unutilized commitments under the January 2016 Facilities Agreement for the availability period applicable to each facility. With effect from first utilization, the commitment fee rate will be 35 percent of the applicable margin. Before first utilization, the commitment fee rate shall be increased in stages from 10 percent to 35 percent of the applicable margin over the period to May 11, 2016.
The January 2016 Facilities Agreement includes customary representations and warranties, covenants and events of default, including requirements that Shire’s (i) ratio of Net Debt to EBITDA in respect of the most recently ended 12-month relevant period, (each as defined in the January 2016 Facilities Agreement), must not, at any time, exceed 3.5:1, except that following the combination with Baxalta, or any other acquisition fulfilling certain criteria, Shire may elect on a once only basis to increase this ratio to (a) 5.5:1 for the relevant period in which the acquisition was completed, (b) 5.0:1 in respect of the first relevant period following the relevant period in which the acquisition was completed and (c) 4.5:1 in respect of the second relevant period following the relevant period in which the acquisition was completed, and (ii) ratio of EBITDA to Net Interest, for the most recently ended 12-month relevant period (each as defined in the January 2016 Facilities Agreement) must not be less than 4.0:1.
The January 2016 Facilities Agreement restricts, subject to certain exceptions, Shire's ability to incur additional financial indebtedness, grant security over its assets or provide loans/grant credit. Further, any lender may require mandatory prepayment of its participation if there is a change of control of Shire, subject to certain exceptions for schemes of arrangement and analogous schemes. In addition, in certain circumstances and subject to certain broad exceptions, the net cash proceeds of disposals and certain issues, loans, sales or offerings of debt securities by any member of Shire's group must be applied in cancellation of the available commitments under the January 2016 Facilities Agreement and, if applicable, mandatory prepayment of any loans made under the January 2016 Facilities Agreement.
Events of default under the January 2016 Facilities Agreement include, subject to customary grace periods and materiality thresholds: (i) non-payment of any amounts due under the finance documents (as defined in the January 2016 Facilities Agreement), (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults, under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of Shire as a whole, (vii) if it becomes unlawful for Shire (or any successor parent company) or any of their respective subsidiaries that are parties to the January 2016 Facilities Agreement to perform their obligations thereunder or (viii) if Shire (or any successor parent company) or any subsidiary thereof which is a party to the January 2016 Facilities Agreement repudiates the January 2016 Facilities Agreement or any other finance document, among others.
The January 2016 Facilities Agreement is governed by English law.
November 2015 Facilities Agreement
On November 2, 2015, Shire (as original guarantor and original borrower) entered into a $5.6 billion facilities agreement with, among others, Morgan Stanley Bank International Limited and Deutsche Bank AG, London Branch acting as mandated lead arrangers and bookrunners (the “November 2015 Facilities Agreement”). The November 2015 Facilities Agreement comprises three credit facilities: (i) a $1.0 billion term loan facility which, subject to a one year extension option exercisable at Shire’s option, matures on November 2, 2016 (“November 2015 Facility A”), (ii) a $2.2 billion amortizing term loan facility which matures on November 2, 2017 (“November 2015 Facility B”) and (iii) a $2.4 billion amortizing term loan facility which matures on November 2, 2018 (“November 2015 Facility C”) .
As of December 31, 2015, the November 2015 Facilities Agreement was undrawn. In January 2016 the November 2015 Facilities Agreement was utilized in full to finance the purchase price payable in respect of Shire’s acquisition of Dyax and certain costs related to the acquisition.
Interest on any loans made under the November 2015 Facilities Agreement is payable on the last day of each interest period, which may be one week or one, two, three or six months, or as otherwise agreed with the lenders. The interest rate applicable is LIBOR plus, in the case of November 2015 Facility A, 0.55% per annum, in the case of November 2015 Facility B, 0.65% per annum and, in the case of November 2015 Facility C, 0.75% per annum, in each case until delivery of the first compliance certificate required to be delivered after the date of the November 2015 Facilities Agreement and is subject to change thereafter depending on (i) the prevailing ratio of Net Debt to EBITDA (each as defined in the November 2015 Facilities Agreement) in respect of the most recently completed financial year or financial half year and (ii) the occurrence and continuation of an event of default in respect of the financial covenants or failure to provide a compliance certificate.
The November 2015 Facilities Agreement includes customary representations and warranties, covenants and events of default, including requirements that Shire’s (i) ratio of Net Debt to EBITDA in respect of the most recently ended 12-month relevant period, (each as defined in the November 2015 Facilities Agreement), must not, at any time, exceed 3.5:1, except that following an acquisition fulfilling certain criteria, Shire may elect on a once only basis to increase this ratio to (a) 5.5:1 for the relevant period in which the acquisition was completed, (b) 5.0:1 in respect of the first relevant period following the relevant period in which the acquisition was completed and (c) 4.5:1 in respect of the second relevant period following the relevant period in which the acquisition was completed, and (ii) ratio of EBITDA to Net Interest in respect of the most recently ended 12 month relevant period, (each as defined in the November 2015 Facilities Agreement), must not be less than 4.0:1.
The November 2015 Facilities Agreement restricts, subject to certain exceptions, Shire's ability to incur additional financial indebtedness, grant security over its assets or provide loans/grant credit. Further, any lender may require mandatory prepayment of its participation if there is a change of control of Shire, subject to certain exceptions for schemes of arrangement and analogous schemes.
Events of default under the November 2015 Facilities Agreement include, subject to customary grace periods and materiality thresholds: (i) non-payment of any amounts due under the finance documents (as defined in the November 2015 Facilities Agreement), (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults, under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of Shire as a whole, (vii) if it becomes unlawful for Shire (or any successor parent company) or any of their respective subsidiaries that are parties to the November 2015 Facilities Agreement to perform their obligations thereunder or (viii) if Shire (or any successor parent company) or any subsidiary thereof which is a party to the November 2015 Facilities Agreement repudiates the November 2015 Facilities Agreement or any other finance document, among others.
The November 2015 Facilities Agreement is governed by English law.
January 2015 Facility Agreement
On January 11, 2015, Shire entered into an $850 million term facility agreement with, among others, Citigroup Global Markets Limited (acting as mandated lead arranger and bookrunner) (the “January 2015 Facility Agreement”) with an original maturity date of January 10, 2016. The maturity date was subsequently extended to July 11, 2016 in
line with the provisions within the January 2015 Facility Agreement allowing the maturity date to be extended twice, at Shire’s option, by six months on each occasion.
The January 2015 Facility Agreement was available to finance the purchase price payable in respect of Shire’s acquisition of NPS Pharma (including certain related costs). On September 28, 2015 the Company reduced the January 2015 Facility Agreement by $100 million. As at December 31, 2015 the January 2015 Facility Agreement was fully utilized in the amount of $750 million. In January 2016 and at various points thereafter, the Company cancelled parts of the January 2015 Facility Agreement. On February 22, 2016, the Company repaid in full the remaining balance of $100 million.
2013 Facilities Agreement
On November 11, 2013, Shire entered into a $2,600 million facilities agreement with, among others, Morgan Stanley Bank International Limited (acting as mandated lead arranger and bookrunner) (the “2013 Facilities Agreement”). The 2013 Facilities Agreement comprised two credit facilities: (i) a $1,750 million term loan facility and (ii) an $850 million term loan facility.
On December 13, 2013 and at various points thereafter, the Company cancelled parts of the 2013 Facilities Agreement. On September 28, 2015 the Company repaid in full the remaining balance of $350 million under the 2013 Facilities Agreement.
Short-term uncommitted lines of credit (“Credit lines”)
Shire has access to various Credit lines from a number of banks which provide flexibility to short-term cash management procedures. These Credit lines can be withdrawn by the banks at any time. The Credit lines are not relied upon for core liquidity. As at December 31, 2015 these Credit lines were not utilized.
Financing
Shire anticipates that its operating cash flow together with available cash, cash equivalents and the RCF will be sufficient to meet its anticipated future operating expenses, capital expenditures, tax and interest payments, lease obligations, repayment of the term loans and milestone payments as they become due over the next twelve months.
Shire’s existing cash, the January 2016 Facilities Agreement and the RCF are sufficient to finance Shire’s proposed combination with Baxalta.
If the Company decides to acquire other businesses, it expects to fund these acquisitions from cash resources, the RCF, term loan facilities and through new borrowings (including issuances of debt securities) or the issuance of new equity if necessary.
Sources and uses of cash
The following table provides an analysis of the Company’s gross and net cash (excluding restricted cash), as at December 31, 2015 and 2014:
(1)Substantially all of the Company’s cash and cash equivalents are held by foreign subsidiaries (i.e, those subsidiaries incorporated outside of Jersey, Channel Islands, the jurisdiction of incorporation of Shire plc, Shire’s holding company). The amount of cash and cash equivalents held by foreign subsidiaries has not had, and is not expected to have, a material impact on the Company’s liquidity and capital resources.
(2)Net (debt)/cash is a Non-GAAP measure. The Company believes that Net (debt)/cash is a useful measure as it indicates the level of net cash /borrowings after taking account the cash and cash equivalents that could be utilized to pay down the outstanding borrowings. See above for reconciliation to cash and cash equivalents.
Cash flow activity
Net cash provided by operating activities for the year to December 31, 2015 decreased by $1,891.4 million or 45% to $2,337.0 million (2014: $4,228.4 million). Net cash provided by operating activities in 2014 included the receipt of the $1,635 million break fee in relation to AbbVie’s terminated offer for Shire, and the benefit of the $417 million repayment received from the Canadian revenue authorities. Excluding these items net cash provided by operating activities in 2015 increased by $160.6 million as a result of higher cash receipts from gross product sales and royalties, which were partially offset by higher operating expense payments, including payments in relation to integration, reorganization activities and employee retention payments following AbbVie’s terminated offer for Shire.
Net cash provided by operating activities for the year to December 31, 2014 increased by $2,765.4 million or 189% to $4,228.4 million (2013: $1,463.0 million) primarily due to the receipt of the $1,635 million break fee in relation to AbbVie’s terminated offer for Shire, the benefit of the $417 million repayment received from the Canadian revenue authorities and higher cash receipts from gross product sales, offset by payments for sales deductions, payments of acquisition and integration costs in respect of the acquisitions of ViroPharma, Lumena and Fibrotech, costs in connection with Abbvie’s terminated offer for Shire and cash payments in respect of the One Shire reorganization.
Net cash used in investing activities was $5,619.9 million in the year to December 31, 2015, principally relating to the cash paid for the acquisition of NPS Pharma of $5,220 million (excluding cash acquired with NPS Pharma of $42 million) and for the acquisitions of Foresight ($299 million) and Meritage Pharma ($75 million).
Net cash used in investing activities was $4,030.6 million in the year to December 31, 2014, principally relating to the cash paid for the acquisition of ViroPharma of $3,997 million (excluding cash acquired with ViroPharma of $233 million) and for the acquisition of Lumena of $300 million (excluding cash acquired with Lumena of $46 million), offset by the proceeds received on the sale of non-core product rights.
Net cash provided by financing activities was $439.0 million for the year to December 31, 2015, principally due to the drawings, net of subsequent repayments, made under Shire’s various borrowing facilities to partially fund the NPS Pharma, Meritage Pharma and Foresight acquisitions. In addition the Company made dividend payments of $134.4 million.
Net cash provided by financing activities was $554.5 million for the year to December 31, 2014, principally due to the drawings, net of subsequent repayments, made under the facilities to partially fund the ViroPharma acquisition. In addition the Company paid cash of $551.4 million to settle the convertible debt assumed with ViroPharma, received cash of $346.7 million upon settlement of a purchased call option acquired with ViroPharma and made dividend payments of $121.2 million.
Outstanding Letters of credit
At December 31, 2015, the Company had irrevocable standby letters of credit and guarantees with various banks totaling $48 million, providing security for the Company’s performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations and supply commitments.
Cash Requirements
At December 31, 2015 the Company’s cash requirements for short and long term liabilities reflected on the Balance Sheet and other contractual obligations were as follows:
(i)The Company leases certain land, facilities, motor vehicles and certain equipment under operating leases expiring through 2021.
(ii)Purchase obligations include agreements to purchase goods, investments or services (including clinical trials, contract manufacturing and capital equipment), including open purchase orders, that are enforceable and legally binding and that specify all significant terms. Shire expects to fund these commitments with cash flows from operating activities.
(iii)Unrecognized tax benefits and associated interest and penalties of $201.2 million are included within payments due in one to three years.
In addition to the above contractual obligations, the Company is committed to make milestone payments (principally arising from the in-licensing or acquisition of products, assets and businesses), contingent upon the occurrence of future events (and therefore payment is not yet due). At December 31, 2015, the Company is contingently committed to pay up to approximately $0.8 billion (aggregate contractual amount) in respect of potential future research and development milestone payments and up to approximately $1.1 billion (aggregate contractual amount) in respect of commercial milestones as a result of prior business combinations and in-licensing agreements. Payments under these agreements are generally due and payable only upon achievement of certain development, regulatory and commercial milestones.
From a business perspective, these payments signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from product sales. However, it is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing of their achievement. As a result, these potential payments are not included in the table of contractual obligations.
Off-balance sheet arrangements
There are no off-balance sheet arrangements, aside from those outlined above, that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Foreign currency fluctuations
A number of the Company’s subsidiaries have a functional currency other than the US Dollar. As such, the consolidated financial results are subject to fluctuations in exchange rates, particularly in the Euro, Swiss Franc and Pound Sterling against the US Dollar.
The accumulated foreign currency translation differences at December 31, 2015 of $156.4 million are reported within accumulated other comprehensive income in the consolidated balance sheet and foreign exchange losses for the year to December 31, 2015 of $26.5 million are reported in the consolidated statements of income.
At December 31, 2015, the Company had outstanding swap and forward foreign exchange contracts to manage the currency risk associated with intercompany transactions. For further information, see ITEM 7A:
ITEM 7A: Quantitative and qualitative disclosures about market risk
Treasury policies and organization
The Company’s principal treasury operations are coordinated by its corporate treasury function. All treasury operations are conducted within a framework of policies and procedures approved annually by the Board of Directors. As a matter of policy, the Company does not undertake speculative transactions that would increase its credit, currency or interest rate exposure.
Interest rate risk
The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities (see Liquidity and Capital Resources for details of each of the Company’s facilities). Interest on each of these facilities is set at floating rates, to the extent utilized. Shire’s exposure under these facilities is to US dollar interest rates. At December 31, 2015 the Company had fully utilized the January 2015 Facility Agreement and utilized $750 million of the RCF. Other facilities were not utilized at December 31, 2015.
The Company regularly evaluates the interest rate risk on its facilities. At December 31, 2015 the Company considered the risks associated with floating interest rates on borrowings under its facilities as appropriate. A hypothetical one percentage point increase or decrease in the interest rates applicable to drawings under the January 2015 Facility Agreement and the RCF at December 31, 2015 would increase interest expense by approximately $15 million per annum or would decrease the interest expense by approximately $7 million per annum.
The Company is also exposed to interest rate risk on its restricted cash, cash and cash equivalents and on foreign exchange contracts on which interest is set at floating rates. This exposure is primarily limited to US dollar, Pounds sterling and Euro interest rates. As the Company maintains all of its cash, liquid investments and foreign exchange contracts on a short term basis for liquidity purposes, this risk is not actively managed. In the year to December 31, 2015 the average interest rate received on cash and liquid investments was less than 1% per annum. These cash and liquid investments were primarily invested in US dollar term deposits with banks and money market and liquidity funds.
No derivative instruments were entered into during the year to December 31, 2015 to manage interest rate exposure. The Company continues to review its interest rate risk and the policies in place to manage the risk and may enter into derivative instruments to manage interest rate risk in the future.
Foreign exchange risk
The Company trades in numerous countries and as a consequence has transactional and translational foreign exchange exposures.
Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. The main trading currencies of the Company are the US dollar, Pounds Sterling, Swiss Franc, Canadian dollar and the Euro. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency.
Where significant exposures remain, the Company uses foreign exchange contracts (being spot, forward and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary. These assets and liabilities relate predominantly to inter-company financing. The foreign exchange contracts have not been designated as hedging instruments. Cash flows from derivative instruments are presented within net cash provided by operating activities in the consolidated
cash flow statement, unless the derivative instruments are economically hedging specific investing or financing activities.
Translational foreign exchange exposure arises on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.
At December 31, 2015 the Company had 39 swap and forward foreign exchange contracts outstanding to manage currency risk. The swap and forward contracts mature within 90 days. The Company did not have credit risk related contingent features or collateral linked to the derivatives. The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the consolidated balance sheet. As at December 31, 2015 the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities of $1.4 million, resulting in net derivative assets and derivative liabilities of $0.5 million and $10.1 million, respectively. Further details are included below.
Foreign exchange risk sensitivity
The following exchange rate sensitivity analysis summarises the sensitivity of the Company’s reported revenues and net income to hypothetical changes in the average annual exchange rates of the Euro, Pound Sterling and Swiss Franc against the US Dollar, (assuming a hypothetical 10% strengthening of the US Dollar against each of the aforementioned currencies in the year to December 31, 2015):
Increase/(reduction) in
revenues Increase/(reduction) in net income
$M $M
Euro (71) (45)
Pound Sterling (17) (9)
Swiss Franc (3.1) (2)
A 10% weakening of the US Dollar against the aforementioned currencies would have an equal and opposite effect.
The table below provides information about the Company's swap and forward foreign exchange contracts by currency pair. The table presents the net principal amounts and weighted average exchange rates of all outstanding contracts. All contracts have a maturity date of less than three months.
December 31, 2015
Principal
Value of
Amount
Receivable
Weighted
Average
Exchange Rate
Fair
Value
$’M
$’M
Swap foreign exchange contracts
Receive USD/Pay EUR 270.4 1.08 (1.1)
Receive GBP/Pay USD 258.1 1.52 (8.3)
Receive USD/Pay JPY 21.4 0.01 (0.3)
Receive USD/Pay SEK 14.4 0.12 (0.3)
Receive USD/Pay MXN 11.6 0.06 0.3
Receive USD/Pay AUD 7.4 0.72 0.1
Concentration of credit risk
Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, derivative contracts and trade accounts receivable (from product sales and from third parties from which the Company receives royalties). Cash is invested in short-term money market instruments, including money market and liquidity funds and bank term deposits. The money market and liquidity funds in which Shire invests are all triple A rated by both Standard and Poor’s and by Moody’s credit rating agencies.
The Company is exposed to the credit risk of the counterparties with which it enters into bank term deposit arrangements and derivative instruments. The Company limits this exposure through a system of internal credit limits which vary according to ratings assigned to the counterparties by the major rating agencies. The internal credit limits are approved by the Board and exposure against these limits is monitored by the corporate treasury function. The counterparties to these derivatives contracts are major international financial institutions.
The Company’s revenues from product sales in the US are mainly governed by agreements with major pharmaceutical wholesalers and relationships with other pharmaceutical distributors and retail pharmacy chains. For the year to December 31, 2015 there were three customers in the US that accounted for 47% of the Company’s product sales. However, such customers typically have significant cash resources and as such the risk from concentration of credit is considered acceptable. The Company has taken positive steps to manage any credit risk associated with these transactions and operates clearly defined credit evaluation procedures. However, an inability of one or more of these wholesalers to honor their debts to the Company could have an adverse effect on the Company’s financial condition and results of operations.
A substantial portion of the Company’s accounts receivable in countries outside of the United States is derived from product sales to government-owned or government-supported healthcare providers. The Company’s recovery of these accounts receivable is therefore dependent upon the financial stability and creditworthiness of the relevant governments. In recent years global and national economic conditions have negatively affected the growth, creditworthiness and general economic condition of certain markets in which the Company operates. As a result, in some countries outside of the US, specifically, in the Relevant Countries the Company is experiencing delays in the remittance of receivables due from government-owned or government-supported healthcare providers. The Company continued to receive remittances in relation to government-owned or government-supported healthcare providers in the Relevant Countries in the year to December 31, 2015, including receipts of $116.0 million and $100.0 million in respect of Spanish and Italian receivables, respectively. The Company’s exposure to Greece, both in terms of gross accounts receivable and annual revenues, is not material.
The Company’s aggregate accounts receivable, net of the allowance for doubtful accounts, in total from government-owned or government-supported healthcare providers in those territories in which the Company is experiencing the most significant delays, (i.e. in the “Relevant Countries”) are as follows:
Accounts receivable due from government-owned or government-supported healthcare providers in the Relevant Countries of $106 million (2014: $77 million) are split by country as follows: Greece $7 million (2014: $4 million); Italy $49 million (2014: $30 million); Portugal $9 million (2014: $11 million); Spain $33 million (2014: $15 million); and Argentina $8 million (2014: $17 million).
The Company continues to receive remittances in relation to government-owned or government-supported healthcare providers in the Relevant Countries and in the year to December 31, 2015 received $294 million in settlement of accounts receivable in the Relevant Countries; $3 million was from Greece; $100 million from Italy; $13 million from Portugal; $116 million from Spain; and $62 million from Argentina.
To date the Company has not incurred significant losses on the accounts receivable in the Relevant Countries, and continues to consider that such accounts receivable are recoverable.
Other than the accounts receivable from government-owned or supported healthcare providers outlined above, the Company does not hold any other government debt from the Relevant Countries. Additionally the Company does not consider it is currently exposed to significant credit risk outside of the Relevant Countries.
The Company continues to evaluate all its accounts receivable for potential collection risks and has made provision for amounts where collection is considered to be doubtful. If the financial condition of the Relevant Countries or other countries suffer significant deterioration, such that their ability to make payments becomes uncertain, additional allowances for doubtful accounts may be required, and losses may be incurred, in future periods. Any such loss could have an adverse effect on the Company’s financial condition and results of operations.
ITEM 8:
ITEM 8: Financial statements and supplementary data
The consolidated financial statements and supplementary data called for by this item are submitted as a separate section of this report. See ITEM 15: Exhibits and financial statement schedules.
ITEM 9:
ITEM 9: Changes in and disagreements with accountants on accounting and financial disclosure
Not applicable.
ITEM 9A:
ITEM 9A: Controls and procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that the Company file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
The Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, has performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (including those applicable to the Income Access Share Trust) (as defined in Exchange Act Rule 13a-15(e)), as at December 31, 2015.
The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (including those applicable to the Income Access Share Trust) are effective at the reasonable level of assurance to ensure that information required to be disclosed in reports that the Company file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13(a)-15(f) or 15(d)-15(f) promulgated under the US Securities Exchange Act of 1934.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting (including those applicable to the Income Access Share Trust) as at December 31, 2015. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control-Integrated Framework issued in 2013 (the “2013 COSO Framework”). Based on its assessment, management believes that, as at December 31, 2015, the Company’s internal control over financial reporting is effective based on those criteria.
Deloitte LLP, an independent registered public accounting firm, has issued an audit report on the Company’s internal control over financial reporting, including those controls applicable to the Income Access Share Trust. This report appears on page of the Company’s consolidated financial statements contained in ITEM 15: Exhibits and financial statement schedules of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
The Company has an integrated information system covering financial processes, production, logistics and quality management. Various upgrades and new implementations were made to the information system during the fourth quarter of 2015 and 2014. The Company reviewed each system change as it was implemented together with any internal controls affected. Alterations were made to affected controls at the time the system changes were implemented. Management believes that the controls as modified are appropriate and functioning effectively.
ITEM 9B:
ITEM 9B: Other Information
None
PART III
ITEM 10:
ITEM 10: Directors, executive officers and corporate governance
Directors of the Company
David Kappler will be stepping down as Deputy Chairman and Senior Independent Director of the Board of Directors. William Burns, Non-Executive Director and member of the Remuneration, Nomination and Science & Technology Committees, will be appointed Senior Independent Director. Both of these changes will be effective upon the conclusion of the Annual General Meeting (“AGM”) to be held on April 28, 2016.
Executive Officers of the Company
Name Age Position
Dr. Flemming Ornskov CEO
Jeffrey Poulton CFO (appointed as Interim CFO and joined the Executive Committee on January 1, 2015, and appointed as CFO on April 29, 2015)
Mark Enyedy Head of Corporate Development
Ginger Gregory Chief Human Resources Officer
William Mordan General Counsel and Company Secretary (appointed and joined the Executive Committee on October 1, 2015)
Dr. Philip Vickers Head of Research and Development
For the purposes of the NASDAQ corporate governance rules, the independent directors are Dominic Blakemore, Olivier Bohuon, William Burns, Dr. Steven Gillis, Dr. David Ginsburg, David Kappler, Susan Kilsby, Sara Mathew and Anne Minto. There is no family relationship between or among any of the directors or executive officers.
Non-Executive Directors are appointed by the Board ordinarily for a term of two years, subject to reappointment by the Board. In addition, in accordance with the UK Corporate Governance Code issued by the UK Financial Reporting Council in September 2014 (the “UK Governance Code”), the Company’s Directors, including Non-Executive Directors, are subject to annual re-election by shareholders.
The current terms of the Non-Executive Directors are as set out below:
Name Date of Term Expiration
Susan Kilsby April 28, 2016
David Kappler End of the AGM to be held in 2016
Dominic Blakemore December 31, 2017
Olivier Bohuon June 30, 2017
William Burns March 14, 2016
Dr. Steven Gillis September 30, 2016
Dr. David Ginsburg June 15, 2016
Sara Mathew August 31, 2017
Anne Minto June 15, 2016
Executive Directors are appointed pursuant to service agreements, which are not limited in term.
Susan Kilsby
Non-Executive Chairman
Ms. Kilsby was appointed to the Board on September 1, 2011, and was appointed Chairman on April 29, 2014. She is also a member of the Nomination Committee. Ms. Kilsby currently holds Non-Executive Directorships at Keurig Green Mountain, Inc., BBA Aviation plc and Fortune Brands Home & Security, Inc. She brings to her role extensive M&A and finance experience having enjoyed a distinguished global career in investment banking. She held senior positions with The First Boston Corporation, Bankers Trust, Barclays de Zoete Wedd and most recently Credit Suisse where she was Chairman of the EMEA Mergers & Acquisitions team until 2009 and a part-time senior advisor until 2014. Ms. Kilsby is also a former Director of L’Occitane International S.A. and Coca-Cola HBC AG. She holds a BA in Economics and a MBA.
Dr. Flemming Ornskov
Chief Executive Officer
Dr. Ornskov was appointed to the Board on January 2, 2013, serving as Chief Executive Officer Designate prior to his appointment as Chief Executive Officer on April 30, 2013. Dr. Ornskov brings to his role his operational and medical knowledge and his extensive international, strategic and operational experience in the pharmaceutical sector. He formerly held the position of Non-Executive Chairman of Evotec AG and was Non-Executive Director of PCI Biotech Holding ASA. From 2010 to 2012 he was Chief Marketing Officer and Global Head, Strategic Marketing for General and Speciality Medicine at Bayer. From 2008 to 2010 Dr. Ornskov served as Global President, Pharmaceuticals and OTC at Bausch & Lomb, Inc. He also served as Chairman, and later as President and Chief Executive Officer, of Life-Cycle Pharma A/S from 2006 to 2008, and as President and Chief Executive officer of Ikaria, Inc. from 2005 to 2006. Earlier in his pharmaceutical career Dr. Ornskov held roles of increasing responsibility at Merck & Co., Inc. and Novartis AG, following a distinguished period spent in hospitals and academic medicine. Dr. Ornskov received his MD from the University of Copenhagen, MBA from INSEAD and Master of Public Health from Harvard University.
Jeffrey Poulton
Chief Financial Officer
Mr. Poulton was appointed to the Board on April 29, 2015, and brings to his role his financial, commercial and strategic acumen. Since joining Shire in 2003 Mr. Poulton has held leadership positions in finance supporting the Neuroscience, Gastrointestinal and Rare Diseases business units as well as the positions of Interim Chief Financial Officer and Head of Investor Relations. In addition, Mr. Poulton oversaw the operations of the Rare Diseases business unit in North America, Latin America and Asia Pacific, as well as leading the integration of the legacy-Viropharma rare disease products into the Shire portfolio. Prior to joining Shire, Mr. Poulton spent time at Cinergy Corp. and PPG Industries in a variety of corporate finance and business development roles, in addition to serving as a commissioned officer in the U.S. Navy. He received a Bachelor of Arts in Economics from Duke University and a Master of Business Administration in Finance from the Kelly School of Business at Indiana University.
David Kappler
Deputy Chairman and Senior Independent Non-Executive Director
Mr. Kappler was appointed to the Board on April 5, 2004, and was later appointed as Senior Independent Non-Executive Director in July 2007 and as Deputy Chairman in June 2008. On February 10, 2016, Shire announced that Mr. Kappler will step down as Deputy Chairman and Senior Independent Director of the Board of Directors, effective upon the conclusion of the AGM to be held on April 28, 2016. He is also Chairman of the Nomination Committee and a member of the Audit, Compliance & Risk Committee. Mr. Kappler brings to the Board his extensive
knowledge and experience in financial reporting, risk management and internal financial controls. He holds the position of Non-Executive Director at Flybe Group plc, served on the Board of InterContinental Hotels Group plc until 2014, was Chairman of Premier Foods plc until 2010 and held directorships at Camelot Group plc and HMV Group plc. He retired from Cadbury Schweppes plc in 2004 after serving as Chief Financial Officer since 1995. Mr. Kappler worked for the Cadbury Schweppes Group between 1965 and 1984 and rejoined the company in 1989 following its acquisition of the Trebor Group, where he was Financial Director. Mr. Kappler is a Fellow of the Chartered Institute of Management Accountants.
Dominic Blakemore
Non-Executive Director
Mr. Blakemore was appointed to the Board on January 1, 2014, and is Chairman of the Audit, Compliance & Risk Committee. Mr. Blakemore brings to the Board strategic and financial experience as Group Chief Operating Officer, Europe at Compass Group PLC having previously served as Chief Financial Officer. He has also held the positions of Chief Financial Officer at Iglo Foods Group and European Finance & Strategy Director, Corporate Finance Director, and Group Financial Controller at Cadbury plc. Earlier in his career he worked at PricewaterhouseCoopers where he advised pharmaceutical sector clients.
Olivier Bohuon
Non-Executive Director
Mr. Bohuon was appointed to the Board on July 1, 2015, and is a member of the Science & Technology Committee. He brings to the Board his extensive international business and leadership experience gained through roles held in pharmaceutical and healthcare companies across Europe, the Middle East and the US. Mr. Bohuon currently holds the positions of Chief Executive Officer at Smith & Nephew plc and Non-Executive Director at Virbac SA, having previously served as Chief Executive Officer and President of Pierre Fabre Group and as President of Abbott Pharmaceuticals; a division of US-based Abbott Laboratories. He has also held diverse commercial leadership positions at GlaxoSmithKline and its predecessor companies in France. Mr. Bohuon has an MBA from HEC Paris School of Management and a doctorate in Pharmacy from the University of Paris.
William Burns
Non-Executive Director
Mr. Burns was appointed to the Board on March 15, 2010, and is a member of the Nomination Committee, the Remuneration Committee and the Science & Technology Committee. On February 10, 2016, Shire announced that Mr. Burns, will be appointed Senior Independent Director, effective upon the conclusion of the AGM to be held on April 28, 2016. Mr. Burns brings to the Board extensive international R&D, commercial, business development and operational experience in the pharmaceutical sector. He is Chairman of Biotie Therapies Corp., Vice Chairman of Vestergaard Frandsen and holds the position of Non-Executive Director at Mesoblast Limited. In addition, he holds positions at Wellcome Trust, the Institute of Cancer Research and the University of Cologne/Bonn Center for Integrated Oncology. Mr. Burns worked for Roche from 1986 until 2009; most recently holding the position of CEO of their pharmaceuticals division and serving as a member of the Roche Group Corporate Executive Committee. He holds a BA (Hons) in Business Economics from the University of Strathclyde.
Dr. Steven Gillis
Non-Executive Director
Dr. Gillis was appointed to the Board on October 1, 2012 and is a member of the Audit, Compliance & Risk Committee, the Remuneration Committee and the Science & Technology Committee. Dr. Gillis brings to the Board his extensive technical and scientific knowledge and commercial experience. He is currently a Managing Director at ARCH Venture Partners; a provider of venture capital for technology firms. He is also Chairman of VBI Vaccines Inc. and Non-Executive Director of Pulmatrix, Inc. Dr. Gillis was a founder and director of Corixa Corporation, acquired by GlaxoSmithKline in 2005, and before that a founder and director of Immunex Corporation.
An immunologist by training Dr. Gillis has authored more than 300 peer-reviewed publications in the areas of molecular and tumor immunology. He is credited as being a pioneer in the field of cytokines and cytokine receptors, directing the development of multiple marketed products including Leukine, (GM-CSF), Prokine (IL-2) and Enbrel (soluble TNF receptor-Fc fusion protein) as well as the regulatory approval of Bexxar (radiolabeled anti-CD20) and the novel vaccine adjuvant, MPL. Dr. Gillis received his BA from Williams College and his Ph.D. from Dartmouth College.
Dr. David Ginsburg
Non-Executive Director
Dr. Ginsburg was appointed to the Board on June 16, 2010, is Chairman of the Science & Technology Committee and is a member of the Nomination Committee. Dr. Ginsburg brings to the Board his clinical medical experience in internal medicine, hematology-oncology, and medical genetics, as well as his extensive basic biomedical laboratory research expertise. He currently holds the positions of James V. Neel Distinguished University Professor of Internal Medicine, Human Genetics and Pediatrics at the University of Michigan and Howard Hughes Medical Institute Investigator. Dr. Ginsburg obtained his BA at Yale University, MD at Duke University and completed his medical and research training at Harvard Medical School. He is the recipient of numerous honours and awards, including election to membership at the National Academy of Sciences, the Institute of Medicine and the American Academy of Arts and Sciences.
Sara Mathew
Non-Executive Director
Ms. Mathew was appointed to the Board on September 1, 2015, and is a member of the Audit, Compliance & Risk Committee and the Remuneration Committee. Ms. Mathew brings to the Board her financial, strategic and technological experience having held various corporate leadership roles. She currently holds the position of Non-Executive Director at Avon Products, Inc., Campbell Soup Company and Freddie Mac and is an International Advisory Council Member at Zurich Financial Services Group. Until 2013 Ms. Mathew served as Chairman, President and Chief Executive Officer of Dun & Bradstreet, Inc. having spent 12 years at the company. Prior to this, Ms. Mathew worked for 18 years at Procter & Gamble where she held a variety of global finance and management positions including Vice President, Finance, Australia, Asia and India. Ms. Mathew received her MBA from Xavier University, her Accounting degree from the Institute of Cost & Works Accountants and her Bachelor’s degree in Physics, Mathematics and Chemistry from the University of Madras.
Anne Minto OBE
Non-Executive Director
Ms. Minto was appointed to the Board on June 16, 2010. She is Chairman of the Remuneration Committee and a member of the Nomination Committee. Ms. Minto brings to the Board her extensive legal, commercial and remuneration experience. She holds Non-Executive Directorships at Tate & Lyle PLC, ExlService Holdings, Inc. and the University of Aberdeen Court and is Vice Chairman and Trustee of the University of Aberdeen Development Trust. Ms. Minto held the position of Group Director, Human Resources at Centrica plc from 2002 to 2011 and was a member of the Centrica Executive Committee. Her extensive business career includes senior management roles at Shell UK, the position of Deputy Director-General of the Engineering Employers’ Federation and the position of Group Director Human Resources at Smiths Group plc. She is also a former Director of Northumbrian Water plc and SITA UK. Ms. Minto holds a Law degree, a postgraduate diploma in Human Resources and is a qualified lawyer. She is also a Fellow of the Chartered Institute of Personnel & Development, the Royal Society of Arts and the London City and Guilds and a Member of Law Society of Scotland.
David Stout
Former Non-Executive Director
Mr. Stout was a member of the Board from October 31, 2009, until April 28, 2015. He also served as a member of the Audit, Compliance & Risk Committee and the Remuneration Committee. Whilst a Non-Executive Director at Shire Mr. Stout held directorships at Jabil Circuit, Inc. and Airgas, Inc. He brought to the Board extensive international sales, marketing, operational and supply chain experience gained in the pharmaceutical sector. Mr. Stout was President, Pharmaceutical Operations at GlaxoSmithKline, where he was responsible for the company’s global pharmaceutical operations from 2003 to 2008. Prior to that he was President of GlaxoSmithKline’s US pharmaceuticals business and before that SmithKline Beecham’s North-American pharmaceuticals business. Before joining SmithKline Beecham, Mr. Stout worked for many years at Schering-Plough. He is also a former Director of Allos Therapeutics, Inc. Mr. Stout holds a BA in Biology.
Shire Executive Committee
Mark Enyedy
Head of Corporate Development
Mr. Enyedy has been with Shire since 2013. He is Head of Corporate Development and held the additional positions of General Counsel and Company Secretary on an interim basis during 2015. Mr. Enyedy is also a member of Shire’s Executive Committee. He previously served as Shire’s Internal Medicine Business Unit Head from August 2013 until April 2014. Prior to joining Shire Mr. Enyedy was Chief Executive Officer at Proteostasis Therapeutics, Inc. Mr. Enyedy also held positions with Genzyme Corporation and practiced law at the firm Palmer & Dodge.
Ginger Gregory
Chief Human Resources Officer
Ms. Gregory joined Shire in 2014. Ms. Gregory is Chief Human Resources Officer and a member of Shire’s Executive Committee. Ms. Gregory was previously Head of Human Resources at Dunkin’ Brands Group, Inc. prior to which she held various roles at Bristol-Myers Squibb Company, Novo Nordisk A/S and Novartis AG.
William Mordan
General Counsel and Company Secretary
Mr. Mordan joined Shire in 2015 as General Counsel and Company Secretary. He is also a member of Shire’s Executive Committee. Mr. Mordan was previously General Counsel and Company Secretary at Reckitt Benckiser Group plc. Prior to that he held various roles at Procter & Gamble in the US, Mexico and Brazil. During his career he also served as a clerk in the US Court of Appeals for the Sixth Circuit.
Dr. Philip Vickers
Head of Research and Development
Dr. Vickers has been with Shire since 2010. Dr. Vickers is Head of Research and Development and a member of Shire’s Executive Committee. Dr. Vickers previously led Research and Development within Shire’s Rare Diseases Business Unit from October 2010 until September 2013. Prior to that Dr. Vickers was Chief Scientific Officer and President at Resolvyx Pharmaceuticals, Inc., before which he worked for Boehringer Ingelheim Pharmaceuticals, Inc. Dr. Vickers also held positions at Pfizer, Inc. and Merck & Co., Inc.
Audit, Compliance & Risk Committee Financial Expert
The members of the Audit, Compliance & Risk Committee as at December 31, 2015, were Mr. Blakemore, Dr. Gillis, Mr. Kappler and Ms. Mathew.
The Board has determined that Mr. Blakemore is the serving financial expert on the Audit, Compliance & Risk Committee and that he is independent as defined under applicable SEC rules. A description of Mr. Blakemore’s relevant experience is provided above.
Code of Ethics
Shire’s Board of Directors has adopted a Code of Ethics that applies to all its directors, officers and employees, including its Chief Executive Officer, Chief Financial Officer and Group Financial Controller. The Code of Ethics is posted on Shire’s website at www.shire.com.
NASDAQ Corporate Governance Exemption
As a foreign private issuer incorporated in Jersey (Channel Islands) with its principal listing on the London Stock Exchange, Shire follows the laws of Jersey and the UK Governance Code, its “home country” corporate governance practices, in lieu of the provisions of the NASDAQ Stock Market’s Marketplace Rule 5600 series that apply to the constitution of a quorum for any meeting of shareholders. The NASDAQ Stock Market’s rules provide for a quorum of no less than 33⅓% of Shire’s outstanding shares. However, Shire’s Articles of Association provide that a quorum has been established when two members are present in person or by proxy and entitled to vote except where the rights attached to any existing class of shares are proposed to be varied, and then the quorum shall be two persons entitled to vote and holding or representing by proxy not less than one-third in nominal value of the issued shares of the class.
ITEM 11:
ITEM 11: Executive compensation
In respect of the financial year to December 31, 2015, the total compensation paid to Shire plc’s directors and executive officers as a group for the periods during which they served in any capacity was $19.63 million. The total amounts set aside or accrued by the Company to provide pension, retirement or similar benefits for this group was $1.0 million. During 2015, members of the group were granted awards over ordinary shares and ADSs of the Company. All such holdings were issued pursuant to the various executive share plans described in Note 28 to the Company’s consolidated financial statements contained in ITEM 15: Exhibits and financial statements schedules of this Annual Report on Form 10-K.
The Company provides information on the individual compensation of its directors in the Directors’ Remuneration Report included within its Annual Report filed with the United Kingdom Listing Authority (“UKLA”). As the Directors’ Remuneration Report is made publicly available, it is reproduced in full below. As at the time of filing this Form 10-K, the Directors’ Remuneration Report is subject to approval by Shire plc’s shareholders at the Company’s AGM. The Directors’ Remuneration Report contains financial measures not calculated and presented in accordance with US GAAP. The measures are identified by use of the descriptive term “Non-GAAP”. The most directly comparable measures calculated and presented in accordance with US GAAP, and reconciliation to such measures, are provided on page 120.
Directors’ Remuneration Report
Table of contents to the Directors’ Remuneration Report
This report has been prepared in compliance with Schedule 8 of the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended by the 2013 Regulations) (the “Schedule 8 Regulations”), as well as the Companies Act 2006 and other related regulations. This report is set out in the following key sections:
Part 1 - Annual Statement
a) Remuneration Committee Chairman’s Statement
b) The Company's remuneration at a glance
Part 2 - Annual Report on Remuneration
a) Implementation of Directors’ Remuneration Policy in 2016
b) 2015 single total figure of remuneration for Executive Directors (subject to audit)
c) 2015 single total figure of remuneration for the Chairman and Non-Executive Directors (subject to audit)
d) Scheme interests awarded during 2015 (subject to audit)
e) Payments to past Directors (subject to audit) and payments for Loss of Office (subject to audit)
f) Directors’ shareholdings and scheme interests (subject to audit)
g) TSR performance graph and CEO pay
h) Percentage change in CEO remuneration
i) Relative importance of spend on pay
j) Remuneration Committee
Appendix - Directors’ Remuneration Policy - key elements
a) Executive Director remuneration policy
b) Chairman and Non-Executive Director remuneration policy
c) Recruitment remuneration policy
d) Service contracts and termination arrangements
e) Shareholder engagement
f) Remuneration of other employees
The Annual Report on Remuneration (Part 2) will be put to an advisory shareholder vote at the 2016 Annual General Meeting (“AGM”). The Directors’ Remuneration Policy (the “Policy”) was approved by shareholders at the 2015 AGM (April 28, 2015) and is intended to be effective for a period of three years. The key parts of the Directors’ Remuneration Policy are provided as an Appendix for completeness. The complete Policy as approved by shareholders can be found within the 2014 Directors’ Remuneration Report available on the Company’s website.
Part 1 - Annual Statement
a) Remuneration Committee Chairman’s Statement
Dear Shareholder
On behalf of the Board, I am pleased to present the Remuneration Committee’s report for the financial year ending December 31, 2015.
Following another year of significant growth and continued change for Shire, I would like to take this opportunity to provide you with an overview of the Committee’s major decisions taken during 2015, together with the context in which these decisions were taken.
We were delighted to receive a high level of shareholder support for the Executive Director’s Remuneration Policy (the Policy) at the 2015 AGM, with 94% of shareholders voting in support of the Company’s Policy. We remain confident that for 2016, the Policy remains appropriate for the business and there are therefore no proposed changes for this year.
To help shareholders understand the Company’s remuneration structure and its link to the Company’s strategy and performance, we have set out the Company’s “remuneration at a glance” on the coming pages. This is followed by the Annual Report on Remuneration which gives details of how the approved Policy was implemented in 2015 and is proposed to be applied in 2016. For completeness, the key parts of the Company’s approved Directors’ Remuneration Policy are provided as an appendix to this report.
Context of the Committee’s decisions
It was another year of very good performance for the business in 2015 as the Company forged ahead in executing its strategy to be the leading global biotech company focused on rare diseases and other specialty pharmaceutical areas. Highlights included the acquisitions of NPS, Meritage and Dyax (in early 2016) and the approval of Natpara as well as the further development of the Company’s rare diseases therapeutics pipeline. The Company’s underlying business continued to perform well.
A number of new appointments were made to the Company’s leadership team at the executive management level: Jeff Poulton (Chief Financial Officer and Board member), Bill Mordan (General Counsel and Corporate Secretary) and Jeff Rosenbaum (Chief Compliance and Risk Officer). In addition, Sara Mathew and Olivier Bohuon were appointed to the Board as Non-Executive Directors. The Company’s new appointments bring a wealth of experience which will be valuable in helping the business to continue to deliver against its ambitious targets.
The Company again recorded strong financial performance in 2015 against its key performance metrics. Highlights include:
·Net Product Sales increased to $6,100 million (2014: $5,830 million)
·Non GAAP EBITDA1 increased to $2,924 million (2014: $2,756 million)
·Non GAAP Adjusted ROIC1 of 10.3% (2014: 14.7%). As expected, this represents a lower return due to a significant increase in the invested capital in the business primarily due to the acquisition of NPS Pharmaceuticals in Q1 2015
1 This is a Non GAAP financial measure. For reconciliation to US GAAP please see page 120.
CEO salary increase
The Committee considered a number of key issues during the year, the most significant of which was to award a 25% salary increase to the CEO, Dr. Flemming Ornskov (from $1,350,000 to $1,688,000) effective from July 1, 2015. The increase is within the parameters of the approved Remuneration Policy. Dr. Ornskov’s salary will be frozen at this level for three years and he will not be eligible for a further salary increase until July 1, 2018 (including in the event that the Baxalta deal is successfully completed).
I engaged with the Company’s largest shareholders in January 2016 prior to the publication of this report to inform them of the decision and to explain the rationale. Under normal circumstances, I would have liked to discuss the decision with the Company’s shareholders at the time of the increase. However, this was not possible owing to the ongoing negotiations with Baxalta on the proposed combination. Furthermore, the Committee did not feel that it was appropriate to delay the increase in light of Dr. Ornskov’s criticality to the business in continuing to deliver the Company’s long-term strategy, the positioning of his package compared to Shire’s peer groups, and his performance and development in role since his appointment. Further details on the Committee’s rationale for awarding Dr. Ornskov this increase are as follows:
·Motivating and retaining talent: The Remuneration Committee was acutely aware in the run up to the summer of 2015 that the CEO's remuneration was positioned behind his peers and that there was an immediate requirement to take action to ensure the CEO's retention given his attractiveness as a potential recruitment target. In this context the Remuneration Committee determined it was appropriate to make the salary increase in July 2015 despite the uncertainty surrounding the outcome of a possible transaction with Baxalta.
·Sustainability of the Shire strategy: The Board strongly believes that the continuity of Dr. Ornskov’s outstanding leadership and drive is key to the execution of Shire’s long-term strategic plan. Since his appointment, Dr. Ornskov’s vision has transformed the business to position Shire’s future as the global leader in rare diseases. Through his efforts, Shire has generated superior financial performance in the business. In 2014 the Company achieved 23% product sales growth, a more than six percentage point improvement in Non GAAP EBITDA margin, and 39% growth in Non GAAP EBITDA itself. This was achieved against the backdrop of completing 11 acquisitions since the start of 2013, continued improvements in the Company’s pipeline, market leading innovation in the digitization of the Company’s commercial model, Shire’s approach to R&D, and improved results in protein and cell engineering. The continuation of this accelerated business transformation and associated growth for shareholders is critically dependent on Dr. Ornskov’s continued leadership in order to deliver the growth set out as part of Shire’s long-term strategic plan.
·Exceptional performance for the Company’s shareholders: The increase recognizes the shareholder value that has been created since Dr. Ornskov’s appointment and his role in delivering that value. For context, since the appointment of Dr. Ornskov up to December 31, 2015, Shire’s total shareholder return (TSR) has been 128% versus a FTSE 50 (excluding Financial Services) median of 26% which ranks Shire 2nd amongst FTSE 50 (excluding Financial Services) companies. Shire’s TSR growth over the period has ranked second and third against the US BioPharma and Global Biotech peer groups respectively. This has been achieved alongside strong growth in earnings per share (EPS) since Dr. Ornskov’s appointment.
·Size and complexity of the business: Shire’s exceptional performance has resulted in a more than doubling of the Company’s market capitalization from $17.0bn to $39.8bn during Dr. Ornskov’s tenure to December 31, 2015. The increase to Dr. Ornskov’s salary
is therefore also a recognition that the business is of significantly greater size and complexity than at Dr. Ornskov’s appointment.
·Competitive positioning of package: The salary increase ensures Dr. Ornskov’s compensation package remains retentive and competitive versus peers. This is particularly relevant in the face of possible recruitment pressure from competitors, for example the US BioPharma and Global Biotech markets (Shire’s primary competitors). An increase in Dr. Ornskov’s compensation package better aligns his positioning against the two sector peer groups used by the Committee in line with its Remuneration Policy. Against the secondary reference peer group of the FTSE 50 (excluding Financial Services) the total compensation package is aligned with the upper quartile of the market, consistent with Shire’s performance.
In making this increase the Committee was extremely mindful of the fact that this increase is high compared to market norms and that it followed a number of other changes to his remuneration arrangements, approved by shareholders at the 2015 AGM. However, in light of the unique combination of reasons I have outlined above, the Committee determined that this was the right thing to do in the best interests of the business and the Company’s shareholders. We also gained comfort from the feedback I had received during the 2015 AGM shareholder consultation, in which nearly all of the Company’s shareholders I spoke to highlighted the value they placed in Dr. Ornskov as CEO and the criticality to the business of retaining him at this time. Recognising the scale of the increase, the Committee considered making three smaller (circa 7% p.a.) increases over the next three years. However, we felt that making the increase in one single step better addressed the issues we were facing and enabled us to position Dr. Ornskov’s compensation appropriately compared to the Company’s peers and to demonstrate the value the Board and shareholders place in his outstanding leadership skills, which have contributed significantly to the business, and his instrumental role in achieving Shire’s long-term plan.
Finally, the Committee recognizes that the salary increase flows through to incentives but is satisfied that it contributes to a remuneration package which is appropriate for a company of Shire’s size and a CEO of Dr. Ornskov’s caliber, positioned as it is, at the median of the US BioPharma peer group, below the lower quartile of the Global Biotech peer group and above the upper quartile of the FTSE 50 excluding Financial Services.
Appointment of new CFO
Jeff Poulton was appointed as the Company’s new Chief Financial Officer (CFO) and was made a member of the Board of Directors, effective April 29, 2015. Following an extensive search of both internal and external candidates, the Board unanimously agreed that Mr. Poulton’s expertise and extensive knowledge of Shire’s business and markets set him apart as CFO and will further strengthen the Board as it oversees the Company’s continued growth. The Committee carefully considered the appropriate remuneration arrangements as part of the appointment process and in line with Shire’s approved remuneration Policy. Details of Mr. Poulton’s remuneration arrangements are provided in the “At a glance” section.
Remuneration outcomes
Overall it has been a strong year for the business in terms of both financial performance and product development. This has been reflected in the outcomes achieved under the incentive arrangements, with the 2015 Executive Annual Incentive Plan (EAIP) paying out at 100% and 66% of the maximum opportunity for the CEO and CFO respectively and the 2013 Performance Share Plan (PSP) vesting at 100% of maximum, on the basis of a Compound Annual Growth Rate (CAGR) of 17.9% in Non GAAP EBITDA and an average of 175 basis points increase per annum in Non GAAP Adjusted ROIC over the 2012 to 2015 period.
I hope you find the contents of this report informative. Finally, I would like to thank my fellow Committee members as well as the internal and external teams who supported us with their commitment and hard work over the past year.
Anne Minto
Chairman of the Remuneration Committee
b) The Company’s remuneration at a glance
Summary of the Company’s strategic priorities
The Executive Director remuneration policy supports Shire’s strategic drivers, which are summarized below:
·Growth - Drive performance from the Company’s currently marketed products to optimize revenue growth and cash generation.
·Innovation - Build the Company’s future assets through both R&D and business development to deliver innovation and value for the future.
·Efficiency - Operate a lean and agile organization and reinvest for growth.
·People - Foster a high performance culture where the Company attracts, retains and promotes the best talent.
The Committee believes that the Executive Directors’ remuneration policy appropriately supports shareholder value creation by delivering sustainable performance consistent with the Company’s strategy and appropriate risk management.
Summary of policy
Element Summary description Maximum opportunity
Base salary Base salaries are set at a level to recognize the market value of the role, an individual’s skills, experience and performance, as well as their contribution to leadership and Company strategy. Increases are made in line with the average of employees’ salary increases, unless the Committee determines otherwise based on factors as set out in the Policy.
Pension and benefits Pension and other benefits provided in line with market practice. Fixed retirement benefits up to 30% of annual salary and levels of benefits are defined by market rates.
Executive Annual Incentive Plan (“EAIP”) Annual bonus is payable each year subject to performance against a scorecard consisting of financial and non financial targets (weighting of 75% and 25% respectively). 25% of any award is deferred as shares for a period of three years. Annual maximum equal to 180% of base salary.
Long-Term Incentive Plan (“LTIP”) Stock Appreciation Rights (“SARs”) and Performance Share Units (“PSUs”)1 vest subject to the achievement of Product Sales and Non GAAP EBITDA targets at the end of a three year period. A Non GAAP Adjusted Return on Invested Capital (“ROIC”) underpin is also used to test underlying performance. Face value of 480% of base salary for SAR awards and 360% of base salary for PSU awards can be granted annually.
1 Formerly referred to as Performance Share Awards (“PSAs”), name changed in the LTIP approved by shareholders at the 2015 AGM.
Remuneration arrangements for new CFO
Jeff Poulton was appointed as the Company’s new CFO and a member of the Board on April 29, 2015. Jeff has held a number of roles at Shire, most recently serving as Interim CFO since January 2015, while overseeing Investor Relations. As part of the appointment process, the Committee carefully considered his remuneration arrangements and took the following decisions in line with Shire’s approved remuneration Policy:
·His salary on appointment was set at $575,000.
·He receives a fixed contribution of 25% of base salary by way of a retirement benefits provision.
·His maximum bonus opportunity is 160% of base salary.
·The face value of his LTIP award is 662% of base salary.
Jeff Poulton’s contract does not have a fixed term but provides for a notice period of 12 months from both parties, in line with the approved remuneration Policy. His contract is dated April 29, 2015.
2015 single total figure of remuneration for Executive Directors
1 The vesting value is calculated using the average share price over the last quarter of 2015 of $207.85 per the relevant UK regulations. Note that Dr. Ornskov’s disclosed long-term incentive awards are not due to vest until February and May 2016. The award vesting in February 2016 represents his annual equity grant under the PSP and has an estimated vesting value of $12,341,138. The award vesting in May 2016 represents his replacement equity award granted upon joining the Company which was subject to performance conditions and has an estimated vesting value of $4,473,222. 76% of the total LTIP value of $16,814,360 is delivered as a result of share price growth over the vesting period.
2 Jeff Poulton was appointed as CFO on April 29, 2015 and therefore the figures above reflect the remuneration he received following his appointment.
CEO base salary increase
Dr. Ornskov’s base salary was increased to $1,688,000 effective July 1, 2015 in light of his exceptional performance since his appointment as CEO, the increased size and complexity of the business and the need for Dr. Ornskov’s compensation package to be positioned competitively against Shire’s peer groups. Dr. Ornskov’s salary will be frozen at this level for three years and he will not be eligible for a further salary increase until July 1, 2018 (including in the event that the Baxalta deal is successfully completed).
Incentive arrangements - performance outcomes for 2015
EAIP - This has been another exceptional year for Shire and as such, the Committee determined that a bonus payment equal to 180% and 106% of 2015 salary would be paid to the CEO and CFO respectively following an assessment of the 2015 corporate scorecard, as set out below, and taking into account the impact on the Company’s performance of strategic actions together with performance relative to overall objectives.
Description Weighting Target Corporate Scorecard multiplier
Financial 75%
• Net products sales (25%)
• Non GAAP EBITA (30%)
• Non GAAP Adjusted ROIC (20%)
• $5,996m
• $2,633m
• 9.5%
• 129.5%
Pipeline & Pre-commercial
(Non Financial)
15%
Growth
• Optimize In-line assets via commercial development
• Progress pipeline and acquire core / adjacent assets
Innovation
• Expand the Company’s rare disease business expertise and offerings
• Extend portfolio to new indications and therapeutic areas
• 159.5%
Organizational Effectiveness
(Non Financial)
10%
Efficiency
• Operate a lean and agile organization
• Concentrate operations in Lexington and Zug
People
• Foster and reward a high performance culture
• Attract, develop and retain the best talent
Long-term incentives - For the CEO’s 2013 PSP awards (which comprise his 2013 annual equity grant and replacement awards granted upon joining), the Committee determined that 100% of the awards would vest after taking into account performance against the 2013 performance matrix (achievement of a CAGR of 17.9% in Non GAAP EBITDA and an average of 175 basis points increase p.a. in Non GAAP Adjusted ROIC over the 2012 to 2015 period), as well as an overall assessment of the underlying performance of the Company over the performance period ending December 31, 2015. As the 2013 awards are not scheduled to vest until February and May 2016 (after the date of this report), an estimated vesting value of $16,814,360 has been included in the single figure table, based on the average share price over the last quarter of 2015 of $207.85.
No awards that have been previously granted to the CFO were scheduled to vest subject to the achievement of performance conditions for the year ending December 31, 2015.
Remuneration Scenarios
The composition and value of the Executive Directors’ remuneration packages in three performance scenarios is set out in the charts below. These show that the proportion of the package delivered through long-term incentives supports the long-term nature of the business and changes significantly across the performance scenarios. The level of remuneration is in accordance with the Policy.
CEO (Flemming Ornskov)
CFO (Jeff Poulton)
The scenarios are defined as follows:
In accordance with the Schedule 8 Regulations, no allowance has been made for share price appreciation. SAR awards are valued with the same Black-Scholes model that is used to determine the share based compensation cost included in the Company’s consolidated statements of income. Any dividend shares receivable have been ignored.
2 A level of 50% vesting for ‘on target’ performance has been assumed.
Executive Directors’ actual shareholdings and shareholding guidelines as at December 31, 2015
Executive Directors are encouraged to meet their shareholding guideline within a five year period following their appointment.
Part 2 - Annual Report on Remuneration
a) Implementation of Directors’ Remuneration Policy in 2016
In 2016, the Executive Director and Non-Executive Director remuneration policies will be implemented as follows:
Effective July 1, 2015
Effective from the date of his appointment (April 29, 2015)
CEO: In light of Dr. Ornskov’s exceptional performance since his appointment as CEO, the increased size and complexity of the business and the need for Dr. Ornskov’s compensation package to be positioned competitively against Shire’s peer groups, the Committee awarded a 25% increase in Dr. Ornskov’s salary (from $1,350,000 to $1,688,000) effective from July 1, 2015.
The Committee recognizes that the 25% increase to Dr. Ornskov’s salary is atypical when considered in the context of normal market practice and, to reflect this, the Committee has committed to freezing Dr. Ornskov’s salary at this level for the next three years (including in the event that the Baxalta deal is successfully completed).
CFO: Following the year end review, the Committee made the decision to award Jeff Poulton a base salary increase of 3%, to give him an annual base salary of $592,000 effective April 1, 2016 (in line with the salary increase effective date for all other employees). This decision reflected strong corporate performance and excellent leadership.
Fixed elements - Retirement and other benefits
The implementation of policy in relation to pension and benefits is unchanged and in line with the disclosed policy in the Appendix of this report.
Short-term incentives - EAIP
There is no change to the level of EAIP award opportunity for Executive Directors (maximum of 180% of base salary for the CEO and 160% of base salary for the CFO).
A scorecard approach will continue to be used for the 2016 EAIP and this will be comprised of 75% financial and 25% non financial performance measures. This weighting recognizes the critical importance of financial results to the Company’s shareholders, bonus affordability and the important role that non financial performance plays in the success and growth of the Company. These measures are aligned with and support the Company’s four key strategic drivers for 2016 of Growth, Innovation, Efficiency and People.
The targets themselves are considered to be commercially sensitive on the grounds that disclosure could damage the Company’s commercial interests. However, retrospective disclosure of the targets and performance against them will be provided in next year’s Annual Report on Remuneration to the extent that they do not remain commercially sensitive at that time. Financial and non financial targets are set at the start of the performance year and are approved by the Committee, which believes the targets are suitably challenging, relevant and measurable. As and when the proposed combination with Baxalta closes, revised targets for the remainder of the performance period will be presented to the Committee for approval. The revised targets will be challenging in the context of the combined entity. The final outcome for the year will be assessed on performance against the targets up to the close of the combination with Baxalta and subsequent performance against the revised targets post combination.
The 2016 corporate scorecard is set out below:
Long-term incentives - LTIP
Following the year end review, the Committee made the following 2016 LTIP award decisions which are in line with the disclosed policy in the Appendix of this report.
The face value allocation between SARs and PSUs is estimated as it is determined on an expected value basis upon grant.
As at January 1, 2016.
20% of the award will be payable for threshold performance. There is no vesting below this performance level. 100% of the award will be payable for maximum performance, which would result in the total award vesting, with straight line vesting within this performance range. In all cases, awards will only vest if the Committee determines that the underlying performance of the Company is sufficient to justify the vesting of the award.
The 2016 LTIP awards will continue to be tested against two independent measures at the end of a three year performance period: 50% Product Sales targets and 50% Non GAAP EBITDA targets. The Committee will also use a Non GAAP Adjusted ROIC underpin at the end of the performance period to ensure vesting levels reflect the sustainability of revenue and profit growth.
The 2016 LTIP targets for Product sales and Non GAAP EBITDA are based off the Company’s 2018 forecast and are considered appropriately challenging by the Committee. The weightings, threshold and maximum target figures are provided in the table below.
This is a Non GAAP financial measure. For reconciliation to US GAAP please see page 120.
Product Sales and Non GAAP EBITDA targets are expressed as absolute dollar values for consistency between the measures.
The Non GAAP Adjusted ROIC underpin will be set at a minimum of 10.625% for the 2016 LTIP award. If Non GAAP Adjusted ROIC over the performance period is below this level no vesting will occur under the LTIP, subject to Remuneration Committee discretion. This will ensure awards only pay out for a return in excess of Shire’s Weighted Average Cost of Capital and maintain focus on quality of earnings and sustainable returns both in the existing core business and from any future M&A activity.
The Committee has determined that the calibration of these proposed targets is sufficiently challenging without incentivizing inappropriate risk-taking by management, taking into account both Shire’s long range plans as well as brokers’ forecasts. As and when the proposed deal with Baxalta closes, revised targets will be presented to the Committee for approval, based on the long range plan of the combined entity. The revised targets will be challenging in the context of the combined entity and will ensure maximum payout only occurs in the event that significant value
from the combination is delivered to shareholders. The revised targets will be disclosed to shareholders when they have been determined, as well as subsequently in the 2016 Directors’ Remuneration Report.
A two year holding period will apply following the three year vesting period for both PSUs and SARs, making a total vesting period of five years before shares can be sold.
Clawback and malus arrangements are in place for awards to cover situations where results are materially misstated or in the event of serious misconduct.
2016 fee levels for the Chairman and Non-Executive Directors remained unchanged from 2015.
The Chairman and Non-Executive Directors will continue to receive 25% of their total fees in the form of shares.
In addition to the basic fee, a committee fee will be paid to the members and Chairman of the Audit, Compliance & Risk, Remuneration, Science & Technology and Nomination Committees.
Non-Executive Directors (excluding the Chairman) will also receive the following additional fees for attending Board and Committee meetings in addition to those scheduled as part of the normal course of business:
·Board meeting - additional £2,000 per meeting
·Committee meeting - additional £1,000 per meeting
The Non-Executive Directors will continue to receive an additional fee of £5,000 for each transatlantic trip made for Board meetings.
b) 2015 single total figure of remuneration for Executive Directors (subject to audit)
The summary table of 2015 remuneration for the Executive Directors comprises a number of key components which are set out in further detail in the relevant sections that follow.
Flemming Ornskov's and Jeff Poulton’s remuneration, which is paid through the US payroll, is reported in US dollars.
1 The vesting value is calculated using the average share price over the last quarter of 2015 of $207.85 per the relevant UK regulations. Note that Dr. Ornskov’s disclosed long-term incentive awards are not due to vest until February and May 2016. The award vesting in February 2016 represents his annual equity grant under the PSP and has an estimated vesting value of $12,341,138. The award vesting in May 2016 represents his replacement equity award granted upon joining the Company which was subject to performance conditions and has an estimated vesting value of $4,473,222. 76% of the total LTIP value of $16,814,360 is delivered as a result of share price growth over the vesting period.
2 Jeff Poulton was appointed as CFO on April 29, 2015. His 2015 remuneration represents the remuneration he received following his appointment as CFO. Prior to Jeff Poulton’s appointment, Flemming Ornskov was the only Executive Director during 2015.
Base salary
Corresponds to the amounts received during the year
·Dr. Ornskov’s 2015 salary was increased by 25% from $1,350,000 to $1,688,000 effective July 1, 2015. The rationale for this increase in provided in Part 1 of this report. His 2014 base salary was $1,300,000 effective January 1, 2014.
·Mr. Poulton’s base salary reflects his annual salary of $575,000 which was awarded upon appointment to CFO on April 29, 2015.
Retirement benefits
Represents the cash value of the total Company contributions towards retirement benefit provision
·Dr. Ornskov received a contribution at a rate of 30% of his base salary through a combination of contributions to the Company’s 401(k) Plan and credits to his SERP account.
·Mr. Poulton received a contribution at a rate of 25% of his base salary through a combination of contributions to the Company’s 401(k) Plan and credits to his SERP account following his appointment to CFO.
Other benefits
Corresponds to the taxable value of all other benefits paid in respect of the year
·The 2015 figures for Dr. Ornskov and Mr. Poulton principally include car allowance, financial and tax advisory support, long-term disability, and life and private medical, dental and vision insurance.
·The 2014 figure for Dr. Ornskov includes $58,642 in relation to temporary living expenses and associated tax assistance.
Short-term incentives
Corresponds to the annual incentive award earned under the EAIP in respect of 2015 performance and comprises a cash element (75%) and a
deferred share element (25%)
EAIP - 2015 outcomes
In determining EAIP awards for the Executive Directors, the Committee considers performance against each of the financial and non financial performance measures within the Shire corporate scorecard, as well as personal performance during the year.
Corporate scorecard
The EAIP outcome is calculated by way of a weighted average of the corporate scorecard outcomes of the financial and non financial performance measures. For each performance measure, outperformance or underperformance is measured as a percentage of target which is then converted into the corporate scorecard multiple. If the weighted average across all the measures falls below 85% then none of the award pays out. If the weighted average across all the measures is 120% or more of target, then the maximum opportunity of the award may pay out, subject to personal performance. As such, there are not actual threshold and stretch performance values for the independent measures as the assessment takes into account performance across all the measures in determining the scorecard outcome. However, for illustrative purposes, indicative threshold and stretch performance values are shown for each of the financial measures to serve as a guide to the performance range. Target performance is considered by the Committee to require an excellent level of performance. Details of actual corporate scorecard outcomes against the 2015 performance measure targets are set out in the table below. 2015 performance results in a weighted average corporate scorecard multiplier of 137%.
1For the purpose of the corporate scorecard multiplier calculation, Non GAAP EBITA and Non GAAP Adjusted ROIC have been adjusted to exclude the impact of the corporate scorecard multiplier on the full year results.
Performance against financial goals
Net product sales
•Delivered net product sales of $6,100 million representing growth of 5% (2014: $5,830 million), driven by strong performance from VYVANSE, CINRYZE, FIRAZYR and LIALDA/MEZAVANT
Non GAAP EBITA
•Non GAAP EBITA of $2,786 million exceeded the Company’s target of $2,633 million by 5.8%.
Non GAAP Adjusted ROIC
•As expected, we saw lower Non GAAP Adjusted ROIC of 10.3% in 2015, as we significantly increased the invested capital in the business following business development activity, including the acquisition of NPS
EAIP award outcomes
The corporate scorecard multiplier determines the bonus funding for all individuals within the plan. Once agreed, each individual’s bonus (including Executive Directors) is then determined based on their individual performance over the course of the year, which results in an adjustment to the corporate scorecard outcome based on an agreed matrix. As a result, bonus outcomes of 180% of salary for Dr. Ornskov and 106% of 2015 salary for Mr. Poulton were determined by the Committee. Full details of the overall EAIP outcomes for the Executive Directors are provided in the table below.
1 Reflects the proportion of his 2015 EAIP award received in respect of services performed as CFO (i.e. from April 29, 2015 to December 31, 2015).
Notes
75% of the award is payable in cash (non-pensionable) and 25% is deferred into shares and released after a period of three years (subject to the participant’s employment not being terminated for cause).
The release of deferred shares will include dividend shares representing any accrued dividends (deferred shares are subject to malus and clawback).
Long-term incentives
Represents the value of any long-term incentive awards vesting during the year.
Flemming Ornskov - vesting of 2013 PSP awards
The table below sets out a summary of the number of shares vesting and the resulting gross estimated vesting value for the 2013 PSP awards for Dr. Ornskov. The awards granted in February 2013 represent his annual equity grant under the PSP and the awards granted May 2013 represent his replacement equity awards granted upon joining. This estimate is on the basis of an average share price over the last quarter of 2015 of $207.85, given that the 2013 PSP awards (2013 - 2015 performance period) vest following the date of this report.
Awards are over American Depositary Shares (ADS).
The figures represent the number of shares vesting taking into account performance against applicable performance conditions (see performance outcome below).
Based on the average share price over the last quarter of 2015 of $207.85
4 The vesting of the PSU element includes dividend shares representing any accrued dividends, in accordance with the relevant plan rules.
2013 performance matrix - performance period ended on December 31, 2015.
Performance outcome
17.9% CAGR in Non GAAP EBITDA; and 175 bp p.a. increase in Non GAAP Adjusted ROIC between 2012 and 2015.
In determining the vesting multiplier under the matrix, the Committee rounds to the closest point on the matrix. This results in a vesting multiplier of 4.0x, meaning that 100% of the total award made will vest).
The Committee reserves the right to make adjustments to the performance conditions to reflect significant one off items which occur during the performance period. In respect of the 2013 PSP awards, the Committee carried out a comprehensive review of potential Significant Adjusting Events (SAEs) against pre-existing guidelines and determined that the following SAEs should be taken into account in the overall assessment of performance over the performance period:
1.To exclude the impact of the acquisition of ViroPharma which had a short-term negative impact on Non GAAP adjusted ROIC performance in 2015. This acquisition was completed in January 2014 and not considered in the 2013 performance matrix;
2.To exclude the impact of the acquisition of NPS which had a short-term negative impact on Non GAAP adjusted ROIC performance in 2015. This acquisition was completed in February 2015 and not considered in the 2013 performance matrix;
3.To grant credit for DERMAGRAFT product as it was considered in the performance matrix. In line with the Company’s refined strategy to prioritize investments that have the greatest clinical and commercial value, the Company announced on January 17, 2014 that it had sold its DERMAGRAFT assets. Without DERMAGRAFT and its assets, Regenerative Medicine was no longer one of the Company’s Business Units; and
4.To grant credit for INTUNIV early generic entry. The 2013 performance matrix considered INTUNIV generic entry in the third quarter of 2015 and actual generic entry started in December 2014.
Jeff Poulton - there is no scheduled vesting of long-term incentive awards subject to the achievement of performance conditions for the year ending December 31, 2015.
c) 2015 single total figure of remuneration for the Chairman and Non-Executive Directors (subject to audit)
Details of the total fees paid to the Chairman and Non-Executive Directors during 2015 and a comparative total for 2014 are set out in the table below.
1For Board and Committee meetings in addition to those scheduled as part of the normal course of business.
2The Non-Executive Directors receive an additional fee of £5,000 for each transatlantic trip made for Board meetings.
3Ms. Kilsby’s taxable benefits figure relates to tax preparation assistance provided by the Company and has been converted into sterling using the average 2015 EUR:GBP exchange rate of 0.7255.
4Dr. Gillis was appointed to the Audit, Compliance & Risk Committee on December 3, 2015. He previously served as an interim member.
5Dr. Ginsburg was appointed to the Nomination Committee on December 3, 2015.
6Mr. Bohuon was appointed to the Board and the Science & Technology Committee on July 1, 2015.
7Mr. Stout stepped down from the Board and the Audit, Compliance & Risk Committee and the Remuneration Committee on April 28, 2015.
8Ms. Mathew was appointed to the Board and the Audit, Compliance & Risk Committee on September 1, 2015 and to the Remuneration Committee on December 3, 2015.
d) Scheme interests awarded during 2015 (subject to audit)
LTIP awards
The following tables set out details of the SAR and PSU awards granted to the Executive Directors under the LTIP during 2015.
Vesting of the 2015 LTIP awards will be determined by the Committee in Q1 2018 taking into account performance against the 2015 performance measures over the performance period (January 1, 2015 to December 31, 2017). In addition, any Significant Adjusting Events that are relevant will be taken into consideration, as well as an overall assessment of the underlying performance of the Company.
The maximum SAR and PSU awards are granted and, subject to the achievement of performance conditions, adjusted at the date of vesting.
The number of SARs and PSUs as well as the exercise price for SAR awards is calculated using an approach based on the average three day closing mid market share price at the date of grant of April 30, 2015.
LTIP performance measures
The 2015 LTIP performance measures comprise Product sales and Non GAAP EBITDA. A Non GAAP Adjusted ROIC underpin is also used to test underlying performance. The weightings, threshold and maximum target figures are provided in the table below.
The Non GAAP Adjusted ROIC underpin is set at a minimum of 11% for the 2015 LTIP award. If Non GAAP Adjusted ROIC over the performance period is below this level no vesting will occur under the LTIP, subject to Remuneration Committee discretion. This will ensure awards only pay out for a return in excess of Shire’s Weighted Average Cost of Capital and maintain focus on quality of earnings and sustainable returns both in the existing core business and from any future M&A activity.
20% of the award will be payable for threshold performance. There is no vesting below this performance level. 100% of the award will be payable for maximum performance, which would result in the total award vesting, with straight line vesting within this performance range. In all cases, awards will only vest if the Committee determines that the underlying performance of the Company is sufficient to justify the vesting of the award.
EAIP deferred shares
Awards of deferred shares under the EAIP were made as follows to the CEO and will vest three years from the point of deferral subject to continued service and the terms of the plan rules.
Based on the share price on the date of grant of February 13, 2015.
Jeff Poulton was not eligible to participate in the EAIP at the time the awards were granted.
e) Payments to past Directors (subject to audit) and payments for Loss of Office (subject to audit)
During 2015, a payment of $16,538 was made to the former Shire CEO (Angus Russell) as reimbursement for a tax filing penalty incurred. The Company reimbursed the former CEO for the penalty, given that the late filing of his tax return was due to an error by the Company. The Company also paid costs of $12,018 in relation to the preparation and submission of his 2013 US tax return and 2013/14 UK tax return, in accordance with the tax equalization benefits provided for under his Service Agreement.
In line with Matthew Emmens’ contract as Chief Executive Officer of Shire, Mr. Emmens is entitled to continued medical cover up to the age of 65. During 2015, the value of this benefit was $20,102. 2016 will be the final year of this benefit as Mr. Emmens will reach the age of 65 during the year.
No further payments were made to past Directors.
No payments were made to Directors for loss of office during the year.
f) Directors’ shareholdings and scheme interests (subject to audit)
The Committee believes that employee share ownership is an important means to support long-term commitment to the Company and the alignment of employee interests with those of shareholders.
The interests of the Executive Directors and other senior executives are closely aligned with those of other shareholders in this regard through the operation of the Company’s long-term incentive plan and, for the Executive Committee, the deferral of one quarter of any EAIP award into shares for a period of three years. These remuneration elements constitute a significant proportion of their individual remuneration packages.
In addition, to ensure that there are appropriate tools to retain Executive Directors and to encourage alignment with shareholders over the long-term through increased shareholding and ownership, a two year holding period post the three year performance period, which applies to both PSUs and SARs, is in place.
The CEO, CFO and other members of the Executive Committee are encouraged to own shares in the Company equivalent to 200%, 150% and 100% of base salary, respectively, within a five year period following their appointment. All shares beneficially owned by an executive or deferred under the EAIP count towards achieving these guidelines. The Committee reviews share ownership levels annually for this group. Current shareholding levels for Directors are set out in the table below and show that the shareholding guideline for the CEO has been achieved. The CFO is new in role and so has not yet met the requirement but has five years in which to do so.
Summary of Directors’ shareholdings and scheme interests
1One ADS is equal to three Ordinary Shares.
2With the exception of the following transactions in shares, no changes in Directors’ interests have occurred during the period December 31, 2015 to February 23, 2016:
Name Security Type Shares acquired Date of transaction
Flemming Ornskov ADS 1,300 February 12, 2016
Flemming Ornskov ADS 1,300 February 16, 2016
Susan Kilsby ADS 1,600 February 12, 2016
Susan Kilsby ADS 1,600 February 16, 2016
Olivier Bohuon Ord Shares 1,000 February 12, 2016
William Burns Ord Shares 1,250 February 12, 2016
Steven Gillis ADS February 12, 2016
Anne Minto Ord Shares February 12, 2016
3This represents unvested shares deferred under the EAIP which are forfeited in the case of termination for cause and, in the case of Dr. Ornskov, deferred shares granted to him which are subject to continued service.
4This represents unvested PSUs which are subject to the achievement of performance conditions.
5This represents unvested SARs which are subject to the achievement of performance conditions.
6This represents vested but unexercised SARs which are no longer subject to the achievement of performance conditions.
The Company also operates broad-based share plans (a Sharesave scheme in the UK and Ireland and a Global Employee Stock Purchase Plan (“ESPP”) in the US and other countries) to encourage wider share ownership among the Company’s employees.
Awards under the Company’s long-term incentive plans and broad-based share plans are satisfied either by market purchased shares which are held in an employee benefit trust or the issue of new shares within the limits agreed by shareholders when the plans were approved. These limits comply with the Investment Association’s guidelines which require that no more than 10% of a company’s issued share capital be issued in accordance with all employee share plans in any 10 year period, with no more than 5% issued in accordance with discretionary employee share plans.
Directors’ scheme interests
Details of Directors’ interests under share plans which were outstanding, awarded, lapsed or exercised during the year are set out in the audited table below.
The number of PSU, SAR and Restricted Stock Units (RSU) awards is calculated using an approach based on the average three day closing mid-market share price at the time of grant.
1All awards are over ADSs.
2In accordance with the plan rules, the vested PSU and RSU awards have been increased to reflect the dividends paid by Shire in the period from the grant date to the vesting date.
3The maximum SAR and PSU awards are granted and, subject to the achievement of performance conditions, adjusted at the date of vesting.
4Performance conditions attached to SAR and PSU awards granted in 2013 and 2014 are Non GAAP Adjusted ROIC and Non GAAP EBITDA. Performance conditions attached to SAR and PSU awards granted from 2015 onwards are Product Sales and Non GAAP EBITDA. In all cases, awards will only vest if the Committee determines that the underlying performance of the Company is sufficient to justify the vesting of the award.
5As disclosed in the 2012 remuneration report, Dr. Ornskov was granted an award of restricted stock as part of his recruitment that subsequently vested on February 28, 2015. The vesting of this award resulted in a release of 15,286 ADSs to Dr. Ornskov. The award was subject to Dr. Ornskov's continued service during the vesting period.
6A two-year holding period will apply following the three-year vesting period for both SAR and PSU awards granted from 2015 onwards.
On January 1, 2015 Dr. Ornskov and Mr. Poulton were granted an option over ADSs pursuant to the Shire 2014 ESPP, saving $568.18 per fortnight. On November 2, 2015 Dr. Ornskov and Mr. Poulton exercised their option over 69 ADSs at an exercise price of $180.66 per ADS. On November 1, 2015 Dr. Ornskov was granted on option over ADSs pursuant to the Shire 2015 Global ESPP, saving $480.77 per fortnight.
g) TSR performance graph and CEO pay
The graph below shows the Total Shareholder Return (“TSR”) for Shire and the FTSE 100 Index over the seven year period ending December 31, 2015. TSR is calculated as the change (indexed) between the fourth quarter TSR in the relevant year and the base year. The FTSE 100 Index reflects the 100 largest quoted companies by market capitalisation in the United Kingdom and has been chosen because the FTSE 100 represents the broad market Index within which the Company’s shares are traded.
Total Shareholder Return - change in value of a hypothetical £100 holding over seven years
Rebased to 100 (GBP)
The historical total remuneration for the person undertaking the role of CEO is set out in the table below.
These calculations are based on the methodology prescribed in the Schedule 8 Regulations. In particular, the long-term incentive figures relate to any awards that vest shortly after the end of the relevant financial year. Note Dr. Ornskov did not have any long-term incentive awards vest until 2015.
h) Percentage change in CEO remuneration
The following table shows the percentage change in the base salary, taxable benefits and annual bonus of the CEO between the current and previous financial year compared to the average percentage change for all other employees.
Due to timing of the 2015 year-end process, the actual short-term incentive figures for all other employees had not been finalized by the date of this report. Therefore, the 2015 short-term incentive figures represent target figures multiplied by the 2015 Corporate Bonus Modifier score approved by the Committee in early February, which represents the Company’s best estimate of actual bonus outcomes.
Reflects the 2014 and 2015 remuneration for Flemming Ornskov as reported in the single total figure of remuneration table in Part 2(b).
Reflects the average change in remuneration for all other employees globally that were annual bonus eligible. To help minimise distortions in the underlying data, certain adjustments have been made. In particular, the figures have been prepared on the basis of permanent employees who have been employed with the Company for the two preceding calendar years to provide for a consistent employee comparator group. This approach is consistent with the disclosure presented in the 2014 Annual Report on Remuneration.
CEO
As previously explained in Part 1 of this report, the increase in the CEO’s salary is due to the 25% increase in his salary from $1,350,000 to $1,688,000, effective July 1, 2015. This increase was awarded in light of Dr. Ornskov’s exceptional performance since his appointment as CEO, the increased size and complexity of the business and the need for Dr. Ornskov’s compensation package to be positioned competitively against Shire’s peer groups. The decrease of 49% in the CEO’s taxable benefits is because the CEO was provided with temporary living support and associated tax assistance in 2014 under the Company’s mobility policy, which he is no longer eligible for. The increase in the CEO’s short-term incentive is due to his short-term incentive being calculated as a percentage of his higher base salary.
All other employees
The increase in salary and fees from 2014 to 2015 is primarily due to annual merit increases, as well as multiple inflationary increases in Latin American countries. The significant increase in taxable benefits is due a much greater number of employees being eligible to receive bonuses under the Company’s retention program in 2015 than in 2014, in order to retain key personnel during the uncertainty of the AbbVie deal. The difference in the short-term incentives figure is due to actual short-term incentive payments in 2014 being compared to target figures (multiplied by the 2015 Corporate Bonus Modifier score) in 2015.
i) Relative importance of spend on pay
The Company considers employee remuneration costs in the context of the general financial performance and position of the Company, including when determining the annual salary increase budget, the annual equity grant budget and annual bonus funding for the organization.
The following graphs set out for 2014 and 2015 the overall spend on pay, shareholder distributions (dividends and share buybacks) and for further context, Non GAAP EBITDA (from continuing operations). This approach is consistent with the disclosure presented in the 2014 Annual Report on Remuneration.
Overall Spend on Pay increased by 7% in 2015 reflecting a 10% increase in the regular workforce in support of business growth and expansion. Non GAAP EBITDA increased 6% in 2015 as a result of continued product sales growth, held back by increased investment in combined R&D and SG&A.
j) Remuneration Committee
Terms of reference
The Committee is responsible for agreeing the broad remuneration policy for the organization and the individual packages for the Chairman, Executive Directors, and certain other senior leadership roles. Within the agreed policy, the Committee determines the terms and conditions to be included in service agreements, including termination payments and compensation commitments, where applicable. The Committee also determines performance targets applicable to the Company’s annual bonus and long-term incentive plans, and has oversight of the Company’s share incentive schemes. The Committee’s terms of reference were reviewed in April 2015 and are available in full on the Company’s website www.shire.com. Other information included on or accessible through our website does not constitute a part of this report and the reference to our website does not constitute incorporation by reference of such information, and should not be relied upon.
Membership and attendance
The Board considers all members of the Committee to be independent. The Directors in the table below served as members of the Committee during the period within which remuneration for the relevant financial year was under consideration.
Note: The number in brackets denotes the number of meetings that Committee members were eligible to attend.
1 There were five scheduled meetings and two ad hoc Committee meetings held during 2015.
Sara Mathew was appointed as a member of the Committee on December 3, 2015 and will attend her first Committee meeting in January 2016.
David Stout stepped down as a member of the Committee on April 28, 2015.
The Chairman, CEO and CFO attend meetings of the Committee by invitation, but are not present in any discussions relating to their own remuneration.
Remuneration Committee activities in
In 2015, the Committee discussed the key agenda items set out in the following table:
Shareholder context for the Committee’s activities	
The table below shows how shareholders voted in respect of the remuneration report and remuneration policy at the AGM held on April 28, 2015.
1 Votes withheld are not a vote in law and are not counted in the calculation of the proportion of votes validly cast.
Advisors
In discharging its responsibilities in 2015, the Committee was materially assisted by those employees performing the roles of Chief Human Resources Officer and Group Vice President, Total Rewards and HR Operations. In addition, PricewaterhouseCoopers LLP (“PwC”), appointed by the Committee, continued to serve as independent external advisor to the Committee following a competitive tendering process in early 2012. PwC also provided global consultancy services to the Company in 2015, primarily in respect of tax matters. Fees paid to PwC in relation to remuneration services provided to the Committee totalled £284,000 in 2015 and were determined based on the scope and nature of the projects undertaken for the Committee.
The Committee is satisfied that the advice received by PwC in relation to executive remuneration matters during the year was independent. The Committee reviewed the potential for conflicts of interest and judged that there were appropriate safeguards against any potential conflicts. PwC is a member of the Remuneration Consultants’ Group which operates a code of conduct in relation to executive remuneration consulting in the UK.
Approval
Approved by the Board and signed on its behalf by:
Anne Minto
Chairman of the Remuneration Committee
February 23, 2016
Appendix - Directors’ Remuneration Policy - key elements
a) Executive Director remuneration policy
The purpose of the remuneration policy is to recruit and retain high caliber executives and encourage them to enhance the Company’s performance responsibly and in line with the Company’s strategy and shareholder interests. The remuneration policy was approved by shareholders at the April 2015 AGM (April 28, 2015) and will be effective for a period of three years. Whilst there is currently no intention to revise the policy more frequently than every three years, the Committee will review the policy on an annual basis to ensure it remains strategically aligned and appropriately positioned against the market. Where any change to policy is considered, the Committee will consult with major shareholders prior to submitting a revised policy for shareholder approval.
This section sets out the key parts of the remuneration policy. The complete remuneration policy as approved by shareholders can be found within the 2014 Directors’ Remuneration Report.
The overall remuneration package for the Executive Directors is designed to provide an appropriate balance between fixed and variable, performance-related components, with a significant element of long-term variable pay given the long-term nature of the business.
In determining the positioning of overall remuneration, the Committee takes into consideration pay levels against a Global Biotech peer group and a US BioPharma peer group. These peer groups reflect the need for Shire to be aligned with the Biotech and BioPharma sectors in which the Company operates, the markets in which the Company competes for talent, and the geographies in which the Company operates. In addition, the FTSE 50 (excluding financial services) is used as a secondary reference point, given Shire’s position as a UK listed company.
The Committee is satisfied that the composition and structure of the remuneration package is appropriate and does not incentivize undue risk taking.
Malus and clawback arrangements are in place. These are compliant with the Code and in line with best practice in this area.
Executive Directors are encouraged to own shares in the Company equivalent to 200% (for the CEO) and 150% (for the CFO) of base salary within a five year period following their appointment. All shares beneficially owned by an executive or deferred under the EAIP count towards achieving these guidelines.
1 Formerly referred to as Performance Share Awards (“PSAs”), name changed in the LTIP approved by shareholders at the 2015 AGM.
2 Product Sales is defined as product sales from continuing operations.
3 Non GAAP EBITDA growth is defined as the CAGR of Non GAAP EBITDA, as derived from the Group’s Non GAAP financial results included in its full year earnings releases, over the three year vesting period.
4 Non GAAP Adjusted ROIC reflects the definition used by the Company in its corporate scorecard. This definition aims to measure true underlying economic performance of the Company, by making a number of adjustments to ROIC as derived from the Company’s Non GAAP financial results including:
·Adding back to Non GAAP operating income all R&D expenses and operating lease costs incurred in the period;
·Capitalizing on the Group’s balance sheet historical, cumulative R&D, in process R&D and intangible asset impairment charges and operating lease costs which previously have been expensed;
·Deducting from Non GAAP operating income and an amortization charge for the above capitalized costs based on the estimated commercial lives of the relevant products;
·Excluding the income statement and balance sheet impact of non-operating assets (such as surplus cash and non-strategic investments); and
·Taxing the resulting adjusted operating income at the underlying Non GAAP effective tax rate.
5 The Significant Adjusting Events pre-existing guidelines consist of the following:
·The event results from a strategic action that has a short-term impact on Non GAAP Adjusted ROIC or Non GAAP EBITDA growth, but is in the long-term interest of shareholders or the event was external and results in a significant change to the Company’s operating environment;
·The event is a one off (as opposed to recurring) in nature;
·The event is “significant” which is defined by reference to its impact on Non GAAP EBITDA relative to a materiality threshold; and
·The event was not taken into account when the performance matrix was set.
Legacy matters in relation to Executive Director remuneration
The Committee will honour remuneration and related commitments to current and former directors (including the exercise of any discretions available to the Committee in relation to such commitments) where the terms were agreed prior to the approval and implementation of the remuneration policy detailed in this report.
Notes to the remuneration policy table
Elements of previous policy that continue to apply
The following existing arrangements will continue to operate on the terms and conditions set out in the relevant Portfolio Share Plan (“PSP”) rules.
b) Chairman and Non-Executive Director remuneration policy
c) Recruitment remuneration policy
The following table sets out the various components which would be considered for inclusion in the remuneration package for the appointment of an Executive Director and the approach to be adopted by the Committee in respect of each component.
d) Service contracts and termination arrangements
Executive Directors
The Committee’s policy on service contracts and termination arrangements for Executive Directors is set out below. As an overriding principle, it is the Committee's policy that there should be no element of reward for failure. The Committee’s approach when considering payments in the event of termination is to take account of the individual circumstances including the reason for termination, performance, contractual obligations of both parties as well as share plan and pension scheme rules.
Notice period
· The Committee’s policy is that Executive Directors’ service contracts should provide for a notice period of 12 months from the Company and the Executive Director.
· The Committee believes this policy provides an appropriate balance between the need to retain the services of key individuals for the benefit of the business and the need to limit the potential liabilities of the Company in the event of termination.
· Flemming Ornskov’s contract does not have a fixed term but provides for a notice period of 12 months in line with this policy. His contract is dated October 24, 2012.
Contractual payments
· Executive Directors’ contracts allow for termination with contractual notice from the Company or termination by way of payment in lieu of notice, at the Company’s discretion. Neither notice nor a payment in lieu of notice will be given in the event of gross misconduct.
· Payments in lieu of notice could potentially include up to 12 months’ base salary and the cash equivalent of 12 months’ pension contributions, car allowance and other contractual benefits. There is no contractual entitlement to annual incentive payments in respect of the notice period - any award is at the Committee’s absolute discretion, performance related and capped at the contractual target level.
· Payment in lieu of notice would be made where circumstances dictate that the Executive Directors’ services are not required for the full 12 months of their notice period. Contracts also allow for phased payments on termination, which allow for further reduction in payments if the individual finds alternative employment outside of the Company during the notice period.
Retirement benefits · Normal treatment to apply as governed by the rules of the relevant pension plan; no enhancement for leavers will be made.
Short-term incentives
· Where an Executive Director’s employment is terminated after the end of a performance year but before the payment is made, the executive will remain eligible for an annual incentive award for that performance year subject to an assessment based on performance achieved over the period. Where an award is made the payment may be delivered fully in cash. No award will be made in the event of gross misconduct.
· Where an Executive Director’s employment is terminated during a performance year, a prorata annual incentive award for the period worked in that performance year may be payable subject to an assessment based on performance achieved over the period.
· The Committee’s policy is not to award an annual incentive for any portion of the notice period not served.
· The relevant plan rules provide that any outstanding deferred shares will vest in accordance with the regular vesting period, except for where an Executive Director’s employment is terminated for cause in which case they will lapse.
· In the event of a variation in the equity share capital of the Company, demerger, a special dividend or distribution, or any corporate event which might affect the value of an award, the Committee may make adjustments to the number or class of stock or securities subject to the award.
Long-term incentives
· The treatment of unvested long-term incentive awards is governed by the rules of the relevant incentive plan, as approved by shareholders.
· Where an individual’s employment terminates, the LTIP rules provide for unvested long-term incentive awards to lapse except as set out below.
· Under the LTIP rules, where an individual is determined to be a “good” leaver, unvested long-term incentive awards will vest at the normal vesting date subject to performance against applicable performance conditions and, unless the Committee determines otherwise, prorating for time. Any Committee determination will take into account a number of considerations, in particular performance and other circumstances relating to their termination of employment.
· Good leaver reasons include retirement in accordance with the Company’s retirement policy, ill health, injury or disability, and redundancy or in other circumstances that the Committee determines.
· Prorating for time will be calculated on the basis of the number of complete weeks in the relevant period during which the executive was employed as a proportion of the number of complete weeks in the relevant period. Where an executive does not work during their notice period, the Committee may apply prorating by reference to the date the notice period would have expired.
· Where an Executive Director’s employment is terminated or an Executive Director is under notice of termination for any reason at the date of award of any long-term incentive awards, no long-term incentive awards will be made.
· In the event of a variation in the equity share capital of the Company, demerger, a special dividend or distribution, or any corporate event which might affect the value of an award, the Committee may make adjustments to the number or class of stocks or securities subject to the award and, in the case of an option, the option price.
Change in control
· In relation to unvested deferred annual bonus awards, the Deferred Bonus Plan rules provide that unvested awards will normally vest on a change in control.
· In relation to unvested long-term incentive awards, the LTIP rules provide that unvested awards will normally only vest on a change in control to the extent that any performance condition has been satisfied and would be reduced where more than a year remains until the relevant vesting date, unless the Committee determines otherwise.
· The Committee’s policy is that contracts of employment should not provide additional compensation on severance as a result of change in control.
External appointments
Executive Directors are permitted to hold one fee-paying external non-executive directorship, subject to prior approval by the Board. Any fees received from such appointments are retained by the Executive Director. During 2015, there were no external non-executive directorships held by the Executive Directors.
Chairman and Non-Executive Directors
Non-Executive Directors have letters of appointment and are appointed by the Board ordinarily for a term of two years. Their initial appointment and any subsequent re-appointment are subject to election, and thereafter annual re-election by shareholders. Non-Executive Directors are not entitled to compensation for loss of office. All Non-Executive Directors are subject to a three month notice period.
All service contracts and letters of appointments are available for viewing at the Company’s registered office.
e) Shareholder engagement
The Committee takes the views of shareholders very seriously and is committed to ongoing dialogue with the Company’s shareholder base, which has a significant transatlantic element. This can take a variety of forms including meetings with major shareholders to consider significant potential changes to policy or specific issues of interest to particular shareholder groups, other dialogue to update shareholders and receive their feedback on planned refinements to arrangements, and annual voting on the DRR.
f) Remuneration of other employees
The Committee recognizes that remuneration has an important role to play in supporting the implementation and achievement of the Company’s strategy and ongoing performance. When making remuneration decisions in respect of the Executive Directors, the Committee is sensitive to pay and employment conditions across the Company, in particular in relation to base salary decisions where the Committee considers the broader employee salary increase budget. The Committee approves the overall annual bonus funding for the Company each year and has oversight over the grant of all LTIP awards across the Company. In addition, annual performance for the Executive Directors is measured against the backdrop of the same corporate scorecard that is appropriately used to assess performance across the organization. This assessment of corporate scorecard performance includes a review of Non GAAP EBITA, Non GAAP Adjusted ROIC and product sales, adjusted to exclude the impact of the annual bonus corporate modifier on the full year results.
Given Shire’s diverse employee base, employing over 5,500 people in 50 locations, the Committee does not consider it appropriate to consult with employees over the remuneration policy for Executive Directors. However, many of the Company’s employees are shareholders through the Company’s all employee share plans, and are therefore able to express their views on director remuneration at each general meeting. The Company also periodically carries out an employee engagement survey which provides employees the opportunity to feedback their views on a variety of employment related matters, including remuneration.
The diagram set out on the following page illustrates how the Company’s remuneration policy and arrangements reinforce the achievement of Shire’s success and ensures that executives and employees are focused on delivering the same core objectives.
The Shire Remuneration Policy
Non GAAP measures used in the Directors’ Remuneration Report
The Directors’ Remuneration Report contains financial measures not prepared in accordance with US GAAP. These measures are referred to as “Non GAAP” measures and include “Non GAAP EBITDA”, “EBITDA Growth”, “Non GAAP EBITA” and combined Non GAAP R&D and SG&A. Non GAAP measures exclude the effect of certain cash and non-cash items, which Shire's management believes are not related to the core performance of Shire’s business. Shire’s Remuneration Committee uses these Non GAAP measures when assessing the performance and compensation of employees, including Shire’s Executive Directors. The most directly comparable measure under US GAAP for Non GAAP EBITDA, and Non GAAP EBITA is US GAAP Net Income. The most directly comparable measure under US GAAP for combined Non GAAP R&D and SG&A as a % of total product sales is combined US GAAP R&D and SG&A as a % of total product sales.
The following table reconciles US GAAP Net Income to Non GAAP EBITDA and Non GAAP EBITA:
Non GAAP EBITDA as a percentage of product sales, excluding royalties and other revenues.
ITEM 12:
ITEM 12: Security ownership of certain beneficial owners and management and related stockholder matters
Set forth in the following table is the beneficial ownership of ordinary shares on February 12, 2016 for (i) each person (or group of affiliated persons) known to the Company to be the beneficial owner of more than 5% of ordinary shares, (ii) all current directors, and (iii) all current directors and executive officers of the Company as a group. As a foreign private issuer incorporated in Jersey (Channel Islands) with its principal listing on the London Stock Exchange, Shire follows its “home country” regulations with respect to executive compensation disclosure in Item 11 of this annual report on Form 10-K and is not required thereunder to identify any “named executive officers”. Except as indicated by the notes to the following table, the holders listed below have sole voting power and investment power over the shares beneficially held by them. The address of each of Shire’s directors and executive officers is that of Shire.
Name
Number of ordinary shares beneficially owned on
February 12, 2016
Percent of
ordinary shares (1)
Beneficial owner
BlackRock Inc. - 55 East 52nd Street, New York NY 10022 59,740,451 10.1%
Management
Susan Kilsby 16,074 *
Dr. Flemming Ornskov (2) 224,022 *
Jeffrey Poulton (3) 26,841 *
David Kappler 12,088 *
Dominic Blakemore *
Olivier Bohuon 1,290 *
William Burns 3,291 *
Dr. Steven Gillis 3,510 *
Dr. David Ginsburg 1,863 *
Sara Mathew *
Anne Minto 4,575 *
All Directors and Executive Officers of the Company (15 persons) (4) 338,602 *
* Less than 1%
1.For the purposes of this table, a person or a group of persons is deemed to have “beneficial ownership” of any shares, which that person has the right to acquire as of April 12, 2016 (being 60 days after February 12, 2016) through the release of restricted shares and the exercise of any vested stock options and awards.
2.Includes 102,603 restricted shares and 55,491 shares that could be acquired upon the exercise of vested but unexercised stock appreciation rights, assuming a share price of $159.90, the closing price on February 12, 2016.
3.Includes 3,846 restricted shares and 14,352 shares that could be acquired upon the exercise of vested but unexercised stock appreciation rights, assuming a share price of $159.90, the closing price on February 12, 2016.
4.Includes restricted shares and shares that could be acquired upon the exercise of vested but unexercised stock appreciation rights, assuming a share price of $159.90, the closing price on February 12, 2016.
Equity Compensation Plan Information
Set forth in the following table are the details, for the year to December 31, 2015, in respect of compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance.
Plan category
Number of securities to be issued upon exercise of outstanding equity awards Weighted-average price of outstanding equity awards
Number of securities remaining available for future issuance under equity compensation plans(1)
(a) (b) (c)
Equity compensation plans approved by security holders 9,588,426 52.02 6,946,248
Equity compensation plans not approved by security holders - -
Total 9,588,426
6,946,248
(1) This number reflects the maximum number of ordinary shares remaining available for issuance (excluding the number of ordinary shares reflected in column (a)) upon the exercise of options that may be issued under the Shire Global Employee Stock Purchase Plan. In addition, certain of the Company’s plans provide for the award of options, share appreciation rights (“SARs”) and restricted stock units (“RSUs”) without limitation of the number of shares that can be awarded.
ITEM 13:
ITEM 13: Certain relationships and related transactions
None.
ITEM 14:
ITEM 14: Principal accountant fees and services
The Audit, Compliance & Risk Committee reviews the scope and results of the audit and non-audit services, including tax advisory and compliance services, provided by the Company’s Independent Registered Public Accountants, Deloitte LLP, and the cost effectiveness and the independence and objectivity of the Registered Public Accountants. In recognition of the importance of maintaining the independence of Deloitte LLP, a process for pre-approval has been in place since July 1, 2002 and has continued through to the end of the period covered by this Annual Report.
The following table provides an analysis of the amount paid to the Company’s Independent Registered Public Accountants, Deloitte LLP, all fees having been pre-approved by the Audit, Compliance & Risk Committee.
Year to December 31,
$’M $’M
Audit fees (1) 4.7 4.0
Audit related fees(2) 0.4 0.2
Tax fees(3) 0.1 -
All other fees(4) 3.9 4.4
Total fees 9.1 8.6
(1)Audit fees consisted of audit work only the Independent Registered Public Accountant can reasonably be expected to perform, such as statutory audits.
(2)Audit-related fees consist of work generally only the Independent Registered Public Accountant can reasonably be expected to perform, such as procedures relating to regulatory filings.
(3)Tax fees consisted principally of assistance with matters related to compliance and advice in various tax jurisdictions.
(4)In the year to December 31, 2015 All other fees includes reporting accountant fees of $3.9 million, in connection with Shire’s proposed combination with Baxalta. In the year to December 31, 2014 All other fees includes reporting accountant fees of $4.0 million, in connection with AbbVie’s terminated offer for Shire, and HR system implementation support fees of $0.4 million.
Policy on Audit, Compliance & Risk Committee pre-approval of audit and permissible non-audit services of Independent Registered Public Accountant
Consistent with SEC policies regarding auditor independence, the Audit, Compliance & Risk Committee has responsibility for appointing, setting compensation and overseeing the work of the Independent Registered Public Accountant. In recognition of this responsibility, the Audit, Compliance & Risk Committee pre-approves all audit and permissible non-audit services provided by the Independent Registered Public Accountant.
Certain services have been pre-approved by the Audit, Compliance & Risk Committee as part of its pre-approval policy, including:
·audit services, such as audit work performed in the preparation of consolidated financial statements, as well as work that generally only the Independent Registered Public Accountant can reasonably be expected to provide, including comfort letters, statutory audits and consultation regarding financial accounting and/or reporting standards;
·audit-related services, such as the audit of employee benefit plans, and special procedures required to meet certain regulatory requirements; and
·certain tax services, such as tax compliance services and tax advice on employee remuneration strategies.
Where it is necessary to engage the Independent Registered Public Accountant for services not contemplated in the pre-approval policy, the Audit, Compliance & Risk Committee must pre-approve the proposed service before engaging the Independent Registered Public Accountant. For this purpose, the Audit, Compliance & Risk Committee has delegated pre-approval authority to the Chairman of the Audit, Compliance & Risk Committee. The pre-approval policy is reviewed and updated periodically and was last updated in December 2011. The Chairman must report any pre-approval decisions to the Audit, Compliance & Risk Committee at its next scheduled meeting.
PART IV
ITEM 15:
ITEM 15: Exhibits and financial statement schedules
The following documents are included as part of this Annual Report on Form 10-K
Index to the consolidated financial statements
Report of Independent Registered Public Accounting Firm	
Consolidated Balance Sheets as at December 31, 2015 and 2014	
Consolidated Statements of Income for each of the three years in the period ended December 31, 2015	
Consolidated Statements of Comprehensive Income for each of the three years in the period ended 	
December 31, 2015
Consolidated Statements of Changes in Equity for each of the three years in the period ended 	
December 31, 2015
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2015	
Notes to the Consolidated Financial Statements	
Index to the Shire Income Access Share Trust financial statements
Report of Independent Registered Public Accounting Firm	
Balance Sheets as at December 31, 2015 and
Statements of Income for each of the three years in the period ended December 31, 2015
Statements of Changes in Equity for each of the three years in the period ended December 31, 2015
Statements of Cash Flows for each of the three years in the period ended December 31, 2015
Notes to the Shire Income Access Share Trust Financial Statements
Financial statement schedule
The following schedule is filed as part of this Form 10-K:
Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2015.
All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes.
Exhibits
10.12
Executive Employment Agreement between Shire Human Genetic Therapies, Inc. and Jeffrey V. Poulton, dated April 29, 2015. (27)
10.13
US$ 5,600,000,000 Term Facilities Agreement dated November 2, 2015 among Shire plc, Morgan Stanley Bank International Limited and Deutsche Bank AG, London Branch. (28)
10.14
Consent Request dated November 4, 2015 to US$ 2,100,000,000 Multicurrency Revolving and Swingline Facilities Agreement. (29)
10.15
Consent Request Approval Notice dated November 20, 2015 to US$ 2,100,000,000 Multicurrency Revolving and Swingline Facilities Agreement. (30)
10.16
Letter Agreement among Shire plc, Baxalta Incorporated and Baxter International Inc. dated January 11, 2016. (31)
10.17
Bridge Facilities Agreement among Shire plc, Barclays Bank plc and Morgan Stanley Bank International Limited dated January 11, 2016. (32)
10.18
Contingent Value Rights Agreement by and between Shire plc and American Stock Transfer & Trust Company, LLC dated as of January 22, 2016. (33)
List of Subsidiaries
23.1
Consent of Deloitte LLP
23.2
Consent of Deloitte LLP
31.1
Certification of Flemming Ornskov pursuant to Rule 13a - 14 under The Exchange Act.
31.2
Certification of Jeffrey Poulton pursuant to Rule 13a - 14 under The Exchange Act.
32.1
Certification of Flemming Ornskov and Jeffrey Poulton pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*Certain portions of this exhibit have been omitted intentionally, subject to a confidential treatment request. A complete version of this agreement has been filed separately with the Securities and Exchange Commission.
(1)Incorporated by reference to Exhibit 2.1 to Shire’s Form 8-K filed on November 12, 2013.
(2)Incorporated by reference to Exhibit 2.1 to Shire’s Form 8-K filed on January 22, 2014.
(3)Incorporated by reference to Exhibit 2.2 to Shire's Form 8-K filed on July 24, 2014.
(4)Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on October 22, 2014.
(5)Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on January 12, 2015.
(6)Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on November 2, 2015.
(7)Incorporated by reference to Exhibit 2.1 to Shire's Form 8-K filed on January 11, 2016.
(8)Incorporated by reference to Exhibit 99.02 to Shire's Form 8-K filed on October 1, 2008.
(9)Incorporated by reference to Exhibit 3.1 to Shire's Form 8-K filed on May 1, 2014.
(10)Incorporated by reference to Exhibit 4.01 to Shire's Form 8-K filed on May 23, 2008.
(11)Incorporated by reference to Exhibit 4.02 to Shire's Form 8-K filed on May 23, 2008.
(12)Incorporated by reference to Exhibit 4.03 to Shire's Form 8-K filed on May 23, 2008.
(13)Incorporated by reference to Exhibit 4.04 to Shire's Form 8-K filed on May 23, 2008.
(14)Incorporated by reference to Exhibit 4.05 to Shire's Form 10-K filed on February 27, 2009.
(15)Incorporated by reference to Exhibit (a) to Shire's Form filed on April 27, 2011.
(16)Incorporated by reference to Exhibit 10.09 to Shire's Form 10-K/A filed on May 30, 2008.
(17)Incorporated by reference to Exhibit 10.1 to Shire's Form 10-Q filed on November 7, 2006.
(18)Incorporated by reference to Exhibit 10.07 to Shire's Form 8-K filed on May 23, 2008.
(19)Incorporated by reference to Exhibit 10.27 to Shire's Form 10-Q filed on May 6, 2010.
(20)Incorporated by reference to Exhibit 10.29 to Shire's Form 10-K filed on February 25, 2013.
(21)Incorporated by reference to Exhibit 10.1 to Shire’s Form 8-K filed on November 12, 2013.
(22)Incorporated by reference to Exhibit 10.1 to Shire’s Form 8-K filed on December 16, 2013.
(23)Incorporated by reference to Exhibit 10.1 to Shire’s Form 8-K filed on February 21, 2014.
(24)Incorporated by reference to Exhibit 10.1 to Shire’s Form 8-K filed on April 11, 2014.
(25)Incorporated by reference to Exhibit 10.1 to Shire’s Form 8-K filed on December 17, 2014.
(26)Incorporated by reference to Exhibit 10.1 to Shire’s Form 8-K filed on January 12, 2015.
(27)Incorporated by reference to Exhibit 10.33 to Shire's Form 10-Q filed on July 30, 2015.
(28)Incorporated by reference to Exhibit 10.2 to Shire's Form 8-K filed on November 2, 2015.
(29)Incorporated by reference to Exhibit 10.01 to Shire's Form 8-K filed on November 30, 2015.
(30)Incorporated by reference to Exhibit 10.02 to Shire's Form 8-K filed on November 30, 2015.
(31)Incorporated by reference to Exhibit 10.1 to Shire's Form 8-K filed on January 11, 2016.
(32)Incorporated by reference to Exhibit 10.2 to Shire's Form 8-K filed on January 11, 2016.
(33)Incorporated by reference to Exhibit 10.1 to Shire's Form 8-K filed on January 22, 2016.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as at December 31, 2015 and 2014
Consolidated Statements of Income for each of the three years in the period to December 31, 2015
Consolidated Statements of Comprehensive Income for each of the three years in the period to December 31, 2015
Consolidated Statements of Changes in Equity for each of the three years in the period to December 31, 2015
Consolidated Statements of Cash Flows for each of the three years in the period to December 31, 2015
Notes to the Consolidated Financial Statements	
Schedule:
Schedule II - Valuation and Qualifying Accounts	for each of the three years in the period to December 31, 2015 S1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Shire plc
We have audited the accompanying consolidated balance sheets of Shire plc and subsidiaries (the "Company") as at December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at ITEM 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Shire plc and subsidiaries as at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as at December 31, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte LLP
DELOITTE LLP
London, United Kingdom
February 23, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Shire plc
We have audited the internal control over financial reporting of Shire plc and subsidiaries (the "Company") as at December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting, including those controls applicable to the Shire Income Access Share Trust (the “Trust”) based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting, including those controls applicable to the Trust, as at December 31, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as at and for the year ended December 31, 2015 of the Company and the Trust and our reports dated February 23, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte LLP
DELOITTE LLP
London, United Kingdom
February 23, 2016
SHIRE PLC
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
Notes $’M $’M
ASSETS
Current assets:
Cash and cash equivalents
135.5 2,982.4
Restricted cash
86.0 54.6
Accounts receivable, net 1,201.2 1,035.1
Inventories 635.4 544.8
Deferred tax asset - 344.7
Prepaid expenses and other current assets 197.4 221.5
Total current assets
2,255.5 5,183.1
Non-current assets:
Investments
50.8 43.7
Property, plant and equipment (“PP&E”), net 828.1 837.5
Goodwill 4,147.8 2,474.9
Other intangible assets, net 9,173.3 4,934.4
Deferred tax asset 121.0 112.1
Other non-current assets
33.3 46.4
Total assets
16,609.8 13,632.1
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued expenses 2,050.6 1,909.4
Short-term borrowings 1,511.5 850.0
Other current liabilities 144.0 262.5
Total current liabilities
3,706.1 3,021.9
Non-current liabilities:
Long-term borrowings 69.9 -
Deferred tax liability 2,205.9 1,210.6
Other non-current liabilities 798.8 736.7
Total liabilities
6,780.7 4,969.2
Commitments and contingencies - -
SHIRE PLC
CONSOLIDATED BALANCE SHEETS (continued)
December 31, December 31,
Notes $’M $’M
Equity:
Common stock of 5p par value; 1,000 million shares authorized; and 601.1 million shares issued and outstanding (2014: 1,000 million shares authorized; and 599.1 million shares issued and outstanding) 58.9 58.7
Additional paid-in capital
4,486.3 4,338.0
Treasury stock: 9.7 million shares (2014: 10.6 million shares) (320.6) (345.9)
Accumulated other comprehensive loss (183.8) (31.5)
Retained earnings
5,788.3 4,643.6
Total equity
9,829.1 8,662.9
Total liabilities and equity
16,609.8 13,632.1
The accompanying notes are an integral part of these consolidated financial statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF INCOME
Year to December 31,
Notes $’M $’M $’M
Revenues:
Product sales
6,099.9 5,830.4 4,757.5
Royalties
300.5 160.8 153.7
Other revenues
16.3 30.9 23.1
Total revenues
6,416.7 6,022.1 4,934.3
Costs and expenses:
Cost of product sales
969.0 979.3 670.8
Research and development(1)
1,564.0 1,067.5 933.4
Selling, general and administrative(1)
2,341.2 2,025.8 1,651.3
Goodwill impairment charge
- - 7.1
Gain on sale of product rights
(14.7) (88.2) (15.9)
Reorganization costs 97.9 180.9 88.2
Integration and acquisition costs 39.8 158.8 (134.1)
Total operating expenses
4,997.2 4,324.1 3,200.8
Operating income from continuing operations
1,419.5 1,698.0 1,733.5
Interest income
4.2 24.7 2.1
Interest expense
(41.6) (30.8) (38.1)
Other income/(expense), net
3.7 8.9 (3.9)
Receipt of break fee - 1,635.4 -
Income from continuing operations before income taxes and equity in (losses)/ earnings of equity method investees
1,385.8 3,336.2 1,693.6
Income taxes (46.1) (56.1) (277.9)
Equity in (losses)/ earnings of equity method investees, net of taxes
(2.2) 2.7 3.9
Income from continuing operations, net of taxes
1,337.5 3,282.8 1,419.6
(Loss)/gain from discontinued operations, net of taxes1 (34.1) 122.7 (754.5)
Net income
1,303.4 3,405.5 665.1
(1)Research and development (“R&D”) includes IPR&D intangible asset impairment charges of $643.7 million for the year to December 31, 2015 (2014: $190.3 million, 2013: $19.9 million). Selling, general and administrative (“SG&A”) costs include amortization of intangible assets relating to intellectual property rights acquired of $498.7 million for the year to December 31, 2015 (2014: $243.8 million, 2013: $152.0 million).
SHIRE PLC
CONSOLIDATED STATEMENTS OF INCOME (continued)
Year to December 31, Notes
Earnings per ordinary share - basic
Earnings from continuing operations
226.5c 559.6c 257.2c
(Loss)/gain from discontinued operations (5.8c) 20.9c (136.7c)
Earnings per ordinary share - basic
220.7c 580.5c 120.5c
Earnings per ordinary share - diluted
Earnings from continuing operations
225.5c 555.2c 245.3c
(Loss)/gain from discontinued operations (5.8c) 20.8c (127.8c)
Earnings per ordinary share - diluted
219.7c 576.0c 117.5c
Weighted average number of shares (millions):
Basic 590.4 586.7 552.0
Diluted 593.1 591.3 590.3
The accompanying notes are an integral part of these consolidated financial statements.
SHIRE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year to December 31,
$'M $'M $'M
Net income 1,303.4 3,405.5 665.1
Other comprehensive income:
Foreign currency translation adjustments (156.4) (136.1) 25.3
Unrealized holding gain/(loss) on available-for-sale securities (net of taxes of $nil, $1.3 million, and $0.1 million) 4.1 (5.6) (2.0)
Comprehensive income 1,151.1 3,263.8 688.4
The components of accumulated other comprehensive loss as at December 31, 2015 and December 31, 2014 are as follows:
The accompanying notes are an integral part of these consolidated financial statements.
SHIRE PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In millions of US dollars except share data)
Common stock Number of shares
M's
Common stock
$'M
Additional paid-in capital
$’M
Treasury stock
$'M
Accumulated other comprehensive loss
$'M
Retained earnings
$'M
Total equity
$'M
As at January 1, 2015 599.1 58.7 4,338.0 (345.9) (31.5) 4,643.6 8,662.9
Net income - - - - - 1,303.4 1,303.4
Other comprehensive loss, net of tax - - - - (152.3) - (152.3)
Options exercised 2.0 0.2 16.4 - - - 16.6
Share-based compensation - - 100.3 - - - 100.3
Tax benefit associated with exercise of stock options - - 31.6 - - - 31.6
Shares released by employee benefit trust to satisfy exercise of stock options - - - 25.3 - (24.3) 1.0
Dividends - - - - - (134.4) (134.4)
As at December 31, 2015 601.1 58.9 4,486.3 (320.6) (183.8) 5,788.3 9,829.1
The accompanying notes are an integral part of these consolidated financial statements.
Dividends per share
During the year to December 31, 2015 Shire plc declared and paid dividends of 23.30 US cents per ordinary share (equivalent to 69.90 US cents per ADS) totaling $134.4 million.
SHIRE PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
(In millions of US dollars except share data)
Common stock Number of shares
M's
Common stock
$'M
Additional paid-in capital
$’M
Treasury stock
$'M
Accumulated other comprehensive (loss)/income
$'M
Retained earnings
$'M
Total equity
$'M
As at January 1, 2014 597.5 58.6 4,186.3 (450.6) 110.2 1,461.5 5,366.0
Net income - - - - - 3,405.5 3,405.5
Other comprehensive loss, net of tax - - - - (141.7) - (141.7)
Options exercised 1.6 0.1 15.1 - - - 15.2
Share-based compensation - - 97.0 - - - 97.0
Tax benefit associated with exercise of stock options - - 39.6 - - - 39.6
Shares released by employee benefit trust ("EBT") to satisfy exercise of stock options - - - 104.7 - (102.2) 2.5
Dividends - - - - - (121.2) (121.2)
As at December 31, 2014 599.1 58.7 4,338.0 (345.9) (31.5) 4,643.6 8,662.9
The accompanying notes are an integral part of these consolidated financial statements.
Dividends per share
During the year to December 31, 2014 Shire plc declared and paid dividends of 20.76 US cents per ordinary share (equivalent to 62.28 US cents per ADS) totaling $121.2 million.
SHIRE PLC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)
(In millions of US dollars except share data)
Common stock Number of shares
M's
Common stock
$'M
Additional paid-in capital
$’M
Treasury stock
$'M
Accumulated other comprehensive income
$'M
Retained earnings
$'M
Total equity
$'M
As at January 1, 2013 562.5 55.7 2,981.5 (310.4) 86.9 995.5 3,809.2
Net income - - - - - 665.1 665.1
Other comprehensive income, net of tax - - - - 23.3 - 23.3
Options exercised 1.2 0.1 16.1 - - - 16.2
Convertible bonds conversion to ordinary shares 33.8 2.8 1,098.7 - - - 1,101.5
Share-based compensation - - 78.1 - - - 78.1
Tax benefit associated with exercise of stock options - - 11.9 - - - 11.9
Shares purchased by EBT - - - (50.0) - - (50.0)
Shares purchased under share buy-back program - - - (193.8) - - (193.8)
Shares released by EBT to satisfy exercise of stock options - - - 103.6 - (102.7) 0.9
Dividends - - - - - (96.4) (96.4)
As at December 31, 2013 597.5 58.6 4,186.3 (450.6) 110.2 1,461.5 5,366.0
The accompanying notes are an integral part of these consolidated financial statements.
Dividends per share
During the year to December 31, 2013 Shire plc declared and paid dividends of 17.60 US cents per ordinary share (equivalent to 52.80 US cents per ADS) totaling $96.4 million.
SHIRE PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year to December 31,
$’M $’M $’M
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 1,303.4 3,405.5 665.1
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 637.2 407.3 324.4
Share-based compensation 100.3 97.0 77.4
Change in fair value of contingent consideration (149.9) 14.7 (159.1)
Impairment of intangible assets 643.7 190.3 19.9
Goodwill impairment charge - - 198.9
Impairment of assets held for sale - - 636.9
Write down of assets - - 58.2
Gain on sale of product rights (14.7) (54.6) (15.9)
Unwind of inventory fair value step-ups 31.1 91.9 -
Other, net 12.5 29.4 11.4
Movement in deferred taxes (198.2) (14.3) (349.9)
Equity in losses/(earnings) of equity method investees 2.2 (2.7) (3.9)
Changes in operating assets and liabilities:
Increase in accounts receivable (211.4) (66.1) (148.3)
Increase in sales deduction accruals 97.6 107.6 177.5
Increase in inventory (63.2) (25.3) (36.6)
Decrease/(increase) in prepayments and other assets 37.2 42.4 (60.9)
Increase in accounts and notes payable and other liabilities 109.2 5.3 67.9
Net cash provided by operating activities (A) 2,337.0 4,228.4 1,463.0
CASH FLOWS FROM INVESTING ACTIVITIES:
Movements in restricted cash (32.0) (32.6) (5.3)
Purchases of subsidiary undertakings and businesses, net of cash acquired (5,553.4) (4,104.4) (227.8)
Purchases of non-current investments (9.5) (23.1) (10.6)
Purchases of PP&E (114.7) (77.0) (157.0)
Proceeds from short-term investments 67.0 57.8 -
Proceeds received on sale of product rights 17.5 127.0 19.2
Proceeds from disposal of non-current investments 18.7 21.5 12.1
Other, net (13.5) 0.2 8.5
Net cash used in investing activities (B) (5,619.9) (4,030.6) (360.9)
SHIRE PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year to December 31,
$’M $’M $’M
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit, long term and short term borrowings 3,760.8 2,310.8 -
Repayment of revolving line of credit, long term and short term borrowings (3,110.9) (1,461.8) -
Repayment of debt acquired through business combinations - (551.5) -
Proceeds from ViroPharma call options - 346.7 -
Payment of dividend (134.4) (121.2) (96.4)
Payments to acquire shares under the share buy-back program - - (193.8)
Payments to acquire shares by the EBT - - (50.0)
Excess tax benefit associated with exercise of stock options 32.4 39.7 13.4
Proceeds from exercise of options 16.6 17.4 17.2
Facility arrangement fee (24.1) (10.2) (13.9)
Contingent consideration payments (101.2) (15.2) (14.1)
Other, net (0.2) (0.2) (7.0)
Net cash provided by/ (used in) financing activities(C) 439.0 554.5 (344.6)
Effect of foreign exchange rate changes on cash and cash equivalents (D) (3.0) (9.3) (0.3)
Net (decrease)/ increase in cash and cash equivalents(A+B+C+D) (2,846.9) 743.0 757.2
Cash and cash equivalents at beginning of period 2,982.4 2,239.4 1,482.2
Cash and cash equivalents at end of period 135.5 2,982.4 2,239.4
Supplemental information associated with continuing operations:
Year to December 31,
$’M $’M $’M
Interest paid (20.0) (14.5) (29.9)
Income taxes repaid 76.9 395.0 -
Income taxes paid (145.9) (200.6) (290.2)
Receipt of break fee (see Note 24) - 1,635.4 -
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In millions of US dollars, except where indicated)
1.Description of operations
Shire plc and its subsidiaries (collectively referred to as either “Shire”, or the “Company”) is a biotech company, focusing on developing and marketing innovative medicines for patients with rare diseases and other select conditions.
The Company has grown both organically and through acquisition, completing a series of major transactions that have brought therapeutic, geographic and pipeline growth and diversification. The Company will continue to conduct its own R&D, focused on rare diseases, as well as evaluate companies, products and pipeline opportunities that offer a strategic fit and have the potential to deliver value to all of the Company’s stakeholders: patients, physicians, policy makers, payers, investors and employees.
2.Summary of significant accounting policies
(a)Basis of preparation
The accompanying consolidated financial statements include the accounts of Shire plc, all of its subsidiary undertakings and the Income Access Share trust, after elimination of inter-company accounts and transactions. They have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and US Securities and Exchange Commission (“SEC”) regulations for annual reporting.
(b)Use of estimates in consolidated financial statements
The preparation of consolidated financial statements, in conformity with US GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, contingent consideration receivable from product divestments, contingent consideration payable in respect of business combinations and asset purchases and assets held for sale. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.
(c)Revenue recognition
The Company recognizes revenue when all of the following conditions are met:
•there is persuasive evidence of an agreement or arrangement;
•delivery of products has occurred or services have been rendered;
•the seller’s price to the buyer is fixed or determinable; and
•collectability is reasonably assured.
Where applicable, all revenues are stated net of value added and similar taxes, and trade discounts. No revenue is recognized for consideration, the value or receipt of which is dependent on future events or future performance.
The Company’s principal revenue streams and their respective accounting treatments are discussed below:
Product sales
Revenue for the sale of products is recognized when delivery has occurred and substantially all the risks and rewards of ownership have been transferred to the customer. Provisions for rebates, product returns and discounts to customers are provided for as reductions to revenue in the same period as the related sales are recorded. The provisions made at the time of revenue recognition are based on historical experience and updated for changes in facts and circumstances including the impact of new legislation and loss of a product’s exclusivity. These provisions are recognized as a reduction to revenues.
Royalty income
Royalty income relating to licensed technology is recognized when the licensee sells the underlying product, with the amount of royalty income recorded based on sales information received from the relevant licensee. The
Company estimates sales amounts and related royalty income based on the historical product information for any period that the sales information is not available from the relevant licensee.
Licensing revenues
Other revenue includes revenues derived from product out-licensing arrangements, which typically consist of an initial up-front payment to Shire by the licensee on inception of the license and subsequent milestone payments to Shire by the licensee, contingent on the achievement of certain clinical and sales milestones. Product out-licensing arrangements often require the Company to provide multiple deliverables to the licensee.
Initial license fees received in connection with product out-licensing agreements entered into prior to January 1, 2011 were deferred and are recognized over the period in which the Company has continuing substantive performance obligations, typically the period over which the Company participates in the development of the out-licensed product, even where such fees are non-refundable and not creditable against future royalty payments.
For product out-licensing arrangements entered into, or subject to material modification, after January 1, 2011, consideration received is allocated between each of the separable elements in the arrangement using the relative selling price method. An element is considered separable if it has value to the customer on a stand-alone basis. The selling price used for each separable element will be based on vendor specific objective evidence (“VSOE”) if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. Revenue is then recognized as each of the separable elements to which the revenue has been allocated is delivered.
Milestone payments which are non-refundable, non-creditable and contingent on achieving certain clinical milestones are recognized as revenues either on achievement of such milestones if the milestones are considered substantive or over the period the Company has continuing substantive performance obligations, if the milestones are not considered substantive. If milestone payments are creditable against future royalty payments, the milestones are deferred and released over the period in which the royalties are anticipated to be paid.
(d)Sales deductions
(i)Rebates
Rebates primarily consist of statutory rebates to state Medicaid agencies and contractual rebates with health-maintenance organizations. These rebates are based on price differentials between a base price and the selling price. As a result, rebates generally increase as a percentage of the selling price over the life of the product (as prices increase). Provisions for rebates are recorded as reductions to revenue in the same period as the related sales are recorded, with the amount of the rebate based on the Company’s best estimate if any uncertainty exists over the unit rebate amount, and with estimates of future utilization derived from historical trends.
(ii)Returns
The Company estimates the proportion of recorded revenue that will result in a return, based on historical trends and when applicable, specific factors affecting certain products at the balance sheet date. The accrual is recorded as a reduction to revenue in the same period as the related sales are recorded.
(iii)Coupons
The Company uses coupons as a form of sales incentive. An accrual is established based on the Company's expectation of the level of coupon redemption, estimated using historical trends. The accrual is recorded as a reduction to revenue in the same period as the related sales are recorded or the date the coupon is offered, if later than the date the related sales are recorded.
(iv)Discounts
The Company offers cash discounts to customers for the early payment of receivables which are recorded as reductions to revenue and accounts receivable in the same period as the related sale is recorded.
(v)Wholesaler chargebacks
The Company has contractual agreements whereby it supplies certain products to third parties at predetermined prices. Wholesalers acting as intermediaries in these transactions are reimbursed by the Company if the predetermined prices are less than the prices paid by the wholesaler to the Company. Accruals for wholesaler chargebacks, which are based on historical trends, are recorded as reductions to revenue in the same period as the related sales are recorded.
(e)Collaborative arrangements
The Company enters into collaborative arrangements to develop and commercialize drug candidates. These collaborative arrangements often require up-front, milestone, royalty or profit share payments, or a combination of these, with payments often contingent upon the success of the related development and commercialization efforts. Collaboration agreements entered into by the Company may also include expense reimbursements or other such payments to the collaborating partner.
The Company reports costs incurred and revenue generated from transactions with third parties as well as payments between parties to collaborative arrangements either on a gross or net basis, depending on the characteristics of the collaborative relationship.
(f)Cost of product sales
Cost of product sales includes the cost of purchasing finished product for sale, the cost of raw materials and manufacturing for those products that are manufactured by the Company, shipping and handling costs, depreciation and amortization of intangible assets in respect of favorable manufacturing contracts. Royalties payable to third party intellectual property owners on sale of the Company’s products are also included in Cost of product sales.
(g)Leased assets
The costs of operating leases are 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 capital leases are included in the consolidated balance sheet as property, plant and equipment and are depreciated over the shorter of the period of the lease or their useful lives. The capital element of future lease payments is recorded as a liability, while the interest element is charged to operations over the period of the lease to produce a level yield on the balance of the capital lease obligation.
(h)Advertising expense
The Company expenses the cost of advertising as incurred. Advertising costs amounted to $56.1 million, $56.4 million and $60.9 million for the years to December 31, 2015, 2014 and 2013 respectively and were included within Selling, general and administrative (“SG&A”) expenses.
(i)Research and development (“R&D”) expense
R&D costs are expensed as incurred. Up-front and milestone payments made to third parties for in-licensed products that have not yet received marketing approval and for which no alternative future use has been identified are also expensed as incurred.
Milestone payments made to third parties on and subsequent to regulatory approval are capitalized as intangible assets, and amortized over the remaining useful life of the related product.
(j)Valuation and impairment of long-lived assets other than goodwill, indefinite lived intangible assets and investments
The Company evaluates the carrying value of long-lived assets other than goodwill, indefinite lived intangible assets and investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of the relevant assets may not be recoverable. When such a determination is made, management’s estimate of undiscounted cash flows to be generated by the use and ultimate disposition of these assets is compared to the carrying value of the assets to determine whether the carrying value is recoverable. If the carrying value is deemed not to be recoverable, the amount of the impairment recognized in the consolidated financial statements is determined by estimating the fair value of the relevant assets and recording an impairment loss for the amount by which the carrying value exceeds the estimated fair value. This fair value is usually determined based on estimated discounted cash flows.
(k)Finance costs of debt
Finance costs relating to debt issued are recorded as a deferred charge and amortized to the consolidated statements of income over the period to the earliest redemption date of the debt, using the effective interest rate method. On extinguishment of the related debt, any unamortized deferred financing costs are written off and charged to interest expense in the consolidated statements of income.
(l)Foreign currency
Monetary assets and liabilities in foreign currencies are translated into the functional currency of the relevant subsidiary in which they arise at the rate of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into the relevant functional currency at the rate of exchange ruling at the date of the transaction. Transaction gains and losses, other than those related to current and deferred tax assets and liabilities, are recognized in arriving at income from operations before income taxes and equity in earnings of equity method investees. Transaction gains and losses arising on foreign currency denominated current and deferred tax assets and liabilities are included within income taxes in the consolidated statements of income.
The results of operations for subsidiaries, whose functional currency is not the US dollar, are translated into the US dollar at the average rates of exchange during the period, with the subsidiaries’ balance sheets translated 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 loss.
Foreign currency exchange transaction losses included in consolidated statements of income in the years to December 31, 2015, 2014 and 2013 amounted to $26.5 million, $15.6 million and $8.7 million, respectively.
(m)Income taxes
Uncertain tax positions are recognized in the consolidated financial statements for positions which are considered more likely than not of being sustained, based on the technical merits of the position on audit by the tax authorities. The measurement of the tax benefit recognized in the consolidated financial statements is based upon the largest amount of tax benefit that, in management’s judgment, is greater than 50% likely of being realized based on a cumulative probability assessment of the possible outcomes.
The Company recognizes interest and penalties relating to unrecognized tax benefits within income taxes.
The Company recognizes interest and penalties relating to income taxes within income taxes. Interest income on cash required to be deposited with the tax authorities is recognized within interest income.
Deferred tax assets and liabilities are recognized for differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the 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.
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.
(n)Earnings per share
Basic earnings per share is based upon net income attributable to the Company divided by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is based upon net income attributable to the Company adjusted for the impact of interest expense on convertible debt on an “if-converted” basis (when the effect is dilutive and prior to the actual conversion or redemption of such debt) divided by the weighted average number of ordinary share equivalents outstanding during the period, adjusted for the dilutive effect of all potential ordinary shares equivalents that were outstanding during the year. Such potentially dilutive shares are excluded when the effect would be to increase diluted earnings per share or reduce the diluted loss per share.
(o)Share-based compensation
Share-based compensation represents the cost of share-based awards granted to employees. The Company measures share-based compensation cost for awards classified as equity at the grant date, based on the estimated fair value of the award. Predominantly all of the Company’s awards have service and/or performance conditions and the fair values of these awards are estimated using a Black-Scholes valuation model.
For share-based compensation awards which cliff vest, the Company recognizes the cost of the relevant share-based payment award as an expense on a straight-line basis (net of estimated forfeitures) over the employee’s requisite service period. For those share-based compensation awards with a graded vesting schedule, the Company recognizes the cost of the relevant share-based payment award as an expense on a straight-line basis (net of estimated forfeitures) over the requisite service period for the entire award (that is, over the requisite service period for the last separately vesting portion of the award). The share-based compensation expense is recorded in Cost of
product sales, R&D, SG&A and Reorganization costs in the consolidated statements of income based on the employees’ respective functions.
The Company records deferred tax assets for awards that result in deductions on the Company’s income tax returns, based on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the Company’s income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in the consolidated statements of income (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).
The Company’s share-based compensation plans are described more fully in Note 28.
(p)Cash and cash equivalents
Cash and cash equivalents are defined as short-term highly liquid investments with original maturities of ninety days or less.
(q)Financial instruments - derivatives
The Company uses derivative financial instruments to manage its exposure to foreign exchange risk principally associated with inter-company financing. These instruments consist of swap and forward foreign exchange contracts. The Company does not apply hedge accounting for these instruments. The fair values of these instruments are included on the balance sheet in current assets / liabilities, with changes in the fair value recognized in the consolidated statements of income. The cash flows relating to these instruments are presented within net cash provided by operating activities in the consolidated statement of cash flows, unless the derivative instruments are economically hedging specific investing or financing activities.
(r)Inventories
Inventories are stated at the lower of cost or market. 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 transportation costs.
Inventories include costs relating to both marketed products and, for certain products, cost incurred prior to regulatory approval. Inventories are capitalized prior to regulatory approval if the Company considers that it is highly probable that the US Food and Drug Administration (“FDA”) or another regulatory body will grant commercial and manufacturing approval for the relevant product, and it is highly probable that the value of capitalized inventories will be recovered through commercial sale.
Inventories are written down for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those anticipated, inventory adjustments may be required.
(s)Assets held-for-sale
An asset or asset disposal group is classified as held-for-sale when, amongst other things, the Company has committed to a plan of disposition, the asset or asset disposal group is available for immediate sale, and the plan is not expected to change significantly. Assets held-for-sale are carried at the lower of their carrying amount or fair value less cost to sell.
The Company does not record depreciation or amortization on assets classified as held-for-sale.
(t)Investments
The Company has certain investments in pharmaceutical and biotechnology companies.
Investments are accounted for using the equity method of accounting if the investment gives the Company the ability to exercise significant influence, but not control over, the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors such as representation on the investee’s Board of Directors and the nature of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the Company records its investments in equity-method investees in the consolidated balance sheet under Investments and its share of the investees’ earnings or losses together with other-than-
temporary impairments in value under equity in (losses)/ earnings of equity method investees, net of taxes in the consolidated statements of income.
All other equity investments, which consist of investments for which the Company does not have the ability to exercise significant influence, are accounted for under the cost method or at fair value. Investments in private companies are carried at cost, less provisions for other-than-temporary impairment in value. For public companies that have readily determinable fair values, the Company classifies its equity investments as available-for-sale and, accordingly, records these investments at their fair values with unrealized holding gains and losses included in the consolidated statement of comprehensive income, net of any related tax effect. Realized gains and losses, and declines in value of available-for-sale securities judged to be other-than-temporary, are included in other income, net in the consolidated statements of income. The cost of securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included as interest income in the consolidated statements of income.
(u)Property, plant and equipment
Property, plant and equipment is shown at cost reduced for impairment losses, net of accumulated depreciation. The cost of significant assets includes capitalized interest incurred during the construction period. Depreciation is recorded 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:
Buildings 15 to 50 years
Office furniture, fittings and equipment 3 to 10 years
Warehouse, laboratory and manufacturing equipment 3 to 15 years
The cost of land is not depreciated. Assets under the course of construction are not depreciated until the relevant assets are available and ready for their intended use.
Expenditures for maintenance and repairs are charged to the consolidated statements of income as incurred. The costs of major renewals and improvements are capitalized. At the time property, plant and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and accumulated depreciation accounts. The profit or loss on such disposition is reflected in operating income.
(v)Goodwill and other intangible assets
(i)Goodwill
In business combinations completed subsequent to January 1, 2009, goodwill represents the excess of the fair value of the consideration given and the fair value of any non-controlling interest in the acquiree over the fair value of the identifiable assets and liabilities acquired. For business combinations completed prior to January 1, 2009 goodwill represents the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired.
Goodwill is not amortized, but instead is reviewed for impairment, at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For the purpose of assessing the carrying value of goodwill for impairment, goodwill is allocated at the Company’s reporting unit level. Events or changes in circumstances which could trigger an impairment review include but are not limited to: significant underperformance of a reporting unit relative to expected historical or projected future operating results; significant changes in the manner of the Company's use of acquired assets or the strategy for the overall business; and significant negative industry trends.
The Company reviews goodwill for impairment by firstly assessing qualitative factors, including comparing the market capitalization of the Company to the carrying value of its assets, to determine whether events or circumstances exist which indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company assesses the totality of events or circumstances and determines if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If, after assessing these qualitative factors, it is deemed more likely than not that the fair value of a reporting unit is less than its carrying value, a “two step” quantitative assessment is performed by comparing the carrying value of the reporting unit's net assets (including allocated goodwill) to the fair value of the reporting unit. If the reporting unit's carrying amount is greater than its fair value, a second step is performed whereby the portion of the reporting unit’s fair value relating to goodwill is compared to the carrying value of the reporting unit’s goodwill. The Company recognizes a goodwill impairment charge for the amount by which the carrying value of goodwill exceeds its estimated fair value. In the year to December 31, 2013 the Company has recorded an impairment charge of $198.9 million related to the goodwill allocated to the Company’s former Regenerative Medicine (“RM”) reporting unit. See Note 11 for further details.
(ii)Other intangible assets
Other intangible assets principally comprise intellectual property rights for products with a defined revenue stream, acquired product technology and IPR&D. Intellectual property rights for currently marketed products and acquired product technology are recorded at fair value and amortized over the estimated useful life of the related product, which ranges from 4 to 24 years (weighted average 20 years). IPR&D acquired through a business combination is capitalized as an indefinite lived intangible asset until the completion or abandonment of the associated R&D efforts. IPR&D is reviewed for impairment using a “one-step” approach which compares the fair value of the IPR&D asset with its carrying amount. An impairment loss is recognized to the extent that the carrying value exceeds the fair value of the IPR&D asset. Once the R&D efforts are completed the useful life of the relevant assets will be determined, and the IPR&D asset amortized over this useful economic life.
The following factors, where applicable, are considered in estimating the useful lives of Other intangible assets:
·expected use of the asset;
·regulatory, legal or contractual 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 stability of the market, known technological advances, 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; and
·historical experience of renewing or extending similar arrangements.
When a number of factors apply to an intangible asset, these factors are considered in combination when determining the appropriate useful life for the relevant asset.
(w)Non-monetary transactions
The Company enters into certain non-monetary transactions that involve either the granting of a license over the Company’s patents or the disposal of an asset or group of assets in exchange for a non-monetary asset, usually equity. The Company accounts for these transactions at fair value if the Company is able to determine the fair value within reasonable limits. To the extent the Company concludes that it is unable to determine the fair value of a transaction that transaction is accounted for at the recorded amounts of the assets exchanged. Management is required to exercise its judgment in determining whether or not the fair value of the asset received or given up can be determined.
(x)New accounting pronouncements
Adopted during the period
Balance Sheet Classification of Deferred Taxes
In November 2015 the Financial Accounting Standards Board (“FASB”) issued guidance to simplify the balance sheet presentation of deferred income taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position compared to the current practice of classifying deferred income tax liabilities and assets into both current and noncurrent amounts. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change, the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted.
Shire adopted this guidance prospectively in the current period presented and the prior year balance sheet classification of deferred taxes has not been adjusted. The adoption of this guidance primarily resulted in a reclassification of net current deferred tax assets to net non-current deferred tax liabilities in the Consolidated Balance Sheet as at December 31, 2015. See Note 26 for details.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014 the FASB issued guidance on the reporting of discontinued operations and disclosures of disposals of components of an entity. The amendments in this update revise the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The guidance requires expanded disclosures
for discontinued operations which provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. The guidance also requires an entity to disclose the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting.
Shire adopted this guidance in the period, which will be effective for discontinued operations occurring after January 1, 2015. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.
To be adopted in future periods
Revenue from Contracts with Customers
In May 2014 the FASB and the International Accounting Standards Board (together the “Accounting Standards Boards”) issued a new accounting standard that is intended to clarify and converge the financial reporting requirements for revenue from contracts with customers. The core principle of the standard is that an “entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”. To achieve that core principle the Accounting Standards Boards developed a five-step model (as presented below) and related application guidance, which will replace most existing revenue recognition guidance in US GAAP.
Five-step model:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Accounting Standards Boards also issued new qualitative and quantitative disclosure requirements as part of the new accounting standard which aims to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015 the FASB decided to defer the effective date of the guidance by one year. Based on this deferral, public entities would need to apply the new guidance for annual reporting periods beginning after December 15, 2017, and interim periods therein. The Company is currently evaluating the impact of adopting this guidance.
Amendments to the Consolidation Analysis
In February 2015 the FASB issued guidance to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities. Financial statement users asserted that in certain situations in which consolidation is ultimately required, deconsolidated financial statements are necessary to better analyze the reporting entity’s economic and operational results. Previously, the FASB issued an indefinite deferral for certain entities to partially address those concerns. However, the amendments in this guidance rescind that deferral and address those concerns by making changes to the consolidation guidance.
Under the amendments, all reporting entities are within the scope of Subtopic 810-10, Consolidation, including limited partnerships and similar legal entities, unless a scope exception applies. The presumption that a general partner controls a limited partnership has been eliminated. In addition, fees paid to decision makers that meet certain conditions no longer cause decision makers to consolidate a VIE in certain instances. The amendments place more emphasis in the consolidation evaluation on variable interests other than fee arrangements such as principal investment risk (for example, debt or equity interests), guarantees of the value of the assets or liabilities of the VIE, written put options on the assets of the VIE, or similar obligations, including some liquidity commitments or agreements (explicit or implicit). Additionally, the amendments reduce the extent to which related party arrangements cause an entity to be considered a primary beneficiary.
The amendments are effective for public business entities for fiscal years, and for interim periods therein, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
Simplifying the Presentation of Debt Issuance Costs
In April 2015 the FASB issued guidance to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update.
In August 2015 the FASB issued further guidance to incorporate the SEC staff’s observation that, given the absence of authoritative guidance, the SEC staff would not object to an entity deferring and presenting debt issuance costs
arising from line-of-credit arrangements as an asset and subsequently amortizing these costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
The amendments in these updates are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods therein. Early adoption is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015 the FASB issued guidance to simplify the customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted for all entities. An entity can elect to adopt the guidance either a) prospectively to all arrangements entered into or materially modified after the effective date or b) retrospectively. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
Simplifying the Measurement of Inventory
In July 2015 the FASB issued guidance to simplify the measurement of inventory which currently requires an entity to measure its inventory at the lower of cost or market, whereby market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendment provides guidance that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last in first out or the retail inventory method. This amendment will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted for all entities. The Company is currently evaluating the impact of adopting this guidance.
Simplifying the Accounting for Measurement-Period Adjustments
In September 2015 the FASB issued guidance to simplify the accounting for measurement-period adjustment. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The guidance further requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance will be effective for fiscal year beginning after December 15, 2015, including interim periods within those fiscal years. The guidance should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016 the FASB issued guidance to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update revises the entity’s accounting related to the classification and measurement of investment in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance will be effective for fiscal year beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption, entities will be required to make a cumulative effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. The guidance on equity securities without readily determinable fair value will be applied prospectively to all equity instruments that exist as of the date of the adoption of this standard. The Company does not expect the adoption of this guidance to have a material effect on its consolidated financial position, results of operations and cash flows.
(y)Statutory accounts
The consolidated financial statements as at December 31, 2015 and 2014, and for each of the three years in the period to December 31, 2015 do not comprise statutory accounts within the meaning of Section 434 of the UK Companies Act 2006 or Article 104 of the Companies (Jersey) Law 1991.
Statutory accounts of Shire, consisting of the solus accounts of Shire plc for the year to December 31, 2014 prepared under UK GAAP and in compliance with Jersey law have been delivered to the Registrar of Companies for Jersey. The consolidated accounts of the Company for the year to December 31, 2014 prepared in accordance with US GAAP, in fulfillment of the Company’s United Kingdom Listing Authority (“UKLA”) annual reporting requirements were filed with the UKLA. The auditor’s reports on these accounts were unqualified.
Statutory accounts of Shire, consisting of the solus accounts of Shire plc for the year to December 31, 2015 prepared under UK GAAP and in compliance with Jersey law will be delivered to the Registrar of Companies in Jersey in 2016. The Company further expects to file the consolidated accounts of the Company for the year to December 31, 2015, prepared in accordance with US GAAP, in fulfillment of the Company’s UKLA annual reporting requirements with the UKLA in 2016.
3.Business combinations
Proposed combination with Baxalta Incorporated (“Baxalta”)
On January 11, 2016 Shire announced that the boards of directors of Shire and Baxalta had agreed on the terms of a recommended combination of Shire with Baxalta. Under the terms of the agreement, Baxalta shareholders will receive $18.00 in cash and 0.1482 Shire ADSs per Baxalta share. Based on Shire’s closing ADS price on January 8, 2016, this implies a total value of $45.57 per Baxalta share, representing an aggregate consideration of approximately $32 billion.
Baxalta is a global biopharmaceutical company that focuses on developing, manufacturing and commercializing therapies for orphan diseases and underserved conditions in hematology, oncology and immunology.
Closing of the transaction is subject to approval by Shire and Baxalta shareholders, certain regulatory approvals, redelivery of tax opinions initially delivered at signing and other customary closing conditions and representations. The transaction is a class 1 transaction for Shire for the purposes of the UK Listing Rules and requires the approval of Shire shareholders. A shareholder circular, together with notice of the relevant shareholder meeting, will be distributed to Shire shareholders in due course. The parties expect the transaction to close in mid-2016.
Acquisition of Dyax Corp. (“Dyax”)
On January 22, 2016 Shire acquired all of the outstanding share capital of Dyax for $37.30 per share in cash. Under the terms of the merger agreement Dyax shareholders may receive additional value through a non-tradable contingent value right worth $4.00 per share, payable subject to FDA approval of DX-2930.
Dyax was a publicly traded, Massachusetts-based rare disease biopharmaceutical company primarily focused on the development of plasma kallikrein (pKal) inhibitors for the treatment of HAE. Dyax’s most advanced clinical program is SHP643 (formerly DX-2930), a Phase 3 program with the potential for improved efficacy and convenience for HAE patients. SHP643 has received Fast Track, Breakthrough Therapy, and Orphan Drug designations by the FDA and has also received Orphan Drug status in the EU. Dyax also brings the marketed product, KALBITOR, a plasma kallikrein inhibitor for the treatment of acute attacks of HAE in patients 12 years of age and older.
The acquisition of Dyax will be accounted for as a business combination using the acquisition method. The preliminary acquisition-date fair value consideration is $6,330.0 million, comprising cash paid on closing of $5,934.0 million and the preliminary fair value of the contingent value right of $396.0 million (maximum payable $646.0 million). The assets acquired and the liabilities assumed from Dyax will be recorded at the date of acquisition, at their fair value. Shire's consolidated financial statements will reflect these fair values at, and the results of Dyax will be included in Shire's consolidated statement of income from, January 22, 2016. As the initial accounting for the business combination has not yet been completed, further disclosure relating to this acquisition will be included in the Company's Form 10-Q for the three months ended March 31, 2016.
In the year to December 31, 2015 the Company expensed costs of $13.2 million (2014: $nil) relating to the acquisition of Dyax, which have been recorded within integration and acquisition costs in the Company's consolidated income statement.
Acquisition of NPS Pharma
On February 21, 2015 Shire completed its acquisition of 100% of the outstanding share capital of NPS Pharma. The acquisition-date fair value of cash consideration paid on closing was $5,220 million.
The acquisition of NPS Pharma added GATTEX/REVESTIVE, approved in the US and EU for the treatment of adults with Short Bowel Syndrome (“SBS”) who are dependent on parenteral support, a rare and potentially fatal gastrointestinal disorder and NATPARA/NATPAR approved in the US and indicated as an adjunct to calcium and vitamin D to control hypocalcemia in patients with HPT, a rare endocrine disease, to Shire’s portfolio of currently marketed products.
The acquisition of NPS Pharma has been accounted for as a business combination using the acquisition method. The assets acquired and the liabilities assumed from NPS Pharma have been recorded at their preliminary fair values at the date of acquisition, being February 21, 2015. The Company’s consolidated financial statements include the results of NPS Pharma from February 21, 2015.
The amount of NPS Pharma’s post-acquisition revenues and pre-tax losses included in the Company’s consolidated statement of income for the year to December 31, 2015 were $285.9 million and $96.7 million respectively. The pre-tax loss includes charges relating to the unwind of inventory fair value adjustments of $29.8 million, intangible asset amortization of $260.3 million and integration costs of $90.1 million.
The purchase price allocation was finalized in the fourth quarter of 2015. The Company’s allocation of the purchase price to the fair value of assets acquired and liabilities assumed, including measurement period adjustments recorded during 2015, is outlined below:
Fair value
$’M
ASSETS
Current assets:
Cash and cash equivalents 41.6
Short-term investments 67.0
Accounts receivable 33.4
Inventories 89.4
Other current assets 11.1
Total current assets 242.5
Non-current assets:
PP&E 4.8
Goodwill 1,551.0
Other intangible assets
- currently marketed products 4,640.0
- royalty rights (categorized as "Other amortized intangible assets" ) 353.0
Total assets 6,791.3
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities 75.7
Short-term debt 27.4
Non-current liabilities:
Long-term debt, less current portion 78.9
Deferred tax liabilities 1,385.2
Other non-current liabilities 4.5
Total liabilities 1,571.7
Fair value of identifiable assets acquired and liabilities assumed 5,219.6
Consideration
Cash consideration paid 5,219.6
(a) Other intangible assets - currently marketed products
Other intangible assets totaling $4,640.0 million relate to intellectual property rights acquired for NPS Pharma’s currently marketed products, primarily attributed to NATPARA/NATPAR and GATTEX/REVESTIVE. The fair value of the currently marketed products is and has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each separately identifiable intangible asset.
The estimated useful lives of the NATPARA/NATPAR and GATTEX/REVESTIVE intangible assets are 24 years, with amortization being recorded on a straight-line basis.
(b) Other intangible assets - Royalty rights
Other intangibles totaling $353.0 million relate to the royalty rights arising from the collaboration agreements with Amgen, Janssen and Kyowa Hakko Kirin. Amgen markets cinacalcet HCl as SENSIPAR in the US and as MIMPARA in the EU; Janssen Pharmaceuticals markets tapentadol as Nucynta in the US; and Kyowa Hakko Kirin markets cinacalcet HCI as REGPARA in Japan, Hong Kong, Malaysia, Macau, Singapore, and Taiwan. NPS Pharma is entitled to royalties from the relevant net sales of these products.
The fair value of these royalty rights has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each royalty right.
The estimated useful lives of these royalty rights range from 4 to 5 years (weighted average 4 years), with amortization being recorded on a straight-line basis.
(c) Goodwill
Goodwill arising of $1,551.0 million, which is not deductible for tax purposes, includes the expected synergies that will result from combining the operations of NPS Pharma with the operations of Shire, particularly those synergies expected to be realized due to Shire’s structure; intangible assets that do not qualify for separate recognition at the time of the acquisition; and the value of the assembled workforce.
In the year to December 31, 2015 the Company expensed costs of $144.5 million (2014: $nil) relating to the acquisition and post-acquisition integration of NPS Pharma, which have been recorded within Integration and acquisition costs in the Company’s consolidated statement of income.
Supplemental disclosure of pro forma information
The following unaudited pro forma financial information presents the combined results of the operations of Shire and NPS Pharma as if the acquisition of NPS Pharma had occurred as at January 1, 2014. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations actually would have been had the acquisition been completed at the date indicated. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.
The unaudited pro forma financial information above reflects the following pro forma adjustments:
(i)an adjustment to decrease net income by $105.3 million for the year to December 31, 2014 to reflect acquisition costs incurred by Shire and NPS Pharma, and increase net income by $105.3 million for the year to December 31, 2015 to eliminate acquisition costs incurred;
(ii)an adjustment to decrease net income by $18.8 million for the year to December 31, 2014 to reflect charges on the unwind of inventory fair value adjustments as acquisition date inventory is sold, and a corresponding increase in net income for the year to December 31, 2015;
(iii)an adjustment of $22.2 million in the year to December 31, 2014 to reflect additional interest expense associated with the drawdown of debt to partially finance the acquisition of NPS Pharma and the amortization of related deferred debt issuance costs; and
(iv)an adjustment to increase amortization expense by approximately $22.2 million in the year to December 31, 2015 and $177.0 million in the year to December 30, 2014 related to amortization of the fair value of identifiable intangible assets acquired and the elimination of NPS Pharma’s historical intangible asset amortization expense.
The adjustments above are stated net of their tax effects, where applicable.
Acquisition of Foresight Biotherapeutics, Inc. (“Foresight”)
On July 30, 2015 Shire completed the acquisition of 100% of the outstanding share capital of Foresight, a privately owned company incorporated in New York. The acquisition-date fair value of cash consideration, which was paid on closing, was $298.8 million.
With this acquisition, Shire acquired the global rights to SHP640 (formerly FST-100), a Phase-3 ready therapy for the treatment of infectious conjunctivitis, an ocular surface condition commonly referred to as pink eye.
The acquisition of Foresight has been accounted for as a business combination using the acquisition method. The assets and liabilities acquired from Foresight have been recorded at their preliminary fair values at the date of acquisition, being July 30, 2015. The Company’s consolidated financial statements include the results of Foresight from July 30, 2015.
The purchase price allocation is preliminary pending the determination of the fair values of certain assets and liabilities. The purchase price has been allocated on a preliminary basis to the SHP640 IPR&D intangible asset ($300.0 million), net current assets assumed ($3.0 million), net non-current liabilities assumed (including deferred tax liabilities) ($116.6 million) and goodwill ($112.4 million). Goodwill is not deductible for tax purposes.
Unaudited pro forma financial information to present the combined results of operations of Shire and Foresight is not provided as the impact of this acquisition is not material to the Company’s results of operations for any period presented.
Acquisition of Solpharm d.o.o (“Solpharm”)
On September 28, 2015 Shire completed the acquisition of 100% of the outstanding share capital of Solpharm, a privately-owned company incorporated in Croatia. The acquisition-date fair value of consideration was $5.2 million, comprising cash paid on closing of $4.5 million and the fair value of contingent consideration payable of $0.7 million (maximum payable $3.1 million dependent upon achievement of post-closing milestones). Shire has preliminarily allocated the purchase price to goodwill ($4.4 million) and other net assets ($0.8 million).
Unaudited pro forma financial information to present the combined results of operations of Shire and Solpharm is not provided as the impact of this acquisition is not material to the Company’s results of operations for any period presented.
Acquisition of Meritage Pharma Inc. (“Meritage”)
Prior to the acquisition of ViroPharma Incorporated (“ViroPharma”) by Shire (see below), ViroPharma had entered into an exclusive development and option agreement with Meritage, a privately owned US company focusing on developing oral budesonide suspension (“OBS”) as a treatment for eosinophilic esophagitis. Under the terms of this agreement Meritage controlled and conducted all related research up to achievement of pre-defined development success criteria at which point ViroPharma had the option to acquire Meritage.
On February 18, 2015, following the exercise of the purchase option, Shire acquired all the outstanding equity of Meritage. The acquisition date fair value of the consideration totalled $166.9 million, comprising cash consideration paid on closing of $74.8 million and the fair value of contingent consideration payable of $92.1 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $175.0 million dependent upon achievement of certain clinical development and regulatory milestones.
With the Meritage acquisition, Shire has acquired the global rights to Meritage’s Phase 3-ready compound, OBS (now SHP621), for the treatment of adolescents and adults with eosinophilic esophagitis.
The acquisition of Meritage has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Meritage have been recorded at their fair values at the date of acquisition, being February 18, 2015. The Company’s consolidated financial statements and results of operations include the results of Meritage from February 18, 2015.
The purchase price allocation is final. The purchase price has been allocated to acquired SHP621 IPR&D intangible asset ($175.0 million), net current assets assumed ($5.5 million), net non-current liabilities assumed (including deferred tax liabilities) ($45.9 million) and goodwill ($32.3 million). Goodwill is not deductible for tax purposes.
Unaudited pro forma financial information to present the combined results of operations of Shire and Meritage is not provided as the impact of this acquisition is not material to the Company’s results of operations for any period presented.
Acquisition of ViroPharma
On January 24, 2014 Shire completed its acquisition of 100% of the outstanding share capital of ViroPharma. The acquisition-date fair value of cash consideration paid on closing was $3,997 million.
The acquisition of ViroPharma added CINRYZE to Shire’s portfolio of currently marketed products. CINRYZE is a leading brand for the prophylactic treatment of Hereditary Angioedema (“HAE”) in adolescents and adults.
The acquisition of ViroPharma has been accounted for as a business combination using the acquisition method. The assets acquired and the liabilities assumed from ViroPharma have been recorded at their fair values at the date of acquisition, being January 24, 2014. The Company’s consolidated financial statements include the results of ViroPharma from January 24, 2014.
The purchase price allocation was finalized in the fourth quarter of 2014. The Company’s allocation of the purchase price to the fair value of assets acquired and liabilities assumed is outlined below:
Identifiable assets acquired and liabilities assumed Acquisition date fair value $’M
ASSETS
Current assets:
Cash and cash equivalents 232.6
Short-term investments 57.8
Accounts receivable 52.2
Inventories 203.6
Deferred tax assets 100.7
Purchased call option 346.7
Other current assets 50.9
Total current assets 1,044.5
Non-current assets:
PP&E 24.7
Goodwill 1,655.5
Other intangible assets
- Currently marketed products 2,320.0
- In-Process Research and Development (“IPR&D”) 315.0
Other non-current assets 10.4
Total assets 5,370.1
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities 122.7
Convertible bond 551.4
Non-current liabilities:
Deferred tax liabilities 603.5
Other non-current liabilities 95.5
Total liabilities 1,373.1
Fair value of identifiable assets acquired and liabilities assumed 3,997.0
Consideration
Cash consideration paid 3,997.0
(a) Other intangible assets - currently marketed products
Other intangible assets totaled $2,320.0 million at the date of acquisition, relating to intellectual property rights acquired for ViroPharma’s then currently marketed products, primarily attributed to CINRYZE, for the routine prophylaxis against HAE attacks in adolescent and adult patients. Shire also obtained intellectual property rights to three other commercialized products, PLENADREN, an orphan drug for the treatment of adrenal insufficiency in adults, BUCCOLAM, an oromucosal solution for the treatment of prolonged, acute, and convulsive seizures in infants, toddlers, children and adolescents and VANCOCIN, an oral capsule formulation for the treatment of C. difficile-associated diarrhea (“CDAD”), which was divested by Shire in the third quarter of 2014. The fair value of currently marketed products has been estimated using an income approach, based on the present value of incremental after tax cash flows attributable to each separately identifiable intangible asset.
The estimated useful lives of the CINRYZE, PLENADREN and BUCCOLAM intangible assets range from 10 to 23 years (weighted average 22 years), with amortization being recorded on a straight-line basis.
(b) Other intangible assets - IPR&D
The IPR&D asset of $315.0 million relates to maribavir (now SHP620), an investigational antiviral product for cytomegalovirus. The fair value of this IPR&D asset was estimated based on an income approach, using the present value of incremental after tax cash flows expected to be generated by this development project after the deduction of contributory asset charges for other assets employed in this project. The estimated cash flows have been probability adjusted to take into account the stage of completion and the remaining risks and uncertainties surrounding the future development and commercialization.
The major risks and uncertainties associated with the timely completion of the acquired IPR&D project include the ability to confirm the efficacy of the technology based on the data from clinical trials, and obtaining the relevant regulatory approvals as well as other risks as described in the Company’s Annual Report on Form 10-K. The valuation of IPR&D has been based on information available at the time of the acquisition (and information obtained during the measurement period) and on expectations and assumptions that (i) have been deemed reasonable by the Company’s management and (ii) are based on information, expectations and assumptions that would be available to a market participant. However, no assurance can be given that the assumptions and events associated with such assets will occur as projected. For these reasons, the actual cash flows may vary from forecast future cash flows.
The estimated probability adjusted after tax cash flows used in fair valuing other intangible assets have been discounted at rates ranging from 9.5% to 10.0%.
(c) Goodwill
Goodwill arising of $1,655.5 million, which is not deductible for tax purposes, includes the expected operational synergies that will result from combining the commercial operations of ViroPharma with those of Shire; other synergies expected to be realized due to Shire’s structure; intangible assets that do not qualify for separate recognition at the time of the acquisition; and the value of the assembled workforce.
Acquisition of Lumena Pharmaceuticals, Inc. (“Lumena”)
On June 11, 2014 Shire completed the acquisition of 100% of the outstanding share capital of Lumena, a privately owned US incorporated biopharmaceutical company. The acquisition date fair value of the consideration totaled $464.3 million, comprising cash consideration paid on closing of $300.3 million and the fair value of contingent consideration payable of $164 million. In the year to December 31, 2015 Shire settled all future contingent milestones payable for a one-time cash payment of $90 million.
This acquisition brought two novel, orally active therapeutic compounds SHP625 (formerly LUM001) and SHP626 (formerly LUM002). Both compounds are inhibitors of the apical sodium-dependent bile acid transport (“ASBT”), which is primarily responsible for recycling bile acids from the intestine to the liver. At acquisition date SHP625 was being investigated for the potential relief of the extreme itching associated with cholestatic liver disease and three other indications. In the year to December 31, 2015 Shire fully impaired the SHP625 IPR&D intangible asset (see Note 12 for further details). SHP626 is in development for the treatment of nonalcoholic steatohepatitis.
The acquisition of Lumena has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Lumena have been recorded at their fair values at the date of acquisition, being June 11, 2014. The Company’s consolidated financial statements and results of operations include the results of Lumena from June 11, 2014.
The purchase price has been allocated to acquired IPR&D ($467 million), net current assets assumed ($52.6 million, including cash of $46.3 million), net non-current liabilities assumed (including deferred tax liabilities) ($169.9 million) and goodwill ($114.6 million). Goodwill arising of $114.6 million is not deductible for tax purposes.
Acquisition of Fibrotech Therapeutics Pty Ltd. (“Fibrotech”)
On July 4, 2014 Shire completed its acquisition of Fibrotech, an Australian biopharmaceutical company developing a new class of orally available drugs with a novel mechanism of action which has the potential to address both the inflammatory and fibrotic components of disease processes. The acquisition of Fibrotech is expected to strengthen the Company’s growing and innovative portfolio targeting renal and fibrotic diseases, and leverage existing renal capabilities.
The acquisition date fair value of the consideration totaled $122.6 million, comprising cash consideration paid on closing of $75.6 million and the fair value of contingent consideration payable of $47 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $482.5 million dependent upon achievement of certain clinical development, regulatory and commercial milestones.
The acquisition of Fibrotech has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from Fibrotech have been recorded at their fair values at the date of acquisition being July 4, 2014. The Company’s consolidated financial statements and results of operations include the results of Fibrotech from July 4, 2014.
The purchase price has been allocated to acquired IPR&D ($11 million), net current assets ($1.4 million) and goodwill ($110.2 million). Goodwill arising of $110.2 million is not deductible for tax purposes. Goodwill generated from the acquisition was primarily attributed to acquired scientific knowledge in fibrotic diseases and the potential to optimize the novel mechanism of action to other fibrotic conditions.
Other Acquisitions
On July 9, 2014 Shire acquired BIKAM Pharmaceuticals, Inc. (“BIKAM”), a US-based biopharmaceutical company with pre-clinical compounds that could provide an innovative approach to treating autosomal dominant retinitis pigmentosa (adRP). In the third quarter of 2014 Shire also acquired certain assets and employees related to the production of BUCCOLAM from its previous contract manufacturer SCM Pharma Limited (“SCM”). The aggregate acquisition date fair value of the consideration for these two acquisitions was $17.9 million, comprising cash paid on closing of $12.1 million and the fair value of contingent consideration payable in respect of BIKAM of $5.8 million. In respect of BIKAM following achievement and payment of the first development milestone in the year to December 31, 2015, the maximum contingent consideration which may now be payable by Shire in future periods is $89.5 million contingent upon the achievement of certain development, regulatory and commercial milestones.
In connection with these two acquisitions, Shire has recorded $1 million in current assets, $4.8 million in non-current assets and $12.1 million in goodwill.
Acquisition of SARcode Bioscience Inc. (“SARcode”)
On April 17, 2013 Shire completed the acquisition of 100% of the outstanding share capital of SARcode. The acquisition date fair value of consideration totaled $368 million, comprising cash consideration paid on closing of $151 million and the acquisition date fair value of contingent consideration payable of $217 million. Following top-line Phase 3 study results in December 2013, the maximum amount of contingent cash consideration which may now be payable by Shire in future periods is $225 million dependent upon achievement of certain net sales milestones.
This acquisition brought the global rights of lifitegrast (now SHP606) into Shire’s portfolio which, at acquisition date, was in Phase 3 development for the treatment of DED.
Top-line results from OPUS-2, a Phase 3 efficacy and safety study of 5.0% SHP606 ophthalmic solution, were announced on December 6, 2013. On April 30, 2014 Shire announced top-line results from the prospective randomized, double-masked, placebo-controlled SONATA trial which indicated no ocular or drug-related serious adverse events. Following a meeting with the FDA, on May 16, 2014 Shire announced that it intended to submit an NDA for SHP606 in the first quarter of 2015 as a treatment for signs and symptoms for DED in adults. On April 9, 2015 Shire announced that the FDA had accepted the NDA and had granted the NDA Priority Review designation. The FDA set an action date of October 25, 2015, based on the Prescription Drug User Fee Act V (”PDUFA”).
On October 16, 2015 the FDA requested an additional clinical study as part of a complete response letter to the NDA. The FDA also requested more information related to product quality. On October 27, 2015, Shire announced positive topline results from the OPUS-3 trial. These data showed OPUS-3 met the primary endpoint of significantly improving patient-reported symptoms of DED from baseline to day 84 (p=0.0007). Additionally, OPUS-3 met the secondary endpoints of symptom improvement from baseline to days 14 and 42 (p<0.0001 for both endpoints). Shire used these data as part of the resubmission of the NDA on January 22, 2016. On February 4, 2016, Shire announced that the FDA had acknowledged receipt of the resubmission of the NDA. The FDA determined that the submission was a complete response and has assigned a 6-month review period for the NDA and a PDUFA date of July 22, 2016.
The acquisition of SARcode has been accounted for as a business combination using the acquisition method. The assets and liabilities assumed from SARcode have been recorded at their fair values at the date of acquisition, being April 17, 2013. The Company’s consolidated financial statements and results of operations include the results of SARcode from April 17, 2013.
The purchase price has been allocated to acquired IPR&D in respect of SHP606 ($412 million), net current liabilities assumed ($8.2 million), net non-current liabilities assumed, including deferred tax liabilities ($122.4 million) and goodwill ($86.6 million). This acquisition resulted in goodwill of $86.6 million, which is not deductible for tax purposes. Goodwill includes the value of the assembled workforce and the related scientific expertise in ophthalmology which allows for potential expansion into a new therapeutic area.
Acquisition of Premacure AB (“Premacure”)
On March 8, 2013 Shire completed the acquisition of 100% of the outstanding share capital of Premacure, a privately-owned Swedish biotechnology company. The acquisition date fair value of the consideration totaled $140.2 million, comprising cash consideration paid on closing of $30.6 million, and the fair value of contingent consideration payable of $109.6 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods, dependent upon the successful completion of certain development and commercial milestones, is $169 million. Shire will also pay royalties on relevant net sales.
Premacure was developing a protein replacement therapy SHP607 (formerly referred to as “PREMIPLEX”) currently in Phase 2 development, for the prevention of Retinopathy of Prematurity (“ROP”). ROP is a rare and potentially blinding eye disorder that primarily affects premature infants and is one of the most common causes of visual loss in childhood. Together, the acquisitions of SARcode and Premacure build Shire’s presence in the ophthalmic therapeutic area. In December 2014 Shire received notification that SHP607 was granted fast Track designation by the FDA. In addition, SHP607 has been granted orphan drug designation in both the US and EU. A Phase 2 clinical trial completed enrolment in December 2015.
The acquisition of Premacure has been accounted for as a business combination using the acquisition method. The assets and the liabilities assumed from Premacure have been recorded at their fair values at the date of acquisition, being March 8, 2013. The Company’s consolidated financial statements and results of operations include the results of Premacure from March 8, 2013.
The purchase price has been allocated to acquired IPR&D in respect of SHP607 ($151.8 million), net current liabilities assumed ($11.7 million), net non-current liabilities assumed, including deferred tax liabilities ($29.5 million) and goodwill ($29.6 million). This acquisition resulted in goodwill of $29.6 million, which is not deductible for tax purposes.
Acquisition of Lotus Tissue Repair, Inc. (“Lotus Tissue Repair”)
On February 12, 2013 Shire completed the acquisition of 100% of the outstanding share capital of Lotus Tissue Repair, a privately-owned US biotechnology company. The acquisition date fair value of consideration totaled $174.2 million, comprising cash consideration paid on closing of $49.4 million, and the fair value of contingent consideration payable of $124.8 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $275 million. The amount of contingent cash consideration ultimately payable by Shire is dependent upon achievement of certain pre-clinical and clinical development milestones.
Lotus Tissue Repair was developing a proprietary recombinant form of human collagen Type VII (“rC7”) as the first and only intravenous protein replacement therapy currently being investigated for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”). DEB is a devastating orphan disease for which there is no currently approved treatment option other than palliative care. The acquisition added to Shire’s pipeline a late-stage pre-clinical product for the treatment of DEB with global rights. In the year to December 31, 2015 Shire fully impaired the SHP608 IPR&D intangible asset (see Note 12 for further details).
The acquisition of Lotus Tissue Repair has been accounted for as a business combination using the acquisition method. The assets and the liabilities assumed from Lotus Tissue Repair have been recorded at their fair values at the date of acquisition, being February 12, 2013. The Company’s consolidated financial statements and results of operations include the results of Lotus Tissue Repair from February 12, 2013.
The purchase price has been allocated to acquired IPR&D in respect of rC7, now SHP608 ($176.7 million), net current assets assumed ($6.8 million), net non-current liabilities assumed, including deferred tax liabilities ($63.4 million) and goodwill ($54.1 million). This acquisition resulted in goodwill of $54.1 million, which is not deductible for tax purposes.
4.Reorganization costs
One Shire business reorganization
On May 2, 2013, the Company initiated the reorganization of its business to integrate the three divisions into a simplified One Shire organization in order to drive future growth and innovation.
In 2014 certain aspects of the One Shire program were temporarily put on hold due to AbbVie’s offer for Shire, which was terminated in October 2014. Subsequent to the termination of AbbVie’s offer, Shire announced on November 10, 2014 its plans to relocate over 500 positions to Lexington, Massachusetts from its Chesterbrook, Pennsylvania, site and establish Lexington as the Company’s US operational headquarters in continuation of the One Shire efficiency program. This relocation will streamline business globally through two principal locations, Massachusetts and Switzerland, with support from regional and country-based offices around the world.
In the year to December 31, 2015 the Company incurred reorganization costs totaling $97.9 million respectively, relating to employee involuntary termination benefits and other reorganization costs. Reorganization costs of $343.4 million have been incurred since the reorganization began in May 2013. The One Shire reorganization is now substantially complete. The Company estimates that further costs in respect of the One Shire reorganization of approximately $50 million will be expensed as incurred during the first half of 2016.
The liability for reorganization costs arising from the One Shire business reorganization at December 31, 2015 is as follows:
Opening liability Amount
Closing liability at
at January 1, charged to re-
December 31,
organization Paid/Utilized
$'M $'M $'M $'M
Involuntary termination benefits 38.0 65.4 (88.4) 15.0
Other reorganization costs - 32.5 (22.4) 10.1
38.0 97.9 (110.8) 25.1
At December 31, 2015 the closing reorganization cost liability was recorded within accounts payable and accrued expenses.
5.Integration and acquisition costs
For the year to December 31, 2015 Shire recorded net integration and acquisition costs of $39.8 million. The net integration and acquisition costs principally comprises costs related to the acquisition and integration of NPS Pharma, Viropharma, Dyax and the proposed combination with Baxalta ($189.7 million), offset by a net credit relating to the change in the fair value of contingent consideration liabilities ($149.9 million). This net credit principally relates to the acquisition of Lumena, reflecting the agreement in the third quarter of 2015 to settle all future contingent milestones payable to former Lumena shareholders for a one-time cash payment of $90 million and the acquisition of Lotus Tissue Repair, Inc. reflecting a lower probability of success for the SHP608 asset (for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”)) as a result of certain preclinical toxicity findings (see note 12 for further details).
In the year to December 31, 2014 Shire recorded integration and acquisition costs of $158.8 million, comprised of $144.1 million relating to the acquisition and integration of ViroPharma and a net charge of $14.7 million relating to the change in fair value of contingent consideration liabilities (principally in relation to the acquisition of SARcode Bioscience Inc. (“SARcode”), reflecting Shire’s increased confidence in the SHP606 asset, offset by credits in relation to the acquisition of FerroKin BioSciences, Inc., reflecting the decision to place the Phase 2 clinical trial for SHP602 on clinical hold).
In the year to December 31, 2013 Shire recorded a net credit to integration and acquisition costs of $134.1 million, comprising costs associated with the acquisitions of ViroPharma, SARcode and Lotus of $25.0 million which were more than offset by a net credit related to the change in the fair value of contingent consideration liabilities of $159.1 million (principally in relation to the acquisition of SARcode following receipt of OPUS-2 trial results).
6.Accounts receivable, net
Accounts receivable at December 31, 2015 of $1,201.2 million (December 31, 2014: $1,035.1 million), are stated at the invoiced amount and net of provision for discounts and doubtful accounts of $55.8 million (December 31, 2014: $48.5 million, 2013: $47.9 million).
Provision for discounts and doubtful accounts:
$’M $’M $’M
As at January 1, 48.5 47.9 41.7
Provision charged to operations 424.2 338.2 306.8
Provision utilization (416.9) (337.6) (300.6)
As at December 31, 55.8 48.5 47.9
At December 31, 2015 accounts receivable included $79.0 million (December 31, 2014: $59.0 million) related to royalty income.
7.Inventories
Inventories are stated at the lower of cost or market. Inventories comprise:
8.Results of discontinued operations
Following the divestment of the Company’s DERMAGRAFT business in January 2014, the operating results associated with the DERMAGRAFT business have been classified as discontinued operations in the consolidated statements of income for all periods presented. In the year to December 31, 2015 the Company recorded a loss from discontinued operations of $34.1 million (net of tax of $18.9 million), primarily relating to a change in estimate in relation to reserves for onerous leases retained by the Company.
In the year to December 31, 2014 the Company recorded a gain from discontinued operations of $122.7 million (net of tax of $211.3 million). The gain from discontinued operations in the year to December 31, 2014 includes a tax credit of $211.3 million primarily driven by a tax benefit arising following a reorganization of the former Regenerative Medicine business undertaken in the fourth quarter of 2014, associated with the divestment of the DERMAGRAFT business in the first quarter of 2014. This gain was partially offset by costs associated with the divestment of the DERMAGRAFT business, including a loss on re-measurement of contingent consideration receivable from Organogenesis to its fair value. The loss from discontinued operations in 2013 of $754.5 million (net of tax of $326.4 million) included a goodwill impairment charge of $191.8 million and a charge of $636.9 million upon re-measurement of the divested assets to their fair values less costs to sell.
9.Prepaid expenses and other current assets
10.Property, plant and equipment, net
Depreciation expense for the years to December 31, 2015, 2014 and 2013 was $138.5 million, $163.5 million and $127.6 million, respectively.
11.Goodwill
In the year to December 31, 2015 the Company completed the acquisitions of NPS Pharma, Meritage, Foresight and Solpharm which resulted in aggregate goodwill of $1,700.1 million (see Note 3 for details).
$’M $’M
As at January 1, 2,474.9 624.6
Acquisitions 1,700.1 1,890.5
Foreign currency translation (27.2) (40.2)
As at December 31, 4,147.8 2,474.9
12.Other intangible assets, net
1.Other intangible assets primarily comprises of royalty right assets acquired with NPS Pharma.
2.Comprising $1,852.1 million of accumulated amortization for intellectual property rights acquired for currently marketed products and $83.5 million for other intangible assets.
The change in the net book value of other intangible assets for the year to December 31, 2015 and 2014 is shown in the table below:
In the year to December 31, 2015 the Company acquired intangible assets totaling $5,475 million, primarily relating to the fair value of intangible assets for currently marketed products and royalty right assets acquired with NPS Pharma of $4,993 million and IPR&D assets of $475 million acquired with Meritage and Foresight (see Note 3 for further details).
The Company reviews its intangible assets for impairment whenever events or circumstances suggest that their carrying value may not be recoverable. In the year to December 31, 2015 the Company identified indicators of impairment in respect of its SHP625 (for the treatment of cholestatic liver disease), and SHP608 (for the treatment of DEB) IPR&D assets.
The indicators of impairment related to SHP625 in 2015 included the results of three Phase 2 studies, comprising a 13-week study of 20 paediatric patients with Alagille syndrome (“ALGS”), a 13 week, double blind, placebo-controlled trial in combination with ursodeoxycholic acid (“UDCA”) for patients with Primary Biliary Cirrhosis (“PBC”), and preliminary results from a 72 week open label Phase 2 study in Progressive Familial Intrahepatic Cholestasis (“PFIC”). Although both the ALGS and PBC trials indicated a reduction in bile serum acids in the SHP625 treated group, neither of these trials met their primary or secondary endpoints. The interim analysis in the PFIC trial was based on the first 12 subjects who completed 13 weeks of treatment per protocol. There was no statistically significant reduction in mean serum bile acid levels from baseline. Following receipt of these results, the Company also updated its revenue and profitability forecasts for ALGS and PFIC.
As a result of these impairment indicators, the Company reviewed the recoverability of its SHP625 IPR&D asset and recorded impairment charges totaling $467 million (within R&D expenses in the consolidated statement of income) in 2015, to record the SHP625 IPR&D asset to its revised fair value of $nil. This fair value was based on the revised discounted cash flow forecasts associated with SHP625, which included a reduced probability of achieving regulatory approval.
For SHP608, preclinical toxicity findings in the second quarter of 2015 have led to a significant reduction in the probability of achieving regulatory approval of this asset. As a result, the Company recorded an impairment charge of $176.7 million within R&D expenses in the consolidated statement of income to fully write off the SHP608 IPR&D asset.
The fair values of the related contingent consideration liabilities arising from the Lumena and Lotus Tissue Repair acquisitions (through which Shire acquired SHP625 and SHP608 respectively) have also been reduced, resulting in a credit of $203.2 million being recorded in integration and acquisition costs for the year ended December 31, 2015.
In the year to December 31, 2014 the Company identified indicators of impairment in respect of its SHP602 (iron chelating agent for the treatment of iron overload secondary to chronic transfusion) and SHP613 (for the treatment of improvement in patency of arteriovenous access in hemodialysis patients) IPR&D assets. The Company therefore reviewed the recoverability of its SHP602 and SHP613 IPR&D assets and recorded an impairment charge of $166.0 million and $22.0 million, respectively, within R&D expenses in the consolidated statement of income to record the IPR&D assets to their revised fair value.
Management estimates that the annual amortization charge in respect of intangible assets held at December 31, 2015 will be approximately $465 million for each of the five years to December 31, 2020. Estimated amortization expense can be affected by various factors including future acquisitions, disposals of product rights, regulatory approval and subsequent amortization of acquired IPR&D projects, foreign exchange movements and the technological advancement and regulatory approval of competitor products.
13.Accounts payable and accrued expenses
14.Other current liabilities
15.Borrowings
Revolving Credit Facilities Agreement
On December 12, 2014, Shire entered into a $2,100 million revolving credit facilities agreement (the “RCF”) with a number of financial institutions, for which Abbey National Treasury Services PLC (trading as Santander Global Banking and Markets), Bank of America Merrill Lynch International Limited, Barclays Bank PLC, Citigroup Global Markets Limited, Lloyds Bank PLC, The Royal Bank of Scotland PLC and Sumitomo Mitsui Banking Corporation acted as mandated lead arrangers and bookrunners and DNB Bank ASA, The Bank of Tokyo-Mitsubishi UFJ, Ltd., Credit Suisse AG, London Branch, Deutsche Bank Luxembourg S.A., Goldman Sachs Bank USA, Mizuho Bank, Ltd. and Morgan Stanley Bank International Limited acted as arrangers. Shire is an original borrower and original guarantor under the RCF. Shire has agreed to act as guarantor for any of its subsidiaries that become additional borrowers under the RCF. As at December 31, 2015 the Company utilized $750 million of the RCF.
The RCF, which terminates on December 12, 2020, may be applied towards financing the general corporate purposes of Shire. The RCF incorporates a $250 million US dollar and euro swingline facility operating as a sub-limit thereof.
Interest on any loans made under the RCF is payable on the last day of each interest period, which may be one week or one, two, three or six months at the election of Shire, or as otherwise agreed with the lenders. The interest rate for the RCF is: LIBOR (or, in relation to any revolving loan in euro, EURIBOR); plus 0.30% per annum subject to change depending upon (i) the prevailing ratio of Net Debt to EBITDA (each as defined in the RCF) in respect of the most recently completed financial year or financial half year and (ii) the occurrence and continuation of an event of default in respect of the financial covenants or the failure to provide a compliance certificate.
Shire shall also pay (i) a commitment fee equal to 35% of the applicable margin on available commitments under the RCF for the availability period applicable thereto and (ii) a utilization fee equal to (a) 0.10% per year of the aggregate of all outstanding loans up to an aggregate base currency amount equal to $700 million, (b) 0.15% per year of the amount by which the aggregate base currency amount of all outstanding loans exceeds $700 million but is equal to or less than $1,400 million and (c) 0.30% per year of the amount by which the aggregate base currency amount of all outstanding loans exceeds $1,400 million.
The RCF includes customary representations and warranties, covenants and events of default, including requirements that Shire’s (i) ratio of Net Debt to EBITDA in respect of the most recently-ended 12-month relevant period (each as defined in the RCF) must not, at any time, exceed 3.5:1 except that, following an acquisition fulfilling certain criteria, Shire may on a once only basis elect to increase this ratio to (a) 5.5:1 for the relevant period in which the acquisition was completed (b) 5.0:1 in respect of the first relevant period following the relevant period in which the acquisition was completed and (c) 4.5:1 in respect of the second relevant period following the relevant period in which the acquisition was completed, and (ii) ratio of EBITDA to Net Interest for the most recently-ended 12-month relevant period (each as defined in the RCF) must not be less than 4.0:1.
The RCF restricts, subject to certain exceptions, Shire’s ability to incur additional financial indebtedness, grant security over its assets or provide loans/grant credit. Further, any lender may require mandatory prepayment of its participation if there is a change of control of Shire, subject to certain exceptions for schemes of arrangement and analogous schemes.
Events of default under the RCF include, subject to customary grace periods and materiality thresholds: (i) non-payment of any amounts due under the finance documents (as defined in the RCF), (ii) failure to satisfy any financial
covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults, under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of Shire as a whole, (vii) if it becomes unlawful for Shire (or any successor parent company) or any of their respective subsidiaries that are parties to the RCF to perform their obligations thereunder or (viii) if Shire (or any successor parent company) or any subsidiary thereof which is a party to the RCF repudiates such agreement or other finance document, among others.
The RCF is governed by English law.
Term Loan Facilities Agreement
January 2016 Facilities Agreement
On January 11, 2016, Shire (as original guarantor and original borrower), entered into, an $18.0 billion bridge facilities agreement with, among others, Barclays Bank PLC ("Barclays"), and Morgan Stanley Bank International Limited, acting as mandated lead arrangers and bookrunners (the “January 2016 Facilities Agreement”). The January 2016 Facilities Agreement comprises two credit facilities: (i) a $13.0 billion term loan facility which, subject to a one year extension option exercisable at Shire's option, matures on January 11, 2017 ("January 2016 Facility A") and (ii) a $5.0 billion revolving loan facility which, subject to a one year extension option exercisable at Shire's option, matures on January 11, 2017 ("January 2016 Facility B"). Shire has agreed to act as guarantor for any of its subsidiaries that become additional borrowers under the January 2016 Facilities Agreement. As of February 23, 2016, the January 2016 Facilities Agreement was undrawn.
January 2016 Facility A may be used to finance the cash consideration payable in respect of the proposed combination with Baxalta and certain costs related to the proposed combination. January 2016 Facility B may be used to finance the redemption of all or part of Baxalta’s senior notes upon completion of the proposed combination.
Interest on any loans made under the January 2016 Facilities Agreement will be payable on the last day of each interest period, which may be one week or one, two, three or six months, or as otherwise agreed with the lenders. The interest rate applicable to the January 2016 Facilities Agreement is LIBOR plus 1.25 percent per annum, increasing by: (i) 0.25 percent per annum on July 11, 2016 and on each subsequent date falling at three month intervals thereafter until (and excluding) April 11, 2017 and (ii) 0.50 percent per annum on April 11, 2017 and on each subsequent date falling at three month intervals thereafter.
Shire shall also pay a commitment fee on the available but unutilized commitments under the January 2016 Facilities Agreement for the availability period applicable to each facility. With effect from first utilization, the commitment fee rate will be 35 percent of the applicable margin. Before first utilization, the commitment fee rate shall be increased in stages from 10 percent to 35 percent of the applicable margin over the period to May 11, 2016.
The January 2016 Facilities Agreement includes customary representations and warranties, covenants and events of default, including requirements that Shire’s (i) ratio of Net Debt to EBITDA in respect of the most recently ended 12-month relevant period, (each as defined in the January 2016 Facilities Agreement), must not, at any time, exceed 3.5:1, except that following the combination with Baxalta, or any other acquisition fulfilling certain criteria, Shire may elect on a once only basis to increase this ratio to (a) 5.5:1 for the relevant period in which the acquisition was completed, (b) 5.0:1 in respect of the first relevant period following the relevant period in which the acquisition was completed and (c) 4.5:1 in respect of the second relevant period following the relevant period in which the acquisition was completed, and (ii) ratio of EBITDA to Net Interest, for the most recently ended 12-month relevant period (each as defined in the January 2016 Facilities Agreement) must not be less than 4.0:1.
The January 2016 Facilities Agreement restricts, subject to certain exceptions, Shire's ability to incur additional financial indebtedness, grant security over its assets or provide loans/grant credit. Further, any lender may require mandatory prepayment of its participation if there is a change of control of Shire, subject to certain exceptions for schemes of arrangement and analogous schemes. In addition, in certain circumstances and subject to certain broad exceptions, the net cash proceeds of disposals and certain issues, loans, sales or offerings of debt securities by any member of Shire's group must be applied in cancellation of the available commitments under the January 2016 Facilities Agreement and, if applicable, mandatory prepayment of any loans made under the January 2016 Facilities Agreement.
Events of default under the January 2016 Facilities Agreement include, subject to customary grace periods and materiality thresholds: (i) non-payment of any amounts due under the finance documents (as defined in the January 2016 Facilities Agreement), (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults, under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of Shire as a whole, (vii) if it becomes unlawful for Shire (or any successor parent company) or any of their respective subsidiaries that are parties to the January 2016 Facilities Agreement to perform their obligations thereunder or (viii) if Shire (or any successor parent company) or any subsidiary thereof which is a party to the January 2016 Facilities Agreement repudiates the January 2016 Facilities Agreement or any other finance document, among others.
The January 2016 Facilities Agreement is governed by English law.
November 2015 Facilities Agreement
On November 2, 2015, Shire (as original guarantor and original borrower) entered into a $5.6 billion facilities agreement with, among others, Morgan Stanley Bank International Limited and Deutsche Bank AG, London Branch acting as mandated lead arrangers and bookrunners (the “November 2015 Facilities Agreement”). The November 2015 Facilities Agreement comprises three credit facilities: (i) a $1.0 billion term loan facility which, subject to a one year extension option exercisable at Shire’s option, matures on November 2, 2016 (“November 2015 Facility A”), (ii) a $2.2 billion amortizing term loan facility which matures on November 2, 2017 (“November 2015 Facility B”) and (iii) a $2.4 billion amortizing term loan facility which matures on November 2, 2018 (“November 2015 Facility C”) .
As of December 31, 2015, the November 2015 Facilities Agreement was undrawn. In January 2016 the November 2015 Facilities Agreement was utilized in full to finance the purchase price payable in respect of Shire’s acquisition of Dyax and certain costs related to the acquisition.
Interest on any loans made under the November 2015 Facilities Agreement is payable on the last day of each interest period, which may be one week or one, two, three or six months, or as otherwise agreed with the lenders. The interest rate applicable is LIBOR plus, in the case of November 2015 Facility A, 0.55% per annum, in the case of November 2015 Facility B, 0.65% per annum and, in the case of November 2015 Facility C, 0.75% per annum, in each case until delivery of the first compliance certificate required to be delivered after the date of the November 2015 Facilities Agreement and is subject to change thereafter depending on (i) the prevailing ratio of Net Debt to EBITDA (each as defined in the November 2015 Facilities Agreement) in respect of the most recently completed financial year or financial half year and (ii) the occurrence and continuation of an event of default in respect of the financial covenants or failure to provide a compliance certificate.
The November 2015 Facilities Agreement includes customary representations and warranties, covenants and events of default, including requirements that Shire’s (i) ratio of Net Debt to EBITDA in respect of the most recently ended 12-month relevant period, (each as defined in the November 2015 Facilities Agreement), must not, at any time, exceed 3.5:1, except that following an acquisition fulfilling certain criteria, Shire may elect on a once only basis to increase this ratio to (a) 5.5:1 for the relevant period in which the acquisition was completed, (b) 5.0:1 in respect of the first relevant period following the relevant period in which the acquisition was completed and (c) 4.5:1 in respect of the second relevant period following the relevant period in which the acquisition was completed, and (ii) ratio of EBITDA to Net Interest in respect of the most recently ended 12 month relevant period, (each as defined in the November 2015 Facilities Agreement), must not be less than 4.0:1.
The November 2015 Facilities Agreement restricts, subject to certain exceptions, Shire's ability to incur additional financial indebtedness, grant security over its assets or provide loans/grant credit. Further, any lender may require mandatory prepayment of its participation if there is a change of control of Shire, subject to certain exceptions for schemes of arrangement and analogous schemes.
Events of default under the November 2015 Facilities Agreement include, subject to customary grace periods and materiality thresholds: (i) non-payment of any amounts due under the finance documents (as defined in the November 2015 Facilities Agreement), (ii) failure to satisfy any financial covenants, (iii) material misrepresentation in any of the finance documents, (iv) failure to pay, or certain other defaults, under other financial indebtedness, (v) certain insolvency events or proceedings, (vi) material adverse changes in the business, operations, assets or financial condition of Shire as a whole, (vii) if it becomes unlawful for Shire (or any successor parent company) or any of their respective subsidiaries that are parties to the November 2015 Facilities Agreement to perform their obligations thereunder or (viii) if Shire (or any successor parent company) or any subsidiary thereof which is a party to the November 2015 Facilities Agreement repudiates the November 2015 Facilities Agreement or any other finance document, among others.
The November 2015 Facilities Agreement is governed by English law.
January 2015 Facility Agreement
On January 11, 2015, Shire entered into an $850 million term facility agreement with, among others, Citigroup Global Markets Limited (acting as mandated lead arranger and bookrunner) (the “January 2015 Facility Agreement”) with an original maturity date of January 10, 2016. The maturity date was subsequently extended to July 11, 2016 in line with the provisions within the January 2015 Facility Agreement allowing the maturity date to be extended twice, at Shire’s option, by six months on each occasion.
The January 2015 Facility Agreement was available to finance the purchase price payable in respect of Shire’s acquisition of NPS Pharma (including certain related costs). On September 28, 2015 the Company reduced the January 2015 Facility Agreement by $100 million. As at December 31, 2015 the January 2015 Facility Agreement was fully utilized in the amount of $750 million. In January 2016 and at various points thereafter, the Company cancelled parts of the January 2015 Facility Agreement. On February 22, 2016, the Company repaid in full the remaining balance of $100 million.
2013 Facilities Agreement
On November 11, 2013, Shire entered into a $2,600 million facilities agreement with, among others, Morgan Stanley Bank International Limited (acting as mandated lead arranger and bookrunner) (the “2013 Facilities Agreement”). The 2013 Facilities Agreement comprised two credit facilities: (i) a $1,750 million term loan facility and (ii) an $850 million term loan facility.
On December 13, 2013 and at various points thereafter, the Company cancelled parts of the 2013 Facilities Agreement. On September 28, 2015 the Company repaid in full the remaining balance of $350 million under the 2013 Facilities Agreement.
Secured Non-recourse Debts
Prior to the acquisition by Shire, NPS Pharma had:
·partially monetized rights to receive future royalty payments from Amgen’s sales of SENSIPAR and MIMPARA through the issuance of $145 million of non-recourse debt that was both serviced and secured by SENSIPAR and MIMPARA royalty revenue;
·sold to DRI Capital Inc. (“DRI”) certain rights to receive up to $96 million of future royalty payments arising from Kyowa Hakko Kirin’s sales of REGPARA and granted DRI a security interest in the license agreement with Kyowa Hakko Kirin, certain patents and other intellectual property related to REGPARA which DRI would be entitled to enforce in the event of default by NPS Pharma; and
·partially monetized PTH-184 (now marketed as NATPARA) through an agreement with an affiliate of DRI pursuant to which NPS Pharma, its licensees and its predecessors in interest, are obligated to pay up to $125 million royalties on sales of PTH-184. Additionally, NPS Pharma granted DRI a security interest in certain patents and other intellectual property related to PTH 1-84 which DRI would be entitled to enforce in the event of default by NPS Pharma.
Following the acquisition of NPS Pharma the Company has assumed these secured non-recourse debt obligations.
In May 2015 the Company notified Amgen that it intended to repay in full the remaining non-recourse debt owed to Amgen. The repayment was effected on May 15, 2015 by Amgen withholding certain royalties that were due to the Company from SENSIPAR and MIMPARA sales in the first quarter of 2015.
As at December 31, 2015 $11.5 million has been included within Short-term borrowings, and $69.9 million has been included within Long-term borrowings in respect of the remaining obligations to DRI.
Short-term uncommitted lines of credit (“Credit lines”)
Shire has access to various Credit lines from a number of banks which provide flexibility to short-term cash management procedures. These Credit lines can be withdrawn by the banks at any time. The Credit lines are not relied upon for core liquidity. As at December 31, 2015 these Credit lines were not utilized.
16.Other non-current liabilities
December 31, December 31,
$’M $’M
Income taxes payable 195.8 199.2
Contingent consideration payable 456.4 435.4
Other non-current liabilities 146.6 102.1
798.8 736.7
17.Commitments and contingencies
(a)Leases
Future minimum lease payments under operating leases at December 31, 2015 are presented below:
Operating
leases
$’M
51.5
40.8
34.6
30.2
29.4
Thereafter 185.8
372.3
The Company leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2032. Lease and rental expense amounted to $40.7 million, $32.9 million and $44.0 million for the year to December 31, 2015, 2014 and 2013 respectively, which is predominately included in SG&A expenses in the Company’s consolidated income statement.
(b)Letters of credit and guarantees
At December 31, 2015 the Company had irrevocable standby letters of credit and guarantees with various banks and insurance companies totaling $48.0 million (being the contractual amounts), providing security for the Company’s performance of various obligations. These obligations are primarily in respect of the recoverability of insurance claims, lease obligations and supply commitments.
(c)Collaborative and other licensing arrangements
Details of significant updates in collaborative and other licensing arrangements are included below:
On September 1, 2015 Shire and Sangamo BioSciences, Inc. (“Sangamo”) agreed to revise the collaboration and license agreement originally entered into in January 2012 to expedite the development of ZFP Therapeutics for hemophilia A and B and Huntington's disease. Under the revised terms, Shire has returned to Sangamo the exclusive world-wide rights to gene targets for the development, clinical testing and commercialization of ZFP Therapeutics for hemophilia A and B, and has retained rights and will continue to develop ZFP Therapeutic clinical leads for Huntington's disease and a ZFP Therapeutic for one additional gene target. Each company will be responsible for expenses associated with its own programs and will reimburse the other for any ongoing services provided. Sangamo has granted Shire a right of first negotiation to license the hemophilia A and B programs. No milestone payments will be made on any program and each company will pay certain royalties to the other on commercial sales up to a specified maximum cap.
As of December 31, 2015 Shire had entered into various other collaborative and out-licensing arrangements under which the Company has out-licensed certain product or intellectual property rights for consideration such as up-front payments, development milestones, sales milestones and/or royalty payments. In some of these arrangements Shire and the licensee are both actively involved in the development and commercialization of the licensed product and have exposure to risks and rewards dependent on its commercial success. Under the terms of these collaborative and out-licensing arrangements, the Company may receive development milestone payments up to an aggregate amount of $32 million and sales milestones up to an aggregate amount of $43 million. The receipt of these substantive milestones is uncertain and contingent on the achievement of certain development milestones or the achievement of a specified level of annual net sales by the licensee. In the year to December 31, 2015 Shire received cash in respect of up-front and milestone payments totaling $19.6 million (2014: $2.2 million, 2013: $3.0 million). In the year to December 31, 2015 Shire recognized milestone income of $8.9 million (2014: $16.7 million, 2013: $5.0 million) in other revenues and $51.0 million (2014: $46.5 million, 2013: $58.3 million) in product sales for shipment of product to the relevant licensee.
(d)Commitments
(i)Clinical testing
At December 31, 2015 the Company had committed to pay approximately $490 million (December 31, 2014: $382 million) to contract vendors for administering and executing clinical trials. The timing of these payments is dependent upon actual services performed by the organizations as determined by patient enrollment levels and related activities.
(ii)Contract manufacturing
At December 31, 2015 the Company had committed to pay approximately $325 million (December 31, 2014: $384 million) in respect of contract manufacturing. The Company expects to pay $ 101 million of these commitments in 2016.
(iii)Other purchasing commitments
At December 31, 2015 the Company had committed to pay approximately $485 million (December 31, 2014: $265 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Company expects to pay $459 million of these commitments in 2016.
(iv)Investment commitments
At December 31, 2015 the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $22 million (December 31, 2014: $67 million) which may all be payable in 2016, depending on the timing of capital calls. The investment commitments include additional funding to certain VIEs of which Shire is not the primary beneficiary.
(v)Capital commitments
At December 31, 2015 the Company had committed to spend $60 million (December 31, 2014: $3 million) on capital projects.
(e)Legal and other proceedings
The Company expenses legal costs as they are incurred.
The Company recognizes loss contingency provisions for probable losses when management is able to reasonably estimate the loss. When the estimated loss lies within a range, the Company records a loss contingency provision based on its best estimate of the probable loss. If no particular amount within that range is a better estimate than any other amount, the minimum amount is recorded. Estimates of losses may be developed substantially before the ultimate loss is known, and are therefore refined each accounting period as additional information becomes known. In instances where the Company is unable to develop a reasonable estimate of loss, no loss contingency provision is recorded at that time. As information becomes known a loss contingency provision is recorded when a reasonable estimate can be made. The estimates are reviewed quarterly and the estimates are changed when expectations are revised. An outcome that deviates from the Company’s estimate may result in an additional expense or release in a future accounting period. At December 31, 2015, provisions for litigation losses, insurance claims and other disputes totaled $9.9 million (December 31, 2014: $16.9 million).
The Company’s principal pending legal and other proceedings are disclosed below. The outcomes of these proceedings are not always predictable and can be affected by various factors. For those legal and other proceedings for which it is considered at least reasonably possible that a loss has been incurred, the Company discloses the possible loss or range of possible loss in excess of the recorded loss contingency provision, if any, where such excess is both material and estimable.
VYVANSE
In May and June 2011, Shire was notified that six separate Abbreviated New Drug Applications ("ANDAs") were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of VYVANSE. The notices were from Sandoz, Inc. ("Sandoz"); Amneal Pharmaceuticals LLC ("Amneal"); Watson Laboratories, Inc. (“Watson”); Roxane Laboratories, Inc. ("Roxane"); Mylan Pharmaceuticals, Inc. (“Mylan”); and Actavis Elizabeth LLC and Actavis Inc. (collectively, "Actavis"). Since filing suit against these ANDA filers, along with API suppliers Johnson Matthey Inc. and Johnson Matthey Pharmaceuticals Materials (collectively “Johnson Matthey”), Shire has been engaged in a consolidated patent infringement litigation in the US District Court for the District of New Jersey against the aforementioned parties (except Watson, who withdrew their ANDA).
On June 23, 2014, the US District Court for the District of New Jersey granted Shire’s summary judgment motion holding that 18 claims of the patents-in-suit were both infringed and valid. On September 24, 2015, the US Court of Appeals of the Federal Circuit (“CAFC”) affirmed that ruling against all of the ANDA filers and the infringement ruling against Johnson Matthey.
LIALDA
In May 2010, Shire was notified that Zydus Pharmaceuticals USA, Inc. (“Zydus”) had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of Delaware against Zydus and Cadila Healthcare Limited, doing business as Zydus Cadila. A Markman hearing took place on January 29, 2015 and a Markman ruling was issued on July 28, 2015. A trial is scheduled to take place starting on March 28, 2016.
In February 2012, Shire was notified that Osmotica Pharmaceutical Corporation ("Osmotica") had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Northern District of Georgia against Osmotica. A Markman hearing took place on August 22, 2013 and a Markman ruling was issued on September 25, 2014. The Court issued an Order on February 27, 2015 in which all dates in the scheduling order have been stayed.
In March 2012, Shire was notified that Watson Laboratories Inc.-Florida had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Southern District of Florida against Watson Laboratories Inc.-Florida and Watson Pharmaceuticals, Inc. Watson Pharma, Inc. and Watson Laboratories, Inc. were subsequently added as defendants. A trial took place in April 2013 and on May 9, 2013 the trial court issued a decision finding that the proposed generic product infringes the patent-in-suit and that the patent is not invalid. Watson appealed the trial court’s ruling to the CAFC and a hearing took place on December 2, 2013. The ruling of the CAFC was issued on March 28, 2014 overruling the trial court on the interpretation of two claim terms and remanding the case for further proceedings. Shire petitioned the Supreme Court for a writ of certiori, which was granted on January 26, 2015. The Supreme Court also vacated the CAFC decision and remanded the case to the CAFC for further consideration in light of the Supreme Court’s decision in Teva v Sandoz. On June 3, 2015, the CAFC reaffirmed its previous decision to reverse the district court’s claims construction. The case has been remanded to the district court and a trial took place beginning on January 25, 2016. Closing arguments are scheduled to take place on March 11, 2016. The court has not issued its ruling on the trial.
In April 2012, Shire was notified that Mylan had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Middle District of Florida against Mylan. A Markman hearing took place on December 22, 2014. A Markman ruling was issued on March 23, 2015. The previously scheduled trial date has been vacated and the case has been stayed until May 31, 2016.
In March 2015, Shire was notified that Amneal had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of New Jersey against Amneal, Amneal Pharmaceuticals of New York, LLC, Amneal Life Sciences Pvt. Ltd. and Amneal Pharmaceuticals Co. India Pvt. Ltd. No trial date has been set.
In September 2015, Shire was notified that Lupin Ltd. had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of LIALDA. Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of Maryland against Lupin Ltd., Lupin Pharmaceuticals Inc., Lupin Inc. and Lupin Atlantis Holdings SA. A Markman hearing is scheduled to take place on August 22, 2016. No trial date has been set.
On October 7, 2015 the Patent Trial and Appeals Board (“PTAB”) of the United States Patent Office instituted an inter parties review (“IPR”) of US Patent 6,773,720 which is the patent-in-suit in the litigations referred to above. The IPR process is designed to re-assess the patentability of the claims of the patent. A decision from the PTAB is expected in October 2016.
Investigation related to DERMAGRAFT
The Department of Justice, including the US Attorney’s Office for the Middle District of Florida, Tampa Division and the US Attorney’s Office for Washington, DC, is conducting civil and criminal investigations into the sales and marketing practices of Advanced BioHealing Inc. (“ABH”) relating to DERMAGRAFT.
Following the disposal of the DERMAGRAFT business in January 2014, Shire has retained certain legacy liabilities including any liability that may arise from this investigation. Shire is cooperating fully with these investigations. Shire is not in a position at this time to predict the scope, duration or outcome of these investigations.
Civil Investigative Demand relating to VANCOCIN
On April 6, 2012, ViroPharma received a notification that the United States Federal Trade Commission (“FTC”) is conducting an investigation into whether ViroPharma had engaged in unfair methods of competition with respect to VANCOCIN. On August 3, 2012, and September 8, 2014, ViroPharma and Shire respectively received Civil Investigative Demands from the FTC requesting additional information related to this matter. Shire has fully cooperated with the FTC’s investigation. At this time, Shire is unable to predict the outcome or duration of this investigation.
Lawsuit related to supply of ELAPRASE to certain patients in Brazil
On September 24, 2014 Shire’s Brazilian affiliate, Shire Farmaceutica Brasil Ltda, was served with a lawsuit brought by the State of Sao Paulo and in which the Brazilian Public Attorney’s office has intervened alleging that Shire is obligated to provide certain medical care including ELAPRASE for an indefinite period at no cost to patients who participated in ELAPRASE clinical trials in Brazil, and seeking recoupment to the Brazilian government for amounts paid for these patients to date, and moral damages associated with these claims. Shire intends to defend itself against these allegations but is not able to predict the outcome or duration of this case.
18.Accumulated Other Comprehensive loss
The changes in accumulated other comprehensive loss, net of their related tax effects, in the year to December 31, 2015 and 2014 are included below:
Foreign currency translation adjustment Unrealized holding gain/(loss) on available-for-sale securities Accumulated other comprehensive loss
$M $M $M
As at January 1, 2015 (25.7) (5.8) (31.5)
Current period change:
Net current period other comprehensive (loss)/income (156.4) 4.1 (152.3)
As at December 31, 2015 (182.1) (1.7) (183.8)
19.Financial instruments
Treasury policies and organization
The Company’s principal treasury operations are coordinated by its corporate treasury function. All treasury operations are conducted within a framework of policies and procedures approved annually by the Board of Directors. As a matter of policy, the Company does not undertake speculative transactions that would increase its credit, currency or interest rate exposure.
Interest rate risk
The Company is principally exposed to interest rate risk on any borrowings under the Company’s various debt facilities (see Note 15 for details of each of the Company’s facilities). Interest on each of these facilities is set at floating rates, to the extent utilized. Shire’s exposure under these facilities is to US dollar interest rates. At December 31, 2015 the Company had fully utilized the January 2015 Facility Agreement and utilized $750 million of the RCF. Other facilities were not utilized at December 31, 2015.
The Company regularly evaluates the interest rate risk on its facilities. At December 31, 2015 the Company considered the risks associated with floating interest rates on borrowings under its facilities as appropriate. A hypothetical one percentage point increase or decrease in the interest rates applicable to drawings under the January 2015 Facility Agreement and the RCF at December 31, 2015 would increase interest expense by approximately $15 million per annum or would decrease the interest expense by approximately $7 million per annum.
The Company is also exposed to interest rate risk on its restricted cash, cash and cash equivalents and on foreign exchange contracts on which interest is set at floating rates. This exposure is primarily limited to US dollar, Pounds sterling and Euro interest rates. As the Company maintains all of its cash, liquid investments and foreign exchange contracts on a short term basis for liquidity purposes, this risk is not actively managed. In the year to December 31, 2015 the average interest rate received on cash and liquid investments was less than 1% per annum. These cash and liquid investments were primarily invested in US dollar term deposits with banks and money market and liquidity funds.
No derivative instruments were entered into during the year to December 31, 2015 to manage interest rate exposure. The Company continues to review its interest rate risk and the policies in place to manage the risk and may enter into derivative instruments to manage interest rate risk in the future.
Credit risk
Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, derivative contracts and trade accounts receivable (from product sales and from third parties from which the Company receives royalties). Cash is invested in short-term money market instruments, including money market and liquidity funds and bank term deposits. The money market and liquidity funds in which Shire invests are all triple A rated by both Standard and Poor’s and by Moody’s credit rating agencies.
The Company is exposed to the credit risk of the counterparties with which it enters into bank term deposit arrangements and derivative instruments. The Company limits this exposure through a system of internal credit limits which vary according to ratings assigned to the counterparties by the major rating agencies. The internal credit limits are approved by the Board and exposure against these limits is monitored by the corporate treasury function. The counterparties to these derivatives contracts are major international financial institutions.
The Company’s revenues from product sales in the US are mainly governed by agreements with major pharmaceutical wholesalers and relationships with other pharmaceutical distributors and retail pharmacy chains. For the year to December 31, 2015 there were three customers in the US that accounted for 47% of the Company’s product sales. However, such customers typically have significant cash resources and as such the risk from concentration of credit is considered acceptable. The Company has taken positive steps to manage any credit risk associated with these transactions and operates clearly defined credit evaluation procedures. However, an inability of one or more of these wholesalers to honor their debts to the Company could have an adverse effect on the Company’s financial condition and results of operations.
A substantial portion of the Company’s accounts receivable in countries outside of the United States is derived from product sales to government-owned or government-supported healthcare providers. The Company’s recovery of these accounts receivable is therefore dependent upon the financial stability and creditworthiness of the relevant governments. In recent years global and national economic conditions have negatively affected the growth, creditworthiness and general economic condition of certain markets in which the Company operates. As a result, in some countries outside of the US, specifically, Argentina, Greece, Italy, Portugal and Spain (collectively the “Relevant Countries”) the Company is experiencing delays in the remittance of receivables due from government-owned or government-supported healthcare providers. The Company continued to receive remittances in relation to government-owned or government-supported healthcare providers in the Relevant Countries in the year to December 31, 2015, including receipts of $116.0 million and $100.0 million in respect of Spanish and Italian receivables, respectively. The Company’s exposure to Greece, both in terms of gross accounts receivable and annual revenues, is not material.
To date the Company has not incurred material losses on accounts receivable in the Relevant Countries, and continues to consider that such accounts receivable are recoverable. The Company will continue to evaluate all its accounts receivable for potential collection risks and has made provision for amounts where collection is considered to be doubtful. If the financial condition of the Relevant Countries or other Eurozone countries suffer significant deterioration, such that their ability to make payments becomes uncertain, or if one or more Eurozone member countries withdraws from the Euro, additional allowances for doubtful accounts may be required, and losses may be incurred, in future periods. Any such loss could have an adverse effect on the Company’s financial condition and results of operations.
Foreign exchange risk
The Company trades in numerous countries and as a consequence has transactional and translational foreign exchange exposures.
Transactional exposure arises where transactions occur in currencies different to the functional currency of the relevant subsidiary. The main trading currencies of the Company are the US dollar, Pounds Sterling, Swiss Franc, Canadian dollar and the Euro. It is the Company’s policy that these exposures are minimized to the extent practicable by denominating transactions in the subsidiary’s functional currency.
Where significant exposures remain, the Company uses foreign exchange contracts (being spot, forward and swap contracts) to manage the exposure for balance sheet assets and liabilities that are denominated in currencies different to the functional currency of the relevant subsidiary. These assets and liabilities relate predominantly to inter-company financing. The foreign exchange contracts have not been designated as hedging instruments. Cash flows from derivative instruments are presented within net cash provided by operating activities in the consolidated cash flow statement, unless the derivative instruments are economically hedging specific investing or financing activities.
Translational foreign exchange exposure arises on the translation into US dollars of the financial statements of non-US dollar functional subsidiaries.
At December 31, 2015 the Company had 39 swap and forward foreign exchange contracts outstanding to manage currency risk. The swap and forward contracts mature within 90 days. The Company did not have credit risk related contingent features or collateral linked to the derivatives. The Company has master netting agreements with a number of counterparties to these foreign exchange contracts and on the occurrence of specified events, the Company has the ability to terminate contracts and settle them with a net payment by one party to the other. The Company has elected to present derivative assets and derivative liabilities on a gross basis in the consolidated balance sheet. As at December 31, 2015 the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities of $1.4 million, resulting in net derivative assets and derivative liabilities of $0.5 million and $10.1 million, respectively. Further details are included below:
Net gains/(losses) (both realized and unrealized) arising on foreign exchange contracts have been classified in the consolidated statements of income as follows:
These net foreign exchange gains/(losses) are offset within Other income, net by net foreign exchange (losses)/gains arising on the balance sheet items that these contracts were put in place to manage.
20.Fair value measurement
Assets and liabilities that are measured at fair value on a recurring basis
As at December 31, 2015 and December 31, 2014 the following financial assets and liabilities are measured at fair value on a recurring basis using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
Total Level 1 Level 2 Level 3
At December 31, 2014 $'M $'M $'M $'M
Financial assets:
Available-for-sale securities(1) 13.1 13.1 - -
Contingent consideration receivable (2) 15.9 - - 15.9
Foreign exchange contracts 12.6 - 12.6 -
Financial liabilities:
Foreign exchange contracts 7.8 - 7.8 -
Contingent consideration payable(3) 629.9 - - 629.9
(1)Available-for-sale securities are included within Investments in the consolidated balance sheet.
(2)Contingent consideration receivable is included within Prepaid expenses and other current assets and Other non-current assets in the consolidated balance sheet.
(3)Contingent consideration payable is included within Other current liabilities and Other non-current liabilities in the consolidated balance sheet.
Certain estimates and judgments were required to develop the fair value amounts. The fair value amounts shown above are not necessarily indicative of the amounts that the Company would realize upon disposition, nor do they indicate the Company’s intent or ability to dispose of the financial instrument.
The following methods and assumptions were used to estimate the fair value of each material class of financial instrument:
·Available-for-sale securities - the fair values of available-for-sale securities are estimated based on quoted market prices for those investments.
·Contingent consideration receivable - the fair value of the contingent consideration receivable has been estimated using the income approach (using a probability weighted discounted cash flow method).
·Foreign exchange contracts - the fair values of the swap and forward foreign exchange contracts have been determined using an income approach based on current market expectations about the future cash flows.
·Contingent consideration payable - the fair value of the contingent consideration payable has been estimated using the income approach (using a probability weighted discounted cash flow method).
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The change in the fair value of the Company’s contingent consideration receivable and payables, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3), are as follows:
Contingent consideration payable
$'M $'M
Balance at January 1, 629.9 405.9
Initial recognition of contingent consideration payable 92.8 226.7
Change in fair value during the period with the corresponding adjustment recognized (within Integration and acquisition costs) in the income statement (149.9) 14.7
Reclassification of amounts to Other current liabilities (100.8) (15.1)
Change in fair value during the period with corresponding adjustment to the associated intangible asset 1.4 2.7
Amounts recorded to other comprehensive income (within foreign currency translation adjustments) 2.5 (5.0)
Balance at December 31, 475.9 629.9
Of the $475.9 million of contingent consideration payable as at December 31, 2015, $19.5 million is recorded within other current liabilities and $456.4 million is recorded within other non-current liabilities in the Company’s balance sheet.
Quantitative Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
Quantitative information about the Company’s recurring Level 3 fair value measurements is included below:
The Company re-measures the CCR (relating to contingent consideration due to the Company following divestment of certain of the Company’s products) at fair value at each balance sheet date, with the fair value measurement based on forecast cash flows, over a number of scenarios which vary depending on the expected performance outcome of the products following divestment. The forecast cash flows under each of these differing outcomes have been included in probability weighted estimates used by the Company in determining the fair value of the CCR.
Contingent consideration payable represents future milestones the Company may be required to pay in conjunction with various business combinations and future royalties payable as a result of certain business combinations and licenses. The amount ultimately payable by Shire in relation to business combinations is dependent upon the achievement of specified future milestones, such as the achievement of certain future development, regulatory and
sales milestones. The Company assesses the probability, and estimated timing, of these milestones being achieved and re-measures the related contingent consideration to fair value each balance sheet date. The amount of contingent consideration which may ultimately be payable by Shire in relation to future royalties is dependent upon future net sales of the relevant products over the life of the royalty term. The Company assesses the present value of forecast future net sales of the relevant products and re-measures the related contingent consideration to fair value each balance sheet date.
The fair value of the Company’s contingent consideration receivable and payable could significantly increase or decrease due to changes in certain assumptions which underpin the fair value measurements. Each set of assumptions and milestones is specific to the individual contingent consideration receivable or payable. The assumptions include, among other things, the probability and expected timing of certain milestones being achieved, the forecast future net sales of the relevant products and related future royalties payable, the probability weightings applied to different sales scenarios of the Company’s divested products and forecast future royalties receivable under scenarios developed by the Company, and the discount rates used to determine the present value of contingent future cash flows. The Company regularly reviews these assumptions, and makes adjustments to the fair value measurements as required by facts and circumstances.
Assets Measured at Fair Value on a Non-Recurring Basis using Significant Unobservable Inputs (Level 3)
In the year to December 31, 2015 the Company reviewed its SHP625 and SHP608 IPR&D intangible assets for impairment and recognized an impairment charge of $643.7 million, recorded within R&D in the consolidated income statement, to write-down these IPR&D assets to their fair value. The fair value of these IPR&D assets was determined using the income approach, which used significant unobservable (Level 3) inputs. These unobservable inputs included, among other things, the probabilities of these IPR&D assets receiving regulatory approval, the timeframe for such approval, risk-adjusted forecast future cash flows to be generated by these IPR&D assets and the determination of an appropriate discount rate to be applied in calculating the present value of forecast future cash flows. The fair value of these IPR&D assets, determined at the time of the impairment review, was $nil.
The carrying amounts of other financial assets and liabilities materially approximate to their fair value either because of the short-term maturity of these amounts or because there have been no significant changes since the asset or liability was last re-measured to fair value on a non-recurring basis.
21.Shareholders’ equity
Authorized common stock
The authorized stock of Shire plc as at December 31, 2015, was 1,000,000,000 ordinary shares and 2 subscriber ordinary shares.
Dividends
Under Jersey law, Shire plc is entitled to fund payments of dividends from any source (other than a capital redemption reserve or nominal capital account) subject to the Directors authorizing the distribution making a solvency statement in the prescribed statutory form. At December 31, 2015, Shire plc’s distributable reserves were approximately $12.1 billion.
Treasury stock
The Company records the purchase of its own shares by the EBT and under the share buy-back program as a reduction of shareholders’ equity based on the price paid for the shares. At December 31, 2015, the EBT held 0.6 million ordinary shares (2014: 0.7 million; 2013: 2.4 million) and 0.2 million ADSs (2014: 0.3 million; 2013: 0.4 million) and shares held under the share buy-back program were 8.5 million ordinary shares (2014: 9.0 million; 2013: 9.8 million). During the year to December 31, 2015 and 2014 the Company did not purchase any shares either through the EBT or under any share buy-back program. In the year to December 31, 2013 a total of 4.2 million ordinary shares and 0.8 million ADSs had been purchased for total consideration of $243.8 million, including stamp duty and broker commission.
Income Access Share Arrangements
Shire has put into place income access arrangements which enable ordinary shareholders, other than ADS holders, to choose whether they receive their dividends from Shire plc, a company tax resident in the Republic of Ireland, or from Shire Biopharmaceutical Holdings (“Old Shire”), a Shire group company tax resident in the UK.
Old Shire has issued one income access share to the Income Access Trust (the “IAS Trust”) which is held by the trustee of the IAS Trust (the “Trustee”). The mechanics of the arrangements are as follows:
i)If a dividend is announced or declared by Shire plc on its ordinary shares, an amount is paid by Old Shire by way of a dividend on the income access share to the Trustee, and such amount is paid by the Trustee to ordinary shareholders who have elected to receive dividends under these arrangements. The dividend which would otherwise be payable by Shire plc to its ordinary shareholders will be reduced by an amount equal to the amount paid to its ordinary shareholders by the Trustee.
ii)If the dividend paid on the income access share and on-paid by the Trustee to ordinary shareholders is less than the total amount of the dividend announced or declared by Shire plc on its ordinary shares, Shire plc will be obliged to pay a dividend on the relevant ordinary shares equivalent to the amount of the shortfall. In such a case, any dividend paid on the ordinary shares will generally be subject to Irish withholding tax at the rate of 20% or such lower rate as may be applicable under exemptions from withholding tax contained in Irish law.
iii)An ordinary shareholder is entitled to make an income access share election such that he/she will receive his/her dividends (which would otherwise be payable by Shire plc) under these arrangements from Old Shire. This can be done by submitting an IAS arrangement election form containing information on the participating shareholders as required by law.
The ADS Depositary has made an election on behalf of all holders of ADSs such that they will receive dividends from Old Shire under the income access share arrangements. Dividends paid by Old Shire under the income access share arrangements will not, under current legislation, be subject to any UK or Irish withholding taxes. If a holder of ADSs does not wish to receive dividends from Old Shire under the income access share arrangements, he/she must withdraw his/her ordinary shares from the ADS program prior to the dividend record date set by the ADS Depositary and request delivery of the Shire plc ordinary shares. This will enable him/her to receive dividends from Shire plc.
It is the expectation, although there can be no certainty, that Old Shire will distribute dividends on the income access share to the Trustee for the benefit of all ordinary shareholders who make an income access share election in an amount equal to what would have been such ordinary shareholders’ entitlement to dividends from Shire plc in the absence of the income access share election. If any dividend paid on the income access share and or paid to the ordinary shareholders is less than such ordinary shareholders’ entitlement to dividends from Shire plc in the absence of the income access share election, the dividend on the income access share will be allocated pro rata among the ordinary shareholders and Shire plc will pay the balance to these ordinary shareholders by way of dividend. In such circumstances, there will be no grossing up by Shire plc in respect of, and Old Shire and Shire plc will not compensate those ordinary shareholders for, any adverse consequences including any Irish withholding tax consequences.
Shire will be able to suspend or terminate these arrangements at any time, in which case the full Shire plc dividend will be paid directly by Shire plc to those ordinary shareholders (including the Depositary) who have made an income access share election. In such circumstances, there will be no grossing up by Shire plc in respect of, and Old Shire and Shire plc will not compensate those ordinary shareholders for, any adverse consequences including any Irish withholding tax consequences.
In the year to December 31, 2015 Old Shire paid dividends totalling $127.7 million (2014: $112.8 million; 2013: $91.1 million) on the income access share to the Trustee in an amount equal to the dividend ordinary shareholders would have received from Shire plc.
22.Earnings per share
The following table reconciles net income and the weighted average ordinary shares outstanding for basic and diluted earnings per share for the periods presented:
Year to December 31,
$’M $’M $’M
Income from continuing operations, net of taxes 1,337.5 3,282.8 1,419.6
(Loss)/ gain from discontinued operations1 (34.1) 122.7 (754.5)
Numerator for basic earnings per share 1,303.4 3,405.5 665.1
Interest on convertible bonds, net of tax - - 28.3
Numerator for diluted earnings per share 1,303.4 3,405.5 693.4
Weighted average number of shares:
Millions Millions Millions
Basic 1 590.4 586.7 552.0
Effect of dilutive shares:
Share-based awards to employees 2 2.7 4.6 4.8
Convertible bonds 2.75% due 2014 3 - - 33.5
Diluted 593.1 591.3 590.3
1. Excludes shares purchased by the EBT and under the shares buy-back program and presented by Shire as treasury stock.
2. Calculated using the treasury stock method.
3. At December 31, 2013, Bondholders had voluntarily converted $1,099,050,000 aggregate principal amount of the Bonds into 33,806,464 fully paid ordinary shares. The remaining outstanding Bonds in an aggregate principle amount of $950,000 were redeemed pursuant to the option redemption notice issued on November 26, 2013. The Company has calculated the impact of the Bonds on diluted earnings per share from January 1, 2013 to the actual date of conversion of the Bonds using the ‘if-converted’ method.
Year to December 31,
Earnings per ordinary share - basic
Earnings from continuing operations 226.5c 559.6c 257.2c
(Loss)/gain from discontinued operations (5.8c) 20.9c (136.7c)
Earnings per ordinary share - basic 220.7c 580.5c 120.5c
Earnings per ordinary share - diluted
Earnings from continuing operations 225.5c 555.2c 245.3c
(Loss)/gain from discontinued operations (5.8c) 20.8c (127.8c)
Earnings per ordinary share - diluted 219.7c 576.0c 117.5c
The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:
No. of shares No. of shares No. of shares
Millions Millions Millions
Share-based awards to employees1 3.4 0.3 0.5
1.Certain stock options have been excluded from the calculation of diluted EPS because (a) their exercise prices exceeded Shire plc’s average share price during the calculation period or (b) the required performance conditions were not satisfied as at the balance sheet date.
23.Segmental reporting
Shire comprises a single operating and reportable segment engaged in the research, development, licensing, manufacturing, marketing, distribution and sale of innovative specialist medicines to meet significant unmet patient needs.
This segment is supported by several key functions: a Pipeline group, consisting of R&D and Corporate Development, which prioritizes its activities towards late-stage development programs across a variety of therapeutic areas, while focusing its pre-clinical development activities primarily in Rare Diseases; a Technical Operations group responsible for the Company’s global supply chain; and an In-line marketed products group which focuses on commercialized products. The In-Line marketed products group has commercial units that focus exclusively on the commercial execution of its marketed products including in the areas of HAE/LSD, Neuroscience, and Gastrointestinal (“GI”) and Internal Medicine, and to support the development of our pipeline candidates, in Ophthalmics. This ensures that the Company provides innovative treatments, and services the needs of its customers and patients, as efficiently as possible. The business is also supported by a simplified, centralized corporate function group. None of these functional groups meets all of the criteria to be an operating segment.
This single operating and reportable segment is consistent with the financial information regularly reviewed by the Executive Committee (which is Shire’s chief operating decision maker) for the purposes of evaluating performance, allocating resources, and planning and forecasting future periods.
Geographic information
Revenues (based on the geographic location from which the sale originated):
Year to December 31,
$’M $’M $’M
Ireland 14.1 18.5 22.5
United States 4,659.2 4,174.1 3,249.3
Rest of World 1,743.4 1,829.5 1,662.5
Total revenues 6,416.7 6,022.1 4,934.3
Long-lived assets comprise all non-current assets, (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments and financial instruments) based on their relevant geographic location:
Year to December 31,
$’M $’M
Ireland 1.7 3.1
United States 751.3 749.8
Rest of World 82.2 91.3
Total 835.2 844.2
Material customers
In the periods set out below, certain customers accounted for greater than 10% of the Company’s product revenues:
In the periods set out below, revenues by major product were as follows:
24.Receipt of break fee
On July 18, 2014, the Boards of AbbVie and Shire announced that they had agreed the terms of a recommended combination of Shire with AbbVie, subject to a number of conditions including approval by shareholders and regulators. On the same date Shire and AbbVie entered into a co-operation agreement in connection with the recommended combination. On October 16, 2014, the Board of AbbVie confirmed that it had withdrawn its recommendation of its offer for Shire as a result of the anticipated impact of a US Treasury Notice on the benefits that AbbVie expected from its offer. As AbbVie’s offer was conditional on the approval of its stockholders, and given
their Board’s decision to change its recommendation and to advise AbbVie’s stockholders to vote against the offer, there was no realistic prospect of satisfying this condition. Accordingly, Shire’s Board agreed with AbbVie to terminate the cooperation agreement on October 20, 2014. The Company entered into a termination agreement with AbbVie, pursuant to which AbbVie paid the break fee due under the cooperation agreement of approximately $1,635.4 million. The Company has obtained advice that the break fee should not be taxable in Ireland. The Company has therefore concluded that no tax liability should arise and has not recognized a tax charge in the income statement in 2014. The relevant tax return was submitted on September 23, 2015.
25.Retirement benefits
The Company makes contributions to defined contribution retirement plans that together cover substantially all employees. The level of the Company’s contribution is fixed at a set percentage of each employee’s pay.
Company contributions to personal defined contribution pension plans totaled $52.3 million, $49.8 million and $45.7 million for the years to December 31, 2015, 2014 and 2013, respectively, and were charged to operations as they became payable.
26.Taxation
The components of pre-tax income from continuing operations are as follows:
Year to December 31,
$’M $’M $’M
Ireland (11.4) 1,472.0 (47.8)
United States 975.8 1,025.9 1,153.3
Rest of the world 421.4 838.3 588.1
1,385.8 3,336.2 1,693.6
The provision for income taxes on continuing operations by location of the taxing jurisdiction for the years to December 31, 2015, 2014 and 2013 consisted of the following:
Year to December 31,
$’M $’M $’M
Current income taxes:
Ireland 0.8 - -
US federal tax 191.7 291.8 274.3
US state and local taxes 17.3 25.3 17.9
Rest of the world 17.8 (290.9) 63.4
Total current taxes 227.6 26.2 355.6
Deferred taxes:
US federal tax (151.2) 39.7 23.8
US state and local taxes (1.7) (2.9) (8.3)
Rest of the world (28.6) (6.9) (93.2)
Total deferred taxes (181.5) 29.9 (77.7)
Total income taxes 46.1 56.1 277.9
The Group has determined the amount of income tax expense or benefit allocable to continuing operations using the incremental approach in accordance with ASC 740-20-45-8. The amount of income tax attributed to discontinued operations is disclosed in Note 8.
The operating results associated with the DERMAGRAFT business have been classified as discontinued operations for all periods presented.
The reconciliation of income from continuing operations before income taxes and equity in earnings/(losses) of equity method investees at the statutory tax rate to the provision for income taxes is shown in the table below:
Year to December 31,
$’M $’M $’M
Income from continuing operations before income taxes and equity in (losses)/ earnings of equity method investees 1,385.8 3,336.2 1,693.6
Statutory tax rate(1) 25.0% 25.0% 25.0%
US R&D credit (7.7%) (2.5%) (4.5%)
Intra-group items(2) (19.5%) (6.3%) (9.2%)
Other permanent items 2.0% 0.7% (0.7%)
Change in valuation allowance 1.0% 0.8% 0.9%
Difference in taxation rates 7.3% 3.4% 7.8%
Change in provisions for uncertain tax positions (0.4%) 0.2% 3.8%
Prior year adjustment (1.6%) 0.1% (3.4%)
Change in fair value of contingent consideration (3.8%) 0.3% (3.6%)
Change in tax rates 0.9% 0.5% (0.2%)
Receipt of break fee 0.0% (12.3%) 0.0%
Settlement with Canadian revenue authorities 0.0% (7.0%) 0.0%
Other 0.1% (1.2%) 0.5%
Provision for income taxes on continuing operations 3.3% 1.7% 16.4%
(1) In addition to being subject to the Irish corporation tax rate of 25%, in 2015 the Company is also subject to income tax in other territories in which the Company operates, including: Canada (15%); France (33.3%); Germany (15%); Italy (27.5%); Luxembourg (21.0%); the Netherlands (25%); Belgium (33.99%); Spain (28%); Sweden (22%); Switzerland (8.5%); United Kingdom (20%) and the US (35%). The rates quoted represent the statutory federal income tax rates in each territory, and do not include any state taxes or equivalents or surtaxes or other taxes charged in individual territories, and do not purport to represent the effective tax rate for the Company in each territory.
(2) Intra-group items principally relate to the effect of inter-company dividends and other intra-territory eliminations, the pre-tax effect of which has been eliminated in arriving at the Company’s consolidated income from continuing operations before income taxes, noncontrolling interests and equity in earnings/(losses) of equity method investees.
Provisions for uncertain tax positions
The Company files income tax returns in the Republic of Ireland, the US (both federal and state) and various other jurisdictions (see footnote (1) to the table above for major jurisdictions). With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2008. Tax authorities in various jurisdictions are in the process of auditing the Company’s tax returns for fiscal periods from 2008, but primarily periods after 2010; these tax audits cover primarily transfer pricing.
In respect of the receipt of the break fee from AbbVie in 2014, the Company has obtained advice that the break fee should not be taxable in Ireland. The Company has therefore concluded that no tax liability should arise and did not recognize a tax charge in the income statement in 2014. The relevant tax return was submitted on September 23, 2015.
While tax audits remain open, the Company also considers it reasonably possible that issues may be raised by tax authorities resulting in increases to the balance of unrecognized tax benefits, however, an estimate of such an increase cannot be made.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
$’M $’M $’M
Balance at January 1 207.8 355.2 278.7
Increases based on tax positions related to the current year 27.0 20.3 56.8
Decreases based on tax positions taken in the current year - - (0.5)
Increases for tax positions taken in prior years 21.8 64.2 34.5
Decreases for tax positions taken in prior years (30.6) (211.0) (0.8)
Decreases resulting from settlements with the taxing authorities (1.2) (9.4) -
Decreases as a result of expiration of the statute of limitations (4.4) (0.6) (0.6)
Foreign currency translation adjustments(1) (4.1) (10.9) (12.9)
Balance at December 31(2) 216.3 207.8 355.2
(1) Recognized within Other Comprehensive Income
(2) Approximately $207m (2014: $181m, 2013: $355m) of which would affect the effective rate if recognized.
The Company considers it reasonably possible that certain audits currently being conducted could be concluded in the next 12 months, and as a result the total amount of unrecognized tax benefits recorded at December 31, 2015 could decrease by up to approximately $60 million. As at the balance sheet date, the Company believes that its reserves for uncertain tax positions are adequate to cover the resolution of these audits. However, the resolution of these audits could have a significant impact on the financial statements if the settlement differs from the amount reserved.
The Company recognizes interest and penalties accrued related to unrecognized tax positions within income taxes. During the years ended December 31, 2015, 2014 and 2013, the Company recognized a charge / (credit) to income taxes of $0.8m, $(103.1) million and $0.4 million in interest and penalties and the Company had a liability of $26.5 million, $25.8 million and $112.2 million for the payment of interest and penalties accrued at December 31, 2015, 2014 and 2013 respectively.
Deferred taxes
The significant components of deferred tax assets and liabilities and their balance sheet classifications, as at December 31, are as follows:
1.Excluding $30.4 million of deferred tax assets at December 31, 2015 (2014: $24.6 million), related to net operating losses that result from excess stock based compensation and for which any benefit realized will be recorded to stockholders' equity.
At December 31, 2015, the Company had a valuation allowance of $416.1 million (2014: $324.7 million) to reduce its deferred tax assets to estimated realizable value. These valuation allowances related primarily to operating loss, capital loss and tax-credit carry-forwards in Switzerland (2015: $131.5 million; 2014: $62.3 million); US (2015: $125.9 million; 2014: $77.5 million); Ireland (2015: $22.2 million; 2014: $75.2 million); and other foreign tax jurisdictions (2015 $136.5 million; 2014: $109.7 million).
Management is required to exercise judgment in determining whether deferred tax assets will more likely than not be realized. A valuation allowance is established where there is an expectation that on the balance of probabilities management considers it is more likely than not that the relevant deferred tax assets will not be realized. In assessing the need for a valuation allowance, management weighs all available positive and negative evidence including cumulative losses in recent years, projections of future taxable income, carry forward and carry back potential under relevant tax law, expiration period of tax attributes, taxable temporary differences, and prudent and feasible tax-planning strategies.
The net increase in valuation allowances of $91.4 million includes (i) increases of $180.4 million relating to operating losses and capital losses primarily acquired with NPS Pharma ($98.9 million) and losses in various jurisdictions ($81.5 million) for which management considers that there is insufficient positive evidence in respect of the factors described above to overcome negative evidence, such as cumulative losses and expiration periods and therefore it is more likely than not that the relevant deferred tax assets will not be realized in full, and ii) decreases of $89 million
primarily in respect of Irish tax losses, which based on the assessment of factors described above now provides sufficient positive evidence to support the losses are more likely than not to be realized.
At December 31, 2015, based upon a consideration of the factors described above management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowances. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if these factors are revised in future periods.
During the period, the Company adopted ASU No.2015-17 which requires that all deferred tax liabilities and deferred tax assets be presented as non-current in the classified balance sheet (ASU 740-10-45-4) for the purpose of simplifying the balance sheet presentation. In accordance with the permitted transition guidance, this new guidance has been applied prospectively in 2015 and the prior year balance sheet classification of deferred taxes has not been adjusted.
The approximate tax effect of NOLs, capital losses and tax credit carry-forwards as at December 31, are as follows:
$’M $’M
US federal tax 149.3 38.7
US state tax 77.2 82.8
Republic of Ireland 61.2 75.2
Foreign tax jurisdictions 434.9 351.8
R&D and other tax credits 257.7 137.8
980.3 686.3
The approximate gross value of net operating losses (“NOLs”) and capital losses at 31 December 2015 is $5,562.3 million (2014: $3,313.0 million). The tax effected NOLs, capital losses and tax credit carry-forwards shown above have the following expiration dates:
The Company does not provide for deferred taxes on the excess of the financial reporting over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. At December 31, 2015, that excess totalled $11.3 billion (2014: $8.1 billion). The determination of the additional deferred taxes that have not been provided is not practicable.
27.Related parties
Shire considers that ArmaGen, Inc. (“ArmaGen”) is a related party by virtue of a combination of Shire’s equity stake in ArmaGen and the worldwide licensing and collaboration agreement between the two parties to develop and commercialize AGT-182. In the year to December 31, 2015 Shire paid $2.5 million in cash to ArmaGen in exchange for an additional equity stake in ArmaGen, following which Shire holds approximately 21% of ArmaGen’s issued equity. In addition, Shire recorded R&D costs arising from the licensing and collaboration arrangement of $7.8 million in the year to December 31, 2015, of which $0.5 million was accrued and unpaid as at December 31, 2015 (2014: $1.0 million).
28.Share-based compensation plans
The following table shows the total share-based compensation expense (see below for types of share-based awards) included in the consolidated statements of income:
Year to December 31,
$’M $’M $’M
Cost of product sales 7.6 8.5 4.4
Research and development 28.6 22.2 22.8
Selling, general and administrative 37.4 35.9 46.9
Reorganization costs 26.7 30.4 3.3
Total 100.3 97.0 77.4
Less tax (28.4) (23.8) (18.1)
71.9 73.2 59.3
There were no capitalized share-based compensation costs at December 31, 2015 and 2014.
At December 31, 2015, $115.3 million (2014: $83.1 million, 2013: $97.0 million) of total unrecognized compensation cost relating to non-vested awards is expected to be recognized over a period of 3 years.
At December 31, 2015, $82.0 million (2014: $71.2 million, 2013: $90.3 million) of total unrecognized compensation cost relating to non-vested in-the-money awards (based on the average share price during the year) is expected to be recognized over a weighted average period of 1.9 years (2014: 1.9 years, 2013: 1.7 years).
On May 2, 2013, the Company initiated the reorganization of its business to integrate the three divisions into a simplified One Shire organization (see Note 4 for details). As a result of this reorganization the Company modified the terms of certain of its equity awards to employees and directors impacted by the One Shire reorganization. Included in the stock compensation expense for the year to December 31, 2015, is $26.7 million (2014: $30.4 million, 2013: $3.3 million) of incremental stock compensation costs related to the modification of awards granted to those individuals impacted by the One Shire reorganization.
Share-based compensation plans
Prior to February 28, 2015 the Company granted stock-settled share appreciation rights (“SARs”) and performance share awards (“PSAs”) over ordinary shares and ADSs to Executive Directors and employees under the Shire Portfolio Share Plan (“PSP”) (Parts A and B). The SARs and PSAs granted under the PSP (Parts A & B) to Executive Directors are exercisable subject to performance and service criteria. Substantially all SARs and PSAs granted to employees are exercisable subject only to service criteria.
The principal terms and conditions of SARs and PSAs under the Shire Portfolio Share Plan (Parts A and B) are as follows: (i) the contractual life of SARs is seven years, (ii) the vesting period of SARs and PSAs granted to employees below the level of Executive Vice President allows for graded vesting over three years, and (iii) awards granted to the level of Executive Director and Executive Vice President, cliff vest after three years and contain performance conditions based on growth in Non-GAAP adjusted return on invested capital (“Adjusted ROIC”) and Non-GAAP earnings before interest, taxation, depreciation and amortization (“Non-GAAP EBITDA”). In 2014 the Company granted PSAs under the PSP to employees at Executive Vice President level and to a select group of senior employees, which are exercisable subject to performance and service criteria. These PSAs cliff vest after three years and contain performance conditions as explained above.
Since February 28, 2015 the Company has granted awards under the Shire Long Term Incentive Plan 2015 (“LTIP”). Under the LTIP the Company grants stock-settled share appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance share units (“PSUs”) over ordinary shares and ADSs to Executive Directors and employees. The PSUs granted under the LTIP and SARs granted to Executive Directors are exercisable subject to performance and service criteria. RSUs granted under the LTIP and SARs granted to all other employees are exercisable subject only to service criteria.
The principal terms and conditions of SARs, RSUs and PSUs granted under the LTIP are as follows: (i) the contractual life of SARs is seven years, (ii) the vesting period of SARs and RSUs granted to employees below the level of Executive Vice President allows for graded vesting, and (iii) all SARs granted to Executive Directors and employees at Executive Vice President level and all PSUs granted cliff vest after three years and, with the exception of SARs granted to employees at Executive Vice President level, contain performance conditions based on product
sales and Non-GAAP EBITDA targets; a Non-GAAP Adjusted ROIC underpin is also used at the end of the three year performance period to assess the underlying performance of the Company before determining the final vesting levels for awards with performance conditions. In addition, a further two year holding period will apply to all awards granted to Executive Directors post vesting.
The Company also operates a Global Employee Stock Purchase Plan, and UK/Irish Sharesave Plans.
The following awards were outstanding as at December 31, 2015:
* Number of awards are stated in terms of ordinary share equivalents.
Stock-settled SARs and stock options
(a)LTIP and PSP - Part A
Stock-settled share appreciation rights are exercisable subject to service and, for grants to Executive Directors only, performance criteria.
In respect of any award made to Executive Directors under the LTIP, performance criteria are based on product sales and Non-GAAP EBITDA targets, with a Non-GAAP Adjusted ROIC underpin. In respect of any award made to Executive Directors under the PSP (Part A), performance criteria are based on growth in Non-GAAP Adjusted ROIC and Non-GAAP EBITDA. These performance measures are an important measure of the Company’s ability to meet the strategic objective to grow value for all of its stakeholders.
Awards granted to employees below Executive Director level are not subject to performance conditions and are only subject to service conditions.
Once awards have vested, participants will have until the seventh anniversary of the date of grant to exercise their awards.
(b)UK/Irish Sharesave Plans (“Sharesave Plans”)
Options granted under the Sharesave Plans are granted with an exercise price equal to 80% and 75% of the mid-market price on the day before invitations are issued to UK and Ireland employees, respectively. Employees may enter into three or five year savings contracts. No performance conditions apply.
(c)Shire Global Employee Stock Purchase Plan (“Stock Purchase Plan”)
Under the Stock Purchase Plan, options are granted with an exercise price equal to 85% of the fair market value of a share on the enrolment date (the first day of the offering period) or the exercise date (the last day of the offering period), whichever is the lower. Employees agree to save for a period up to 12 months. No performance conditions apply.
A summary of the status of the Company’s SARs and stock options as at December 31, 2015 and of the related transactions during the period then ended is presented below:
Weighted average exercise price
Year to December 31, 2015 £ Number of Intrinsic value
shares* £’M
Outstanding as at beginning of period 33.27 7,756,516
Granted 52.12 4,444,345
Exercised 50.99 (3,104,782)
Forfeited 40.69 (1,299,583)
Outstanding as at end of period 52.02 7,796,496 98.5
Exercisable as at end of period 35.61 2,408,241 54.8
* Number of awards are stated in terms of ordinary share equivalents
The weighted average grant date fair value of SARs and stock options granted in the year ended December 31, 2015 was £10.36 (2014: £6.19; 2013: £3.37).
SARs and stock options outstanding as at December 31, 2015 have the following characteristics:
Number of awards outstanding* Exercise prices Weighted Average remaining contractual term (Years) Weighted average exercise price of awards outstanding Number of awards exercisable Weighted average exercise price of awards exercisable
£
£
£
3,307,723 14.01-28.00 3.7 20.61 1,953,627 20.43
1,019,985 28.01-40.00 5.2 36.06 264,646 36.01
3,468,788 40.01-53.87 5.3 46.05 189,968 53.27
7,796,496
2,408,241
* Number of awards are stated in terms of ordinary share equivalents
RSUs, PSUs and PSAs
LTIP and PSP - Part B
PSUs granted to Executive Directors and certain senior employees under the 2015 LTIP are exercisable subject to certain performance and service criteria.
In respect of any award granted to Executive Directors and certain senior employees under the LTIP, the performance criteria are based on product sales and Non-GAAP EBITDA targets, with a Non-GAAP Adjusted ROIC underpin. In respect of any award granted to Executive Directors and certain senior employees under the PSP (Part B), performance criteria are based on growth in Non-GAAP Adjusted ROIC and Non-GAAP EBITDA.
RSUs and PSAs granted to employees below Executive Director and Executive Vice President level are not subject to performance conditions and are only subject to service conditions (with the exception of a select group of senior employees).
A summary of the status of the Company’s performance share awards as at December 31, 2015 and of the related transactions during the period then ended is presented below:
RSUs, PSUs and PSAs Number of shares* Aggregate intrinsic value £’M Weighted average remaining life
Outstanding as at beginning of period 2,166,181
Granted 1,075,254
Exercised (975,895)
Forfeited (473,610)
Outstanding as at end of period 1,791,930 84.2 5.4
Exercisable as at end of period - N/A N/A
* Number of awards are stated in terms of ordinary share equivalents
The weighted average grant date fair value of RSUs and performance share awards granted in the year to December 31, 2015 is £53.11 (2014:£35.11; 2013:£19.71).
Exercises of employee share-based awards
The total intrinsic values of share-based awards exercised for the years to December 31, 2015, 2014 and 2013 were $198.8 million, $200.8 million and $298.3 million, respectively. The total cash received from employees as a result of employee share option exercises for the period to December 31, 2015, 2014 and 2013 was approximately $16.6 million, $17.4 million and $17.2 million, respectively. In connection with these exercises, the tax benefit credited to additional paid-in capital for the years to December 31, 2015, 2014 and 2013 was $31.6 million, $39.6 million and $11.9 million respectively.
The Company will settle future employee share award exercises with either newly listed ordinary shares or with shares held in the EBT. The number of shares to be purchased by the EBT in 2016 will be dependent on the number of employee share awards granted and exercised during the year and Shire plc’s share price. At December 31, 2015 the EBT held 0.6 million ordinary shares and 0.2 million ADSs.
Valuation methodologies
The Company estimates the fair value of its share-based awards using a Black-Scholes valuation model. Key input assumptions used to estimate the fair value of share-based awards include the grant price of the award, the expected stock-based award term, volatility of the Company’s share price, the risk-free rate and the Company’s dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair values of Shire’s stock-based awards. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company under guidance issued by the FASB on share-based payment transactions.
The fair value of share awards granted was estimated using the following assumptions:
Period ended December 31,
Risk-free interest rate1 0.6-1.8% 0.3-1.8% 0.1-0.9%
Expected dividend yield 0.2-0.4% 0.2-0.4% 0.4-0.6%
Expected life 1-4 years 1-4 years 1-4 years
Volatility 23-26% 23-27% 23-26%
Forfeiture rate 5-7% 5-7% 5-9%
(1)	Risk-free interest rate is for UK and US grants
The following assumptions were used to value share-based awards:
·risk-free interest rate - for awards granted over ADSs, the US Federal Reserve treasury constant maturities rate with a term consistent with the expected life of the award is used. For awards granted over ordinary shares, the yield on UK government bonds with a term consistent with the expected life of the award is used;
·expected dividend yield - measured as the average annualized dividend estimated to be paid by the Company over the expected life of the award as a percentage of the share price at the grant date;
·expected life - estimated based on the contractual term of the awards and the effects of employees’ expected exercise and post-vesting employment termination behavior;
·expected volatility - measured using historical daily price changes of the Company’s share price over the respective expected life of the share-based awards at the date of the award; and
·the forfeiture rate is estimated using historical trends of the number of awards forfeited prior to vesting.
Quarterly results of operations (Unaudited)
The following table presents summarized unaudited quarterly results for the years to December 31, 2015 and 2014:
Q1 Q2 Q3 Q4
$’M $’M $’M $’M
Total revenues 1,488.4 1,557.6 1,655.0 1,715.7
Cost of product sales 227.8 228.0 262.7 250.5
Income from continuing operations, net of taxes 412.9 164.1 477.1 283.4
Loss from discontinued operations, net of taxes (2.5) (4.5) (24.3) (2.8)
Net income 410.4 159.6 452.8 280.6
Earnings per ordinary share - basic
Earnings from continuing operations 70.1c 27.8c 80.7c 47.9c
Loss from discontinued operations (0.4c) (0.8c) (4.1c) (0.5c)
Earnings per share - basic 69.7c 27.0c 76.6c 47.4c
Earnings per ordinary share - diluted
Earnings from continuing operations 69.7c 27.7c 80.4c 47.8c
Loss from discontinued operations (0.4c) (0.8c) (4.1c) (0.5c)
Earnings per share - diluted 69.3c 26.9c 76.3c 47.3c
Q1 Q2 Q3 Q4
$’M $’M $’M $’M
Total revenues 1,346.8 1,502.1 1,597.1 1,576.1
Cost of product sales 229.5 277.0 254.3 218.5
Income from continuing operations, net of taxes 253.1 528.3 515.8 1,985.6
(Loss)/gain from discontinued operations, net of taxes (22.7) (5.2) (36.1) 186.7
Net income 230.4 523.1 479.7 2,172.3
Earnings per ordinary share - basic
Earnings from continuing operations 43.3c 90.1c 87.8c 338.3c
(Loss)/gain from discontinued operations (3.9c) (0.9c) (6.1c) 31.8c
Earnings per share - basic 39.4c 89.2c 81.7c 370.1c
Earnings per ordinary share - diluted
Earnings from continuing operations 43.0c 89.5c 87.0c 335.7c
(Loss)/gain from discontinued operations (3.9c) (0.9c) (6.1c) 31.6c
Earnings per share - diluted 39.1c 88.6c 80.9c 367.3c
INDEX TO THE SHIRE INCOME ACCESS SHARE TRUST FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets as at December 31, 2015 and 2014
Statements of Income for each of the three years in the period ended December 31, 2015
Statements of Changes in Equity for each of the three years in the period ended December 31, 2015
Statements of Cash Flows for each of the three years in the period ended December 31, 2015
Notes to the Shire Income Access Share Trust Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Equiniti Trust (Jersey) Limited, Trustee of the Shire Income Access Share Trust and the Board of Directors and Stockholders of Shire plc
We have audited the accompanying balance sheets of the Shire Income Access Share Trust (the “Trust”) as at December 31, 2015 and 2014 and the related statements of income, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Trustee and Shire plc’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such separate opinion. 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 our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Shire Income Access Share Trust as at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte LLP
DELOITTE LLP
London, United Kingdom
February 23, 2016
SHIRE INCOME ACCESS SHARE TRUST
BALANCE SHEETS
Notes December 31, 2015 December 31, 2014
$’M $’M
ASSETS
Total assets - -
LIABILITIES AND EQUITY
Total liabilities - -
Equity:
Total equity - -
Total liabilities and equity - -
The notes on page are an integral part of these financial statements.
SHIRE INCOME ACCESS SHARE TRUST
STATEMENTS OF INCOME
Year to Year to Year to
Notes
December 31, 2015 December 31, 2014 December 31, 2013
$’M $’M $’M
Dividend income
127.7 112.8 91.1
Net income
127.7 112.8 91.1
The notes on page are an integral part of these financial statements.
SHIRE INCOME ACCESS SHARE TRUST
STATEMENTS OF CHANGES IN EQUITY
Capital account Revenue account Total equity
$’M $’M $’M
As at December 31, 2012 - - -
Net income for the year - 91.1 91.1
Distributions made - (91.1) (91.1)
As at December 31, 2013 - - -
Net income for the year - 112.8 112.8
Distributions made - (112.8) (112.8)
As at December 31, 2014 - - -
Net income for the year - 127.7 127.7
Distributions made - (127.7) (127.7)
As at December 31, 2015 - - -
The notes on page are an integral part of these financial statements.
SHIRE INCOME ACCESS SHARE TRUST
STATEMENTS OF CASHFLOWS
Year to Year to Year to
Notes December 31, 2015 December 31, 2014 December 31, 2013
$’M $’M $’M
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
127.7 112.8 91.1
Net cash provided from operating activities(A)
127.7 112.8 91.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by investing activities(B) - - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions made
(127.7) (112.8) (91.1)
Net cash used in financing activities(C)
(127.7) (112.8) (91.1)
Net increase in cash and cash equivalents (A+B+C) - - -
Cash and cash equivalents at beginning of period - - -
Cash and cash equivalents at end of period - - -
The notes on page are an integral part of these financial statements.
NOTES TO THE SHIRE INCOME ACCESS SHARE TRUST FINANCIAL STATEMENTS
(a)The Trust
The Shire Income Access Share Trust (the “Trust”) was established on August 29, 2008 by Shire Biopharmaceuticals Holdings (formerly Shire plc). The Trust is governed by the applicable laws of England and Wales and is resident in Jersey. The Trustee of the Trust is Equiniti Trust (Jersey) Limited, 26 New Street, St Helier, Jersey, JE4 3RA.
The Trust was established as part of the Income Access Share mechanism, as outlined in Note 21 in this Annual Report on Form 10-K of Shire plc and its subsidiaries (collectively referred to as either “Shire” or the “Company”).
(b)Basis of preparation
The financial statements of the Trust have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The financial statements have been prepared under the historical cost convention.
The preparation of financial statements in conformity with US GAAP requires the use of certain accounting estimates. It also requires management to exercise its judgment in the process of applying the Trust’s accounting policies. Actual results may differ from these estimates.
The results of operations, and the financial position and cash flows of the Trust are also consolidated in the Company’s financial statements, as contained on pages to.
(c)Summary of significant accounting policies
i)	Functional currency
The functional currency of the Trust is US dollars.
ii)	Foreign currency translation
Income and expense items denominated in currencies other than the functional currency are translated into the functional currency at the rate ruling on their transaction date. Monetary assets and liabilities recorded in currencies other than the functional currency have been expressed in the functional currency at the rates of exchange ruling at the respective balance sheet dates. Differences on translation are included in the consolidated statements of income.
iii)	Dividend income
Interim dividends declared on the Income Access Share are recognized on a paid basis unless the dividend has been confirmed by a general meeting of Shire, in which case income is recognized on the record date of the dividend by Shire on its ordinary shares.
(d)Capital account
The Capital account is represented by the Income Access Share of 5 pence settled in the Trust by Old Shire.
(e)Distributions made
Distributions are made to those shareholders of Shire who have elected to receive dividends from the Trust in accordance with the Trust Deed. Unclaimed dividends are not included in distributions made. There were no unclaimed dividends at December 31, 2015. Amounts are recorded as distributed once a wire transfer or check is issued. All checks are valid for one year from the date of issue. Any wire transfers that are not completed are replaced by checks. To the extent that checks expire or are returned unrepresented, the Trust records a liability for unclaimed dividends and a corresponding amount of cash.
(f)Financial instruments
The Trust, in its normal course of business, is not subject to market risk, credit risk or liquidity risk. The Trustees do not consider that any foreign exchange exposure will materially affect the operations of the Trust.
Schedule II - Valuation and Qualifying Accounts
Beginning balance Provision charged to income(1) Costs incurred/ utilization(1) Ending balance
Provision for sales rebates, returns and coupons $’M $’M $’M $’M
2015:
Accrued rebates - Medicaid and HMOs 882.1 2,128.0 (2,027.7) 982.4
Sales returns reserve 131.7 19.4 (22.8) 128.3
Accrued coupons 20.1 140.5 (134.0) 26.6
1,033.9 2,287.9 (2,184.5) 1,137.3
2014:
Accrued rebates - Medicaid and HMOs 806.5 1,877.7 (1,802.1) 882.1
Sales returns reserve 97.9 60.1 (26.3) 131.7
Accrued coupons 20.7 98.9 (99.5) 20.1
925.1 2,036.7 (1,927.9) 1,033.9
2013:
Accrued rebates - Medicaid and HMOs 640.5 1,626.6 (1,460.6) 806.5
Sales returns reserve 90.5 34.5 (27.1) 97.9
Accrued coupons 8.0 107.4 (94.7) 20.7
1,768.5 (1,582.4) 925.1
(1) In the analysis above, due to systems limitations, it is not practical and has not been necessary to break out current versus prior year activity. When applicable, Shire has performed general ledger reviews of sales deduction provisions charged to income, and the utilization of these provisions in subsequent years. Shire has determined that adjustments made in each year as a result of changes to estimates that related to prior year sales, and adjustments made as a result of differences between prior period provisions and actual payments, did not have a material impact on the Company’s financial performance or position either in each individual year, or in the Company’s performance over the reported period.
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
SHIRE PLC
(the “Registrant”)
Date: February 23, 2016
By: /s/ Flemming Ornskov
Flemming Ornskov, Chief Executive Officer
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.
Signature Title Date
/s/ Susan Kilsby
SUSAN KILSBY Non-Executive Chairman February 23, 2016
/s/ Dr. Flemming Ornskov
FLEMMING ORNSKOV Chief Executive Officer (Principal Executive Officer) and Executive Director February 23, 2016
/s/ Jeffrey Poulton
JEFFREY POULTON Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 23, 2016
/s/ David Kappler
DAVID KAPPLER Non-Executive Director February 23, 2016
/s/ Dominic Blakemore
DOMINIC BLAKEMORE Non-Executive Director February 23, 2016
/s/ Olivier Bohuon
OLIVIER BOHUON Non-Executive Director February 23, 2016
/s/ William Burns
WILLIAM BURNS Non-Executive Director February 23, 2016
/s/ Dr. Steven Gillis
STEVEN GILLIS Non-Executive Director February 23, 2016
/s/ Dr. David Ginsburg
DAVID GINSBURG Non-Executive Director February 23, 2016
/s/ Sara Mathew
SARA MATHEW Non-Executive Director February 23, 2016
/s/ Anne Minto
ANNE MINTO Non-Executive Director February 23, 2016