XLON:SHP Shire PLC Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2012

Commission File Number: 0-29630
 
SHIRE PLC
(Exact name of registrant as specified in its charter)
 
Jersey (Channel Islands)
(State or other jurisdiction of incorporation or organization)
98-0601486
(I.R.S. Employer Identification No.)
 
5 Riverwalk, Citywest Business Campus, Dublin 24, Republic of Ireland
 (Address of principal executive offices and zip code)
 
+353 1 429 7700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [X]                                No [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes [X]                                No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
 
Large accelerated filer [X]  Accelerated filer [  ]    Non-accelerated filer [  ]    Smaller reporting company [  ]
                
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes [  ]                                No [X]
 
As at July 27, 2012 the number of outstanding ordinary shares of the Registrant was 562,535,922.
 
 
1

 
 
THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
Statements included herein that are not historical facts are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, the Company’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, risks associated with: the inherent uncertainty of research, development, approval, reimbursement, manufacturing and commercialization of the Company’s Specialty Pharmaceuticals (“SP”), Human Genetic Therapies (“HGT”) and Regenerative Medicine (“RM”) products, as well as the ability to secure new products for commercialization and/or development; government regulation of the Company’s products; the Company’s ability to manufacture its products in sufficient quantities to meet demand; the impact of competitive therapies on the Company’s products; the Company’s ability to register, maintain and enforce patents and other intellectual property rights relating to its products; the Company’s ability to obtain and maintain government and other third-party reimbursement for its products; and other risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
 
The following are trademarks either owned or licensed by Shire plc or its subsidiaries, which are the subject of trademark registrations in certain territories, or which are owned by third parties as indicated and referred to in this Form 10-Q:
 
ADDERALL XR® (mixed salts of a single entity amphetamine)
CEREZYME® (trademark of Genzyme Corporation (“Genzyme”))
DAYTRANA® (trademark of Noven Pharmaceutical Inc. (“Noven”))
DERMAGRAFT® (human fibroblast-derived dermal substitute)
ELAPRASE® (idursulfase)
EQUASYM® (methylphenidate hydrochloride)
FIRAZYR® (icatibant)
FOSRENOL® (lanthanum carbonate)
FABRAZYME® (trademark of Genzyme)
INTUNIV® (guanfacine extended release)
LIALDA® (trademark of Giuliani International Limited (“Guiliani”))
MEZAVANT® (trademark of Guiliani)
PENTASA® (trademark of Ferring B.V. Corp (“Ferring”))
REPLAGAL® (agalsidase alfa)
RESOLOR® (prucalopride)
VASCUGEL® (human aortic endothelial cells on a porcine gelatin sponge)
VPRIV® (velaglucerase alfa)
VYVANSE® (lisdexamfetamine dimesylate)
XAGRID® (anagrelide hydrochloride)
ZEFFIX® (trademark of GlaxoSmithKline (“GSK”))
3TC® (trademark of GSK)
 
 
2

 
 
SHIRE PLC
Form 10-Q for the three months to June 30, 2012

Table of contents

     
 Page
PART I                 FINANCIAL INFORMATION
   
ITEM 1.  FINANCIAL STATEMENTS
   
 
Unaudited Consolidated Balance Sheets at June 30, 2012 and December 31, 2011
 
4
 
Unaudited Consolidated Statements of Income for the three months and six months to June 30, 2012 and June 30, 2011
 
6
 
Unaudited Consolidated Statements of Comprehensive Income for the three months and six months to June 30, 2012 and June 30, 2011
 
7
 
Unaudited Consolidated Statement of Changes in Equity for the six months to June 30, 2012
 
8
 
Unaudited Consolidated Statements of Cash Flows for the six months to June 30, 2012 and June 30, 2011
 
9
 
Notes to the Unaudited Consolidated Financial Statements
 
11
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
35
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
52
ITEM 4.  CONTROLS AND PROCEDURES
 
52
     
PART II  OTHER INFORMATION
 
52
ITEM 1.  LEGAL PROCEEDINGS
 
52
ITEM 1A.  RISK FACTORS
 
52
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
52
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
52
ITEM 4.  MINE SAFETY DISCLOSURES
 
52
ITEM 5.  OTHER INFORMATION
 
53
ITEM 6.  EXHIBITS
 
53
 
 
3

 
 
PART I: FINANCIAL INFORMATION
 
ITEM1: FINANCIAL STATEMENTS
 
SHIRE PLC
 
UNAUDITED CONSOLIDATED BALANCE SHEETS
 

         
June 30,
   
December 31,
 
         
2012
   
2011
 
   
Notes
    $’M     $’M  
ASSETS
                     
Current assets:
                     
Cash and cash equivalents
          1,112.7       620.0  
Restricted cash
          14.4       20.6  
Accounts receivable, net
    3       815.4       845.0  
Inventories
    4       411.8       340.1  
Deferred tax asset
            214.1       207.6  
Prepaid expenses and other current assets
    5       135.1       174.9  
Total current assets
            2,703.5       2,208.2  
                         
Non-current assets:
                       
Investments
            34.6       29.9  
Property, plant and equipment, net
            925.7       932.1  
Goodwill
            636.0       592.6  
Other intangible assets, net
    6       2,625.6       2,493.0  
Deferred tax asset
            44.7       50.7  
Other non-current assets
            70.9       73.7  
Total assets
            7,041.0       6,380.2  
                         
LIABILITIES AND EQUITY
                       
Current liabilities:
                       
Accounts payable and accrued expenses
    7       1,415.3       1,370.5  
Convertible bonds
    9       -       1,100.0  
Other current liabilities
    8       105.5       63.8  
Total current liabilities
            1,520.8       2,534.3  
                         
Non-current liabilities:
                       
Convertible bonds
    9       1,100.0       -  
Deferred tax liability
            538.3       516.6  
Other non-current liabilities
    10       264.8       144.3  
Total liabilities
            3,423.9       3,195.2  
Commitments and contingencies
    11                  
 
 
4

 

 
SHIRE PLC
UNAUDITED CONSOLIDATED BALANCE SHEETS (continued)


               
     
June 30,
   
December 31,
 
     
2012
   
2011
 
 
Notes
  $’M     $’M  
                   
Equity:
                 
Common stock of 5p par value; 1,000 million shares authorized; and 562.5 million shares issued and outstanding (2011: 1,000 million shares authorized; and 562.5 million shares issued and outstanding)
      55.7       55.7  
Additional paid-in capital
      2,932.9       2,853.3  
Treasury stock: 6.8 million shares (2011: 11.8 million shares)
      (188.8 )     (287.2 )
Accumulated other comprehensive income
      48.6       60.3  
Retained earnings
      768.7       502.9  
Total equity
      3,617.1       3,185.0  
Total liabilities and equity
      7,041.0       6,380.2  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
5

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 
       
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
       
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
       
2012
   
2011
   
2012
   
2011
 
   
Notes
    $’M     $’M     $’M     $’M  
Revenues:                                      
  Product sales
          1,147.7       993.3       2,254.6       1,882.6  
  Royalties
          56.3       63.4       112.6       137.0  
  Other revenues
          3.8       6.2       12.4       15.5  
Total revenues
          1,207.8       1,062.9       2,379.6       2,035.1  
                                       
Costs and expenses:
                                     
  Cost of product sales (1)
          152.5       143.7       310.9       268.2  
  Research and development(1)
          238.6       176.9       458.9       354.8  
  Selling, general and administrative ("SG&A")(1)
          511.0       440.3       1,011.0       843.2  
  (Gain)/loss on sale of product rights
          (3.6 )     2.2       (10.8 )     3.5  
  Reorganization costs
          -       7.5       -       13.0  
  Integration and acquisition costs
    2       7.1       9.0       12.4       2.6  
Total operating expenses
            905.6       779.6       1,782.4       1,485.3  
Operating income
            302.2       283.3       597.2       549.8  
 
                                       
Interest income
            0.6       0.6       1.4       1.2  
Interest expense
            (9.6 )     (9.9 )     (19.8 )     (19.1 )
Other (expense)/income, net
            (1.8 )     -       0.1       0.3  
Total other expense, net
            (10.8 )     (9.3 )     (18.3 )     (17.6 )
Income before income taxes and equity in (losses)/earnings of equity method investees
            291.4       274.0       578.9       532.2  
Income taxes
            (53.0 )     (69.7 )     (103.0 )     (117.8 )
Equity in (losses)/earnings of equity method investees, net of taxes
            (0.6 )     1.2       0.3       2.4  
Net income
            237.8       205.5       476.2       416.8  
Earnings per ordinary share - basic
          42.7 c     37.2 c     85.8 c     75.7 c
Earnings per ordinary share - diluted
          41.3 c     35.9 c     82.8 c     72.9 c
                                       
Weighted average number of shares (millions):
                                     
Basic
    15       557.0       552.3       555.2       551.1  
Diluted
    15       594.9       595.1       594.8       594.8  
 
(1)  
Cost of product sales includes amortization of intangible assets relating to favorable manufacturing contracts of $0.5 million for the three months to June 30, 2012 (2011: $0.4 million) and $0.7 million for the six months to June 30, 2012 (2011: $0.9 million). Research and development costs includes intangible asset impairment charges of $27.0 million for the three and six months to June 30, 2012 (2011: $nil). SG&A costs includes amortization of intangible assets relating to intellectual property rights acquired of $51.0 million for the three months to June 30, 2012 (2011: $36.7 million) and $96.6 million for the six months to June 30, 2012 (2011: $72.7 million).
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
6

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


   
3 months to
   
3 months to
   
6 months to
   
6 months to
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
$'M
   
$'M
   
$'M
   
$'M
 
                         
Net income
    237.8       205.5       476.2       416.8  
Other comprehensive income:
                               
Foreign currency translation adjustments
    (54.3 )     29.6       (17.7 )     100.2  
Unrealized holding gain on available-for-sale securities (net of taxes of $2.9 million, $1.1 million, $2.9 million and $3.4 million)
    3.1       5.9       6.0       16.0  
Other than temporary impairment of available-for-sale securities (net of taxes of $nil in all periods)
    -       -       -       2.4  
Comprehensive income
    186.6       241.0       464.5       535.4  

The components of accumulated other comprehensive income as at June 30, 2012 and December 31, 2011 are as follows:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Foreign currency translation adjustments
    43.7       61.4  
Unrealized holding gain/(loss) on available-for-sale securities, net of taxes
    4.9       (1.1 )
Accumulated other comprehensive income
    48.6       60.3  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
7

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In millions of US dollars except share data)
   
Shire plc shareholders' equity
 
   
Common stock
$'M
   
Common stock
Number of shares
M's
   
Additional paid-in capital
$’M
   
Treasury stock
$'M
   
Accumulated other comprehensive income
$'M
   
Retained earnings
$'M
   
Total equity
$'M
 
As at January 1, 2012
    55.7       562.5       2,853.3       (287.2 )     60.3       502.9       3,185.0  
Net income
    -       -       -       -       -       476.2       476.2  
Foreign currency translation
    -       -       -       -       (17.7 )     -       (17.7 )
Options exercised
    -       -       0.1       -       -       -       0.1  
Share-based compensation
    -       -       44.3       -       -       -       44.3  
Tax benefit associated with exercise of stock options
    -       -       35.2       -       -       -       35.2  
Shares purchased by Employee Benefit Trust ("EBT")
    -       -       -       (41.7 )     -       -       (41.7 )
Shares released by EBT  to satisfy exercise of stock options
    -       -       -       140.1       -       (139.7 )     0.4  
Unrealized holding gain on available-for-sale securities, net of taxes
    -       -       -       -       6.0       -       6.0  
Dividends
    -       -       -       -       -       (70.7 )     (70.7 )
As at June 30, 2012
    55.7       562.5       2,932.9       (188.8 )     48.6       768.7       3,617.1  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
Dividends per share
 
During the six months to June 30, 2012 Shire plc declared and paid dividends of 12.59 US cents per ordinary share (equivalent to 37.77 US cents per ADS) totalling $70.7 million.
 
 
8

 
 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


6 months to June 30,
 
2012
   
2011
 
 
  $’M     $’M  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
    476.2       416.8  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    152.4       132.3  
Share based compensation
    43.4       34.9  
Impairment of intangible assets
    27.0       -  
Other
    (6.5 )     (2.2 )
Movement in deferred taxes
    (24.1 )     17.7  
Equity in earnings of equity method investees
    (0.3 )     (2.4 )
 
               
Changes in operating assets and liabilities:
               
Decrease/(increase) in accounts receivable
    22.4       (56.2 )
Increase in sales deduction accrual
    27.6       66.1  
Increase in inventory
    (67.0 )     (30.6 )
Decrease/(increase) in prepayments and other assets
    32.1       (13.8 )
Increase/(decrease) in accounts and notes payable and other liabilities
    34.7       (77.1 )
Returns on investment from joint venture
    4.9       -  
Net cash provided by operating activities (A)
    722.8       485.5  
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Movements in restricted cash
    6.2       4.8  
Purchases of subsidiary undertakings and businesses, net of cash acquired
    (97.0 )     (719.7 )
Purchases of non-current investments
    (4.7 )     (4.5 )
Purchases of property, plant and equipment ("PP&E")
    (64.4 )     (95.0 )
Purchases of intangible assets
    (43.5 )     -  
Proceeds from disposal of non-current investments and PP&E
    4.6       -  
Proceeds from capital expenditure grants
    8.4       -  
Proceeds received on sale of product rights
    10.4       6.9  
Returns of equity investments and proceeds from short term investments
    0.1       1.6  
Net cash used in investing activities (B)
    (179.9 )     (805.9 )
 
 
9

 

 
SHIRE PLC
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


6 months to June 30,
 
2012
   
2011
 
 
  $’M     $’M  
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from drawing of revolving credit facility ("RCF")
    -       30.0  
Repayment of debt acquired through business combinations
    (3.0 )     (13.1 )
Excess tax benefit associated with exercise of stock options
    35.2       18.8  
Payment of dividend
    (70.7 )     (60.5 )
Payments to acquire shares by EBT
    (10.7 )     (63.9 )
Other
    0.6       0.4  
Net cash used in financing activities(C)
    (48.6 )     (88.3 )
Effect of foreign exchange rate changes on cash and cash equivalents (D)
    (1.6 )     2.7  
Net increase/(decrease) in cash and cash equivalents (A+B+C+D)
    492.7       (406.0 )
Cash and cash equivalents at beginning of period
    620.0       550.6  
Cash and cash equivalents at end of period
    1,112.7       144.6  

Supplemental information associated with continuing
           
operations:
           
             
6 months to June 30,
 
2012
   
2011
 
    $’M     $’M  
                 
Interest paid
    (17.3 )     (16.2 )
Income taxes paid
    (68.3 )     (147.7 )
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
10

 
 
SHIRE PLC
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.           Summary of Significant Accounting Policies

(a)           Basis of preparation
 
These interim financial statements of Shire plc and its subsidiaries (collectively “Shire” or the “Company”) and other financial information included in this Form 10-Q, are unaudited. 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 interim reporting.
 
The balance sheet as at December 31, 2011 was derived from audited financial statements but does not include all disclosures required by US GAAP.
 
These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year to December 31, 2011.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted from these interim financial statements. However, these interim financial statements include all adjustments, which are, in the opinion of management, necessary to fairly state the results of the interim period and the Company believes that the disclosures are adequate to make the information presented not misleading. Interim results are not necessarily indicative of results to be expected for the full year.
 
(b)           Use of estimates in interim financial statements
 
The preparation of interim 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, the valuation of equity investments, 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 and contingent consideration payable in respect of business combinations and asset purchases. 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)           New accounting pronouncements

Adopted during the period

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (“IFRS”)
 
On January 1, 2012 the Company adopted new guidance issued by the Financial Accounting Standard Board (“FASB”) on fair value measurement and disclosure. The guidance amends the existing requirements and improves the comparability of fair value measurement and disclosure between US GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The guidance has been adopted prospectively from January 1, 2012. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows. Enhanced disclosure of fair value measurement as required by this guidance is included in Note 14.

Presentation of Comprehensive Income

On January 1, 2012 the Company adopted new guidance issued by FASB on the presentation of comprehensive income, which revises the manner in which entities present comprehensive income in their financial statements. The guidance requires entities to report components of comprehensive income in either: (i) a single, continuous statement of comprehensive income; or (ii) two separate but consecutive statements. The guidance does not change those items which must be reported in other comprehensive income, and does not change the definition of net income or the
 
 
11

 
 
calculation of earnings per share. The requirement to present the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented has currently been deferred.
 
The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows. The Company has elected to present the components of comprehensive income in two separate, but consecutive statements. Enhanced disclosure of the components of comprehensive income is included in Note 12.

Goodwill Impairment Testing

On January 1, 2012 the Company adopted new guidance issued by FASB on the testing of goodwill for impairment. The guidance permits an entity to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. An entity also has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test and may resume performing the qualitative assessment in any subsequent period. The guidance has been adopted prospectively from January 1, 2012. The adoption of the guidance did not impact the Company’s consolidated financial position, results of operations or cash flows.

To be adopted in future periods

Indefinite-Lived Intangible Assets (Other than Goodwill) Impairment Testing

In July 2012 the FASB issued guidance on the testing of indefinite-lived intangible assets for impairment. The guidance permits an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, performing the impairment test is unnecessary. The more-likely-than-not threshold is defined as a likelihood of more than 50 percent. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the impairment test and may resume performing the qualitative assessment in any subsequent period. The guidance will be effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. 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.
 
2.           Business combinations
 
Acquisition of FerroKin BioSciences, Inc. (“FerroKin”)
 
On April 2, 2012 Shire completed the acquisition of 100% of the outstanding share capital of FerroKin. The acquisition-date fair value of consideration totalled $159.3 million, comprising cash consideration paid on closing of $94.5 million and the fair value of contingent consideration payable of $64.8 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is $225.0 million. The amount of contingent cash consideration ultimately payable by Shire is dependent upon the achievement of certain clinical development, regulatory and net sales milestones.

The acquisition of FerroKin adds global rights to a Phase 2 product, SPD 602 (formerly referred to as FBS0701), to Shire’s SP pipeline. SPD 602 is intended to serve a chronic patient need for treatment of iron overload following numerous blood transfusions. Together with our collaboration with Sangamo Biosciences Inc. (“Sangamo”), this acquisition is a strategic step in building Shire’s hematology business, which already includes XAGRID and a growing development pipeline.

The acquisition of FerroKin has been accounted for as a purchase business combination. The assets acquired and the liabilities assumed from FerroKin have been recorded at their preliminary fair values at the date of acquisition, being April 2, 2012. The Company’s consolidated financial statements and results of operations include the results of FerroKin from April 2, 2012. In the three and six months to June 30, 2012 the Company included pre tax losses of $2.4 million (2011: $nil) and $2.4 million (2011: $nil), respectively for FerroKin within its consolidated income statement.
 
 
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The purchase price allocation is preliminary pending final determination of the fair values of certain assets acquired and liabilities assumed. The purchase price has been allocated to acquired in-process research and development (“IPR&D”) in respect of SPD602 ($166.0 million), net current liabilities assumed ($6.6 million), net non-current liabilities assumed (including deferred tax liabilities) ($46.2 million) and goodwill ($46.1 million). The final determination of these fair values will be completed as soon as possible but no later than one year from the acquisition date. Goodwill arising of $46.1 million, which is not deductible for tax purposes, has been assigned to the SP operating segment.
 

In the three and six months to June 30, 2012 the Company expensed costs of $2.5 million (2011: $nil) and $4.1 million (2011: $nil) respectively relating to the FerroKin acquisition, which have been recorded within Integration and acquisition costs in the Company’s consolidated income statement.
 
Acquisition of certain assets & liabilities of Pervasis Therapeutics, Inc. (“Pervasis”)
 
On April 19, 2012 Shire acquired substantially all the assets and certain liabilities of Pervasis. The acquisition date fair value of the consideration totaled $26.1 million, comprising cash consideration paid on closing of $2.5 million and the fair value of contingent consideration payable of $23.6 million. The maximum amount of contingent cash consideration which may be payable by Shire in future periods is up to $169.5 million. The amount of contingent cash consideration ultimately payable by Shire is dependent upon achievement of certain clinical development, regulatory and net sales milestones. The acquisition adds VASCUGEL to Shire’s Regenerative Medicine business. VASCUGEL is currently in Phase 2 development for acute vascular repair, focused on improving hemodialysis access for patients with end-stage renal disease.
 
The acquisition has been accounted for as a purchase business combination. The assets acquired and the liabilities assumed from Pervasis have been recorded at their preliminary fair values at the date of acquisition, being April 19, 2012. The Company’s consolidated financial statements and results of operations include the results of the assets acquired and the liabilities assumed from Pervasis from April 19, 2012. The purchase price has been allocated on a preliminary basis to acquired IPR&D (principally for VASCUGEL) ($24.3 million), current liabilities assumed ($0.2 million) and goodwill ($2.0 million). Goodwill, which is not deductible for tax purposes, has been assigned to the RM operating segment.

Acquisition of Advanced BioHealing, Inc. (“ABH”)
 
On June 28, 2011 Shire completed its acquisition of 100% of the outstanding shares and other equity instruments of ABH. The fair value of cash consideration paid by the Company during 2011 was $739.6 million.

The acquisition of ABH was accounted for as a purchase business combination. The assets acquired and the liabilities assumed from ABH have been recorded at their fair values at the date of acquisition, being June 28, 2011. The determination of final fair values was completed on June 28, 2012. The determination of final fair values did not result in any adjustments to the preliminary purchase price allocation which was included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The Company’s consolidated financial statements and results of operations include the results of ABH from June 28, 2011. In the three months and six months to June 30, 2012 the Company included revenues for ABH of $52.4 million and $101.2 million (2011: $2.0 million and $2.0 million) and pre tax losses of $15.8 million and $25.3 million (2011: $6.0 million and $6.0 million) (after intangible asset amortization of $10.0 million and $19.8 million (2011: $0.2 million and $0.2 million)) respectively within its consolidated income statements.

In the three and six months to June 30, 2012 the Company incurred acquisition and integration costs of $4.3 million and $8.0 million (2011: $6.9 million and $6.9 million) respectively in respect of the acquisition and post-acquisition integration of ABH, which have been charged to Integration and acquisition costs in the Company’s consolidated income statement.
 
 
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3.           Accounts receivable, net

Accounts receivable at June 30, 2012 of $815.4 million (December 31, 2011: $845.0 million), are stated net of a provision for discounts and doubtful accounts of $36.6 million (December 31, 2011: $31.1 million).

Provision for discounts and doubtful accounts:

   
2012
   
2011
 
    $’M     $’M  
As at January 1,
    31.1       23.4  
Provision charged to operations
    135.0       114.8  
Provision utilization
    (129.5 )     (109.4 )
As at June 30,
    36.6       28.8  

At June 30, 2012 accounts receivable included $64.4 million (December 31, 2011: $73.3 million) related to royalty income.

4.           Inventories

Inventories are stated at the lower of cost or market and comprise:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Finished goods
    105.8       99.9  
Work-in-progress
    206.9       162.6  
Raw materials
    99.1       77.6  
      411.8       340.1  

At June 30, 2012 inventories included $nil (December 31, 2011: $22.7 million) of costs capitalized prior to regulatory approval of the relevant manufacturing facilities.

5.           Prepaid expenses and other current assets

   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Prepaid expenses
    45.3       46.9  
Income tax receivable
    17.9       48.1  
Value added taxes receivable
    17.5       18.9  
Other current assets
    54.4       61.0  
      135.1       174.9  
 
 
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6.           Other intangible assets, net
   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Amortized intangible assets
               
Intellectual property rights acquired for currently marketed products
    2,548.1       2,500.7  
Acquired product technology
    710.0       710.0  
Other intangible assets
    45.1       23.2  
      3,303.2       3,233.9  
Unamortized intangible assets
               
Intellectual property rights acquired for IPR&D
    277.9       119.8  
      3,581.1       3,353.7  
                 
Less: Accumulated amortization
    (955.5 )     (860.7 )
      2,625.6       2,493.0  

As at June 30, 2012 the net book value of intangible assets allocated to the SP segment was $1,444.7 million (December 31, 2011: $1,348.3 million), to the HGT segment was $484.5 million (December 31, 2011: $453.2 million) and to the RM segment was $696.4 million (December 31, 2011: $691.5 million).

The change in the net book value of other intangible assets for the six months to June 30, 2012 and 2011 is shown in the table below:

   
Other intangible assets
 
   
2012
   
2011
 
    $’M     $’M  
As at January 1,
    2,493.0       1,978.9  
Acquisitions
    272.5       711.5  
Amortization charged
    (97.3 )     (73.6 )
Impairment charges
    (27.0 )     -  
Foreign currency translation
    (15.6 )     62.6  
As at June 30,
    2,625.6       2,679.4  

Management estimates that the annual amortization charge in respect of intangible assets held at June 30, 2012 will be approximately $202.6 million for each of the five years to June 30, 2017. 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.
 
 
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7.           Accounts payable and accrued expenses
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Trade accounts payable and accrued purchases
    254.5       259.6  
Accrued rebates – Medicaid
    392.3       409.8  
Accrued rebates – Managed care
    231.5       202.8  
Sales return reserve
    96.9       88.8  
Accrued bonuses
    83.0       103.0  
Accrued employee compensation and benefits payable
    69.6       59.3  
R&D accruals
    58.2       52.7  
Other accrued expenses
    229.3       194.5  
      1,415.3       1,370.5  

8.           Other current liabilities

   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Income taxes payable
    16.4       27.7  
Value added taxes
    18.8       13.3  
Contingent consideration payable
    11.6       -  
Other current liabilities
    58.7       22.8  
      105.5       63.8  
 
9.           Long-term debt

Shire 2.75% Convertible Bonds due 2014

On May 9, 2007 Shire issued $1,100 million in principal amount of 2.75% convertible bonds due 2014 and convertible into fully paid ordinary shares of Shire plc (the “Bonds”). The Bonds were issued at 100% of their principal amount, and will be redeemed on May 9, 2014 (the “Final Maturity Date”) unless purchased and cancelled, redeemed (for example on the occurrence of a change of control of Shire) or converted prior to that date, at their principal amount.
 
On April 9, 2012 the deadline for Bondholders to choose to exercise their Put Option on May 9, 2012 passed. No elections from the Bondholders were received by this date and the Bonds are now due on the Final Maturity Date, subject to the exceptions above.  As the Company is no longer required to redeem the Bonds within twelve months of the balance sheet date, the Bonds have been presented as a non-current liability at June 30, 2012.
 
 
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10.           Other non-current liabilities
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $’M     $’M  
Income taxes payable
    84.8       78.3  
Deferred revenue
    12.4       12.2  
Deferred rent
    12.0       14.0  
Insurance provisions
    13.8       14.5  
Contingent consideration payable
    115.6       -  
Other non-current liabilities
    26.2       25.3  
      264.8       144.3  

11.           Commitments and contingencies

(a)           Leases

Future minimum lease payments under operating leases at June 30, 2012 are presented below:
   
Operating
 
   
leases
 
    $’M  
2012 
    20.2  
2013 
    37.4  
2014 
    33.0  
2015 
    26.8  
2016 
    20.0  
2017 
    16.5  
Thereafter
    95.1  
      249.0  

The Company leases land, facilities, motor vehicles and certain equipment under operating leases expiring through 2032. Lease and rental expense amounted to $21.5 million and $17.7 million for the six months to June 30, 2012 and 2011 respectively, which is predominately included in SG&A expenses in the Company’s consolidated income statement.

(b)           Letters of credit and guarantees

At June 30, 2012 the Company had irrevocable standby letters of credit and guarantees with various banks and insurance companies totaling $35.7 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.

(c)           Collaborative arrangements

Details of significant updates in collaborative arrangements in the six months to June 30, 2012 are included below:

In-licensing arrangements

Collaboration and license agreement with Sangamo

On February 1, 2012 Shire and Sangamo announced that they had entered into a collaboration and license agreement to develop therapeutics for hemophilia and other monogenic diseases based on Sangamo’s zinc finger DNA-binding protein (“ZFP”) technology. Sangamo is responsible for all activities through submission of Investigational New Drug Applications
 
 
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and European Clinical Trial Applications for each product and Shire will reimburse Sangamo for its internal and external research program-related costs. Shire is responsible for clinical development and commercialization of products arising from the collaboration. Shire paid Sangamo an up-front fee of $13.0 million in the six months to June 30, 2012 (2011: $nil) and may be required to pay research, regulatory, development and commercial milestone payments, and royalties on product sales.

Out-licensing arrangements

Shire has entered into various collaborative 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 arrangements, the Company may receive development milestone payments up to an aggregate amount of $39.0 million and sales milestones up to an aggregate amount of $56.3 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 six months to June 30, 2012 Shire received up-front and milestone payments totaling $6.0 million (2011: $6.8 million). In the six months to June 30, 2012 Shire recognized milestone income of $6.0 million (2011: $8.6 million) in other revenues and $38.0 million (2011: $27.6 million) in product sales for shipment of product to the relevant licensee.

Co-promotion agreements - VYVANSE

Shire terminated its co-promotion agreement for VYVANSE with GSK in 2010. Following Shire’s termination, GSK filed a lawsuit against Shire in the Philadelphia Court of Common Pleas relating to the co-promotion agreement. On June 29, 2012 Shire and GSK settled this dispute. The terms of the settlement are confidential.

(d)           Commitments

(i)           Clinical testing

At June 30, 2012 the Company had committed to pay approximately $370.8 million (December 31, 2011: $358.6 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 June 30, 2012 the Company had committed to pay approximately $116.5 million (December 31, 2011: $86.4 million) in respect of contract manufacturing. The Company expects to pay $83.4 million of these commitments in 2012.

(iii)           Other purchasing commitments

At June 30, 2012 the Company had committed to pay approximately $171.2 million (December 31, 2011: $190.1 million) for future purchases of goods and services, predominantly relating to active pharmaceutical ingredients sourcing. The Company expects to pay $162.9 million of these commitments in 2012.

(iv)           Investment commitments

At June 30, 2012 the Company had outstanding commitments to subscribe for interests in companies and partnerships for amounts totaling $14.5 million (December 31, 2011: $9.4 million) which may all be payable in 2012, depending on the timing of capital calls.

(v)           Capital commitments

At June 30, 2012 the Company had committed to spend $28.8 million (December 31, 2011: $25.4 million) on capital projects.
 
 
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(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 are often 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 June 30, 2012 provisions for litigation losses, insurance claims and other disputes totaled $85.0 million (December 31, 2011: $36.9 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, provided that 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.; Roxane Laboratories, Inc. ("Roxane"); Mylan Pharmaceuticals, Inc.; and Actavis Elizabeth LLC and Actavis Inc. (collectively, "Actavis").  Within the requisite 45 day period, Shire filed lawsuits for infringement of certain of Shire's VYVANSE patents in the US District Court for the District of New Jersey against each of Sandoz, Roxane, Amneal and Actavis; in the US District Court for the Central District of California against Watson Laboratories, Inc.; and in the US District Court for the Eastern District of New York against Mylan Pharmaceuticals, Inc. and Mylan Inc. (collectively "Mylan"). On December 9, 2011, the District Court of New Jersey consolidated the Sandoz, Roxane, Amneal and Actavis cases. On January 5, 2012, the Watson case was transferred to the District Court of New Jersey, but not consolidated with the other cases. The filing of the lawsuits triggered a stay of approval of all six ANDAs for up to 30 months from the expiration of the new chemical entity exclusivity, which will expire August 23, 2012. In December 2011 and February 2012, Shire received additional notifications that Mylan had filed further certifications challenging other VYVANSE patents listed in the Orange Book.  Within the requisite 45 day period, Shire filed a new lawsuit against Mylan, Johnson Matthey Pharmaceutical Materials and Johnson Matthey Inc. in New Jersey.  In May 2012, the Mylan case that was filed in the Eastern District of New York was transferred and consolidated with the Sandoz, Roxane, Amneal and Actavis cases in New Jersey. No trial dates have been set.
 
INTUNIV
 
In March and April 2010, Shire was notified that three separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of INTUNIV. The notices were from Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. (collectively, “Teva”); Actavis; and Anchen Pharmaceuticals, Inc. and Anchen, Inc. (collectively, "Anchen"). Within the requisite 45 day period, Shire filed lawsuits in the US District Court for the District of Delaware against each of Teva, Actavis and Anchen for infringement of certain of Shire’s INTUNIV patents. The filing of the lawsuits triggered a stay of approval of these ANDAs for up to 30 months. These lawsuits have been consolidated. A Markman hearing was held on February 14, 2012, and a written Markman decision was given by the court on March 22, 2012.  A trial is scheduled to begin on September 17, 2012.
 
 
In October 2010, Shire was notified that two separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of the 4mg strength of INTUNIV. The notices were from Watson Pharmaceuticals, Inc. and from Impax Laboratories, Inc. (“Impax”). Shire was subsequently advised that Impax amended its ANDA to include the 1mg, 2mg and 3mg strengths of INTUNIV.  Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Northern District of California against each of Watson Pharmaceuticals, Inc., Watson Laboratories, Inc.-Florida, Watson Pharma, Inc., ANDA, Inc. (collectively “Watson”) and Impax for infringement of certain of Shire’s INTUNIV patents.  The filing of the lawsuit triggered a stay of approval of these ANDAs for up to 30 months. A Markman hearing was held on May 30, 2012, and a written Markman decision was given by the court on June 1, 2012. A trial is scheduled to begin on July 8, 2013.
 

 
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In February 2011, Shire was notified that Mylan Pharmaceuticals, Inc. submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of the 4mg strength of INTUNIV.   Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the Southern District of New York against Mylan for infringement of certain of Shire’s INTUNIV patents. In April 2011, Shire filed a lawsuit against Mylan in the US District Court for the District of West Virginia for infringement of certain of Shire’s INTUNIV patents and dismissed the lawsuit in the Southern District of New York. The filing of the lawsuit in West Virginia did not trigger a stay of approval of this ANDA.  A Markman hearing has been scheduled for September 6, 2012. A trial is scheduled to start on December 2, 2013. Shire was subsequently advised that Mylan amended its ANDA to include the 1mg, 2mg and 3mg strengths of INTUNIV.  Within the requisite 45 day period, Shire filed another lawsuit against Mylan in the US District Court for the District of West Virginia.
 
In March 2011, Shire was notified that Sandoz had submitted an ANDA under the Hatch-Waxman Act seeking permission to market a generic version of the 4mg strength of INTUNIV.  Within the requisite 45 day period, Shire filed a lawsuit in the US District Court for the District of Colorado against Sandoz for infringement of certain of Shire’s INTUNIV patents. The filing of the lawsuit triggered a stay of approval of this ANDA for up to 30 months.  Shire was subsequently advised that Sandoz amended its ANDA to include the 1mg, 2mg and 3mg strengths of INTUNIV.  Within the requisite 45 day period, Shire filed another lawsuit against Sandoz in the US District Court for the District of Colorado.  The filing of the lawsuit triggered a stay of approval of the 1mg, 2mg and 3mg strengths for up to 30 months.  A Markman hearing has been scheduled for August 10, 2012. No trial date has been set.
 
On March 22, 2012, US Patent No. 5,854,290, one of the patents-in-suit in all the INTUNIV litigations referenced above was dedicated to the public by the inventors. Two other patents relating to formulations of guanfacine remain in each of the lawsuits regarding INTUNIV. Those two patents expire on December 20, 2020 and July 4, 2022.
 
REPLAGAL

Mt. Sinai School of Medicine of New York University (“Mt. Sinai”) initiated lawsuits against Shire in Sweden on April 14, 2010, and in Germany on April 20, 2010, alleging that Shire’s enzyme replacement therapy (“ERT”) for Fabry disease, REPLAGAL, infringes Mt. Sinai’s European Patent No. 1 942 189, granted April 14, 2010.  Mt. Sinai sought injunctions against the use of REPLAGAL in these jurisdictions until expiration of the patent. Mt. Sinai has been granted Supplementary Protection Certificates (“SPC”) in respect of the patent in certain EU countries (including Sweden and Germany) which, where granted, extends the patent until August 2016. Where no SPC has been granted, the patent expires November 2013.
 
Shire filed an opposition against Mt. Sinai’s patent before the European Patent Office (“EPO”) on July 23, 2010, and commenced invalidity proceedings in the UK on December 8, 2010. Mt. Sinai counterclaimed alleging infringement in the UK proceedings. 
 
On May 9, 2012, Shire and Mt. Sinai agreed to settle all proceedings in connection with the validity and infringement by REPLAGAL of Mt. Sinai’s European Patent No. 1 942 189.  The parties agreed to discontinue all court and related proceedings in this dispute, and Mt. Sinai has granted Shire a non-exclusive license to the patent in connection with the on-going sales of REPLAGAL in the EU and in certain other non-EU territories. Shire has made an up-front cash payment to Mt.Sinai and will make additional cash payments based on REPLAGAL sales over the license term.
 
FOSRENOL
In February 2009 Shire was notified that three separate ANDAs were submitted under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of FOSRENOL. The notices were received from Barr Laboratories, Inc. (“Barr”); Mylan, Inc., Mylan Pharmaceuticals, Inc. and Matrix Laboratories, Inc. (collectively, “Mylan-Matrix”); and Natco Pharma Limited (“Natco”). In December 2010, Shire was notified that Alkem Laboratories Ltd. (“Alkem”) submitted an ANDA under the Hatch-Waxman Act seeking permission to market generic versions of all approved strengths of FOSRENOL. Within the requisite 45 day period, Shire filed lawsuits in the US District Court for the Southern District of New York against each of Barr, Mylan-Matrix and Natco and in both the US District Court for the Southern District of New York and the US District Court for the Northern District of Illinois against Alkem for infringement of certain of Shire’s FOSRENOL patents.  In April 2011, Shire and Barr reached a settlement which provides Barr with a license to market its own generic version of FOSRENOL in the US but only after October 1, 2021, or earlier under certain circumstances. No payments to Barr are involved with the settlement. As a result of the settlement, the lawsuit against Barr was subsequently dismissed. The lawsuits against both Mylan-Matrix and Alkem have been dismissed, and consequently, each of Mylan-Matrix and Alkem may enter the market upon FDA approval of their respective versions of generic FOSRENOL.  In April 2012 the 30 month stay of approval with respect to Natco expired. No trial date has been set with respect to Natco.
 
 
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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. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months. All scheduled dates in the lawsuit have been vacated, including the Markman hearing date originally scheduled for April 26, 2012 and the trial date originally scheduled for October 8, 2012. No dates have been rescheduled.
 
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. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months.
 
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. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months. In August 2012, Shire filed an amended complaint adding Watson Pharma, Inc. and Watson Laboratories, Inc. as defendants. A trial is scheduled to begin on February 11, 2013.
 
In April 2012, Shire was notified that Mylan Pharmaceuticals, Inc. 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. The filing of the lawsuit triggered a stay of approval of the ANDA for up to 30 months.
 
 
ADDERALL XR
 
On November 1, 2010 Impax filed suit against Shire in the US District Court for the Southern District of New York claiming that Shire is in breach of its supply contract for the authorized generic version of ADDERALL XR.  Shire’s ability to supply this product is limited by quota restrictions that the US Drug Enforcement Administration places on amphetamine, which is the product’s active ingredient. Impax is seeking specific performance, equitable relief and damages. Shire has filed a counterclaim against Impax seeking damages and a declaratory judgment that Shire has satisfied its obligations under the supply contract. The April 10, 2012 trial date has been postponed and a new trial date has not yet been set.
 
In February 2011, 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 all approved strengths of ADDERALL XR. This new ANDA is not covered under the existing settlement agreements entered into in November 2007 between Shire and Watson Pharmaceuticals, Inc. (the “Settlement Agreements”). The Settlement Agreements cover a different ANDA and do not provide any license for Watson Laboratories, Inc.-Florida to sell the products covered in Watson Laboratories, Inc.-Florida’s new ANDA. Within the requisite 45 day period, Shire filed a lawsuit in the U.S. District Court for the Southern District of New York against Watson Pharmaceuticals, Inc., Watson Laboratories, Inc.-Florida, Watson Pharm, Inc., Andrx Corporation, and Andrx Pharmaceuticals, L.L.C. for infringement of certain of Shire’s ADDERALL XR patents and also for breach of contract in connection with the Settlement Agreements. The filing of the lawsuit triggered a stay of approval of this ANDA for up to 30 months. A Markman hearing was held on June 13, 2012 but a decision has not yet been given. On June 22, 2012, the FDA responded to Shire’s ADDERALL XR citizen petition and set forth more stringent bioequivalence standards that all ANDAs for ADDERALL XR must meet for approval. On July 30, 2012, Shire filed a request with the U.S. District Court for the Southern District of New York seeking a 90-day stay of these legal proceedings because Shire believes Watson Laboratories, Inc.-Florida’s ANDA fails to meet the FDA’s new bioequivalence standards and will not receive FDA approval. The judge has not yet ruled on the stay, and no trial date has been set.
 

Subpoena related to ADDERALL XR, DAYTRANA and VYVANSE

On September 23, 2009 the Company received a civil subpoena from the US Department of Health and Human Services Office of Inspector General in coordination with the US Attorney for the Eastern District of Pennsylvania seeking production of documents related to the sales and marketing of ADDERALL XR, DAYTRANA and VYVANSE. The investigation covers whether Shire engaged in off-label promotion and other conduct that may implicate the civil False Claims Act. Shire is cooperating fully with this investigation. At this time, Shire is unable to predict the outcome or duration of this investigation.

 
 
21

 
Investigation related to DERMAGRAFT

Shire understands that 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 ABH relating to DERMAGRAFT.  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 for ADDERALL XR, ADDERALL XR Authorized Generics and VYVANSE

On April 5, 2012 Shire received a Civil Investigative Demand (“CID”) from the United States Federal Trade Commission (“FTC”) requesting that Shire provide it with certain information regarding the supply and reported shortages of ADDERALL XR and its authorized generics and the marketing and sale of ADDERALL XR, its authorized generics and VYVANSE. Shire believes the CID was triggered by reports of product shortages of ADDERALL XR and the authorized generic products in 2011. Shire is cooperating fully with the FTC. At this time, Shire is unable to predict the outcome or duration of this investigation. Separately, members of the US Congress are reviewing industry wide drug shortages which have been well publicized in the US media and Shire has responded to a specific inquiry relating to ADDERALL XR.


12.           Accumulated Other Comprehensive Income

The changes in accumulated other comprehensive income, net of their related tax effects, in the six months to June 30, 2012 are included below:

   
Foreign
currency
translation
adjustment
   
Un-realized
holding
gain/(loss) on
available for sale
securities
   
Accumulated
other
Comprehensive
income
 
    $M     $M     $M  
                         
As at January 1, 2012
    61.4       (1.1 )     60.3  
Current period change
    (17.7 )     6.0       (11.7 )
As at June 30, 2012
    43.7       4.9       48.6  
                         

13.           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. As a matter of policy, the Company does not undertake speculative transactions that would increase its currency or interest rate exposure.

Interest rate risk
 
The Company is exposed to interest rate risk on restricted cash, cash and cash equivalents and on foreign exchange contracts on which interest is at floating rates. This exposure is primarily 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 six months to June 30, 2012 the average interest rate received on cash and liquid investments was less than 1% per annum. The largest proportion of these cash and liquid investments was in US dollar money market and liquidity funds.
 
The Company incurs interest at a fixed rate of 2.75% on $1,100 million in principal amount convertible bonds due 2014.
 
No derivative instruments were entered into during the six months to June 30, 2012 to manage interest rate exposure. The Company continues to review its interest rate risk and the policies in place to manage the risk.

Credit risk
 
Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, trade accounts receivable (from product sales and from third parties from which the Company receives royalties) and derivative contracts. 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 derivative instruments. The Company limits this exposure through a system of internal credit limits which require counterparties to have a long term credit rating of A- / A3 or better from the major rating agencies. The internal credit limits are approved by the Board and
 
 
22

 
 
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, 2011 there were three customers in the US that accounted for 49% 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 our 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 the creditworthiness and general economic condition of a number of Eurozone countries (including Greece, Ireland, Italy, Portugal and Spain (the “Relevant Countries”)) has deteriorated. As a result, in some of these countries the Company is experiencing delays in the remittance of receivables due from government-owned or government-supported healthcare providers. The Company continues to receive remittances from government-owned or government-supported healthcare providers in the Relevant Countries, and in the six months to June 30, 2012 received $82.8 million and $52.2 million in respect of Spanish and Italian receivables, respectively.
 
To date the Company has not incurred significant 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. For further information, see PART II: ITEM 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
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 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 intercompany financing, accruals for royalty receipts and specific external receivables. 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 June 30, 2012 the Company had 30 swap and forward foreign exchange contracts outstanding to manage currency risk. The swaps and forward contracts mature within 90 days. The Company did not have credit risk related contingent features or collateral linked to the derivatives. At June 30, 2012 the fair value of these contracts was a net liability of $1.3 million. Further details are included below:
 
 
23

 
 
 
   
Fair value
   
Fair value
 
     
June 30,
   
December 31,
 
     
2012
   
2011
 
      $’M     $’M  
Assets
Prepaid expenses and other current assets
    2.7       3.4  
Liabilities
Other current liabilities
    4.0       0.4  

Net gains/losses (both realized and unrealized) arising on foreign exchange contracts have been classified in the consolidated statements of income as follows:

 
Location of net
gain/(loss) recognized in
income
 
Amount of net gain/(loss)
recognized in income
 
Six months to
   
June 30,
   
June 30,
 
     
2012
   
2011
 
      $’M     $’M  
Foreign exchange contracts
Other income, net
    6.9       (2.6 )

These net foreign exchange losses are offset within Other income, net by net foreign exchange gains/(losses) arising on the balance sheet items that these contracts were put in place to manage.
 
 
24

 

14.           Fair value measurement

Assets and liabilities that are measured at fair value on a recurring basis

As at June 30, 2012 and December 31, 2011 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).

 
 
Carrying
   
Fair value
 
 
 
value
                         
 
       
Total
   
Level 1
   
Level 2
   
Level 3
 
At June 30, 2012
 
$'M
   
$'M
   
$'M
   
$'M
   
$'M
 
Financial assets:
                             
Available-for-sale securities(1)
    20.3       20.3       20.3       -       -  
Contingent consideration receivable (2)
    37.9       37.9       -       -       37.9  
Foreign exchange contracts
    2.7       2.7       -       2.7       -  
 
                                       
Financial liabilities:
                                       
Foreign exchange contracts
    4.0       4.0       -       4.0       -  
Contingent consideration payable(3)
    127.2       127.2       -       -       127.2  
 
                                       
 
 
       
Total
   
Level 1
   
Level 2
   
Level 3
 
At December 31, 2011
 
$'M
   
$'M
   
$'M
   
$'M
   
$'M
 
Financial assets:
                             
Available-for-sale securities(1)
    7.4       7.4       7.4       -       -  
Contingent consideration receivable (2)
    37.8       37.8       -       -       37.8  
Foreign exchange contracts
    3.4       3.4       -       3.4       -  
 
                                       
Financial liabilities:
                                       
Foreign exchange contracts
    0.4       0.4       -       0.4       -  
 
(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).

 
25

 
 
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
receivable
 
 
 
2012
   
2011
 
 
 
$'M
   
$'M
 
 
           
Balance at January 1,
    37.8       61.0  
Gain/(loss) recognized in the income statement (within Gain/(loss) on sale of product rights) due to change in fair value during the period
    10.8       (3.5 )
Reclassification of amounts to Other receivables within Other current assets
    (10.0 )     (9.2 )
Amounts recorded to other comprehensive income (within foreign currency translation adjustments)
    (0.7 )     4.8  
 
               
Balance at June 30,
    37.9       53.1  
 
               
 
 
Contingent consideration
payable
 
 
    2012       2011  
 
 
$'M
   
$'M
 
             
Balance at January 1,
    -       -  
Initial recognition of contingent consideration payable
    127.8          
Loss recognized in the income statement (within Integration and acquisition costs) due to change in fair value during the period
    2.1       -  
Reclassification of amounts to Other current liabilities
    (2.7 )     -  
 
               
Balance at June 30,
    127.2       -  
 
 
26

 

 
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:

Financial assets:
Fair Value at the Measurement Date
 
 
 
 
 
 
 
 
At June 30, 2012
Fair value
 
 
Valuation
Technique
 
 
Significant unobservable Inputs
 
Range
 
$'M
           
Contingent consideration receivable ("CCR")
37.9 
 
Income approach (probability weighted discounted cash flow)
 
• Probability weightings applied to different sales scenarios
 
• Future forecast royalties receivable at relevant contractual royalty rates
 
• Assumed market participant discount rate
 
 
10-40%
 
 
 
•$10 million to $143 million
 
 
 
• 6.1%
 
               
Financial liabilities:
Fair Value at the Measurement Date
               
At June 30, 2012
Fair value
 
 
Valuation
Technique
 
 
Significant unobservable Inputs
 
Range
 
$'M
           
Contingent consideration payable
127.2 
 
Income approach (probability weighted discounted cash flow)
 
• Cumulative probability of  milestones being achieved
 
• Assumed market participant discount rate
 
 
• Periods in which milestones are expected to be achieved
 
• Forecast quarterly royalties payable on net sales of
relevant products
 
 
 
19 to 45% (Weighted average)
 
•7.4 to 9.1% (Weighted average)
 
 
• 2013 to 2028
 
 
 
 
•$2.7 to $3.4 million
 
 

The Company re-measures the CCR (relating to contingent consideration due to the Company following divestment of one 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 product 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.
 
 
27

 

Contingent consideration payable represents future amounts the Company may be required to pay in conjunction with the FerroKin and Pervasis business combinations (see Note 2) and the license acquired following settlement of proceedings with Mt. Sinai (see Note 11). The amount of contingent consideration which may ultimately be payable by Shire in relation to the FerroKin and Pervasis 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 the license acquired from Mt. Sinai is dependent upon future net sales of REPLAGAL in the relevant territories over the life of the license. The Company assesses the present value of forecast future net sales of REPLAGAL 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 payables could significantly increase or decrease due to changes in certain assumptions which underpin the fair value measurements. Each set of assumptions and milestones are 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 REPLAGAL and related future royalties payable, the probability weightings applied to different sales scenarios of one 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 six months to June 30, 2012 the Company reviewed certain of its indefinite lived IPR&D intangible assets (“IPR&D assets”) for impairment and recognized an impairment charge of $27.0 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, risk-adjusted forecast future cash flows to be generated by these IPR&D assets, contributory asset charges for other assets employed in these IPR&D projects 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 $77.0 million.

Financial assets and liabilities that are not measured at fair value on a recurring basis

The carrying amounts and estimated fair values as at June 30, 2012 and December 31, 2011 of the Company’s financial assets and liabilities which are not measured at fair value on a recurring basis are as follows:

   
June 30, 2012
   
December 31, 2011
 
   
Carrying
         
Carrying
       
   
amount
   
Fair value
   
amount
   
Fair value
 
      $’M       $’M       $’M       $’M  
                                 
Financial liabilities:
                               
Convertible bonds (Level 1)
    1,100.0       1,248.2       1,100.0       1,309.7  
Building financing obligation (Level 3)
    8.3       8.3       8.2       9.7  

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:

·  
Convertible bonds – the fair value of Shire’s $1,100 million 2.75% convertible bonds due 2014 is determined by reference to the market price of the instrument as the convertible bonds are publicly traded.
 
 
28

 

 
·  
Building finance obligations - the fair value of building finance obligations are estimated based on the present value of future cash flows, and an estimate of the residual value of the underlying property at the end of the lease term, associated with these obligations.

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses materially approximate to their fair value because of the short-term maturity of these amounts.
 
 
29

 
 
15.           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:

 
                       
 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
 
    $’M       $’M       $’M       $’M  
Numerator for basic earnings per share
    237.8       205.5       476.2       416.8  
 
                               
Interest on convertible bonds, net of tax
    7.8       8.4       16.2       16.8  
Numerator for diluted earnings per share
    245.6       213.9       492.4       433.6  
 
                               
 
                               
Weighted average number of shares:
                               
 
 
Millions
   
Millions
   
Millions
   
Millions
 
Basic
    557.0       552.3       555.2       551.1  
Effect of dilutive shares:
                               
Share based awards to employees
    4.4       9.3       6.1       10.3  
Convertible bonds 2.75% due 2014
    33.5       33.5       33.5       33.4  
Diluted
    594.9       595.1       594.8       594.8  

1. Excludes shares purchased by the EBT and presented by the Company as treasury stock.
2. Calculated using the treasury stock method.
3. Calculated using the ‘if-converted’ method.

The share equivalents not included in the calculation of the diluted weighted average number of shares are shown below:

 
 
3 months to
   
3 months to
   
6 months to
   
6 months to
 
 
 
June 30,
   
June 30,
   
June 30,
   
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
 
 
No. of shares
   
No. of shares
   
No. of shares
   
No. of shares
 
 
 
Millions
   
Millions
   
Millions
   
Millions
 
Share based awards to employees
    6.3       2.9       4.5       3.8  

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.
 
 
30

 
 
16.           Segmental reporting

Shire’s internal financial reporting is in line with its business unit and management reporting structure. The Company has three business units and three reportable segments: SP, HGT and RM. The SP, HGT and RM reportable segments represent the Company’s revenues and costs for currently promoted and sold products, together with the costs of developing products for future commercialization. ‘All Other’ has been included in the table below in order to reconcile the three segments to the total consolidated figures.

The Company evaluates performance based on revenue and operating income. The Company does not have inter-segment transactions. Assets that are directly attributable or allocable to the segments have been separately disclosed.

 
 
SP
   
HGT
   
RM
   
All Other
   
Total
 
3 months to June 30, 2012
    $’M       $’M       $’M       $’M       $’M  
Product sales
    735.5       359.8       52.4       -       1,147.7  
Royalties
    45.4       -       -       10.9       56.3  
Other revenues
    3.6       0.2       -       -       3.8  
Total revenues
    784.5       360.0       52.4       10.9       1,207.8  
 
                                       
Cost of product sales(1)
    84.8       50.7       17.0       -       152.5  
Research and development(1)
    158.3       76.0       4.3       -       238.6  
Selling, general and administrative(1)
    311.5       95.9       42.6       61.0       511.0  
Gain on sale of product rights
    (3.6 )     -       -       -       (3.6 )
Integration and acquisition costs
    2.8       -       4.3       -       7.1  
Total operating expenses
    553.8       222.6       68.2       61.0       905.6  
Operating income/(loss)
    230.7       137.4       (15.8 )     (50.1 )     302.2  
 
                                       
Total assets
    2,534.6       1,931.1       980.5       1,594.8       7,041.0  
Long-lived assets(2)
    130.1       707.9       25.0       64.2       927.2  
Capital expenditure on long-lived assets(2)
    12.1       18.3       0.1       5.8       36.3  

(1)
Depreciation from manufacturing plants ($7.0 million) and amortization of favorable manufacturing contracts ($0.5 million) is included in Cost of product sales; depreciation of research and development assets ($6.4 million) and impairment of certain IPR&D intangible assets in the SP reporting segment ($27.0 million) is included in Research and development; and all other depreciation and amortization ($65.5 million) is included in Selling, general and administrative.
(2)
Long-lived assets comprise all non-current assets (excluding goodwill and other intangible assets, deferred contingent consideration assets, deferred tax assets, investments, income tax receivable and financial instruments).
 
 
31

 

 
 
 
SP
   
HGT
   
RM
   
All Other
   
Total
 
3 months to June 30, 2011
    $’M       $’M       $’M       $’M       $’M  
Product sales
    674.7       316.6       2.0       -       993.3  
Royalties
    51.8       -       -       11.6       63.4  
Other revenues
    4.7       0.2       -       1.3       6.2  
Total revenues
    731.2       316.8       2.0       12.9       1,062.9  
 
                                       
Cost of product sales(1)
    93.8       49.6       0.3       -       143.7  
Research and development(1)
    105.0       71.8       0.1       -       176.9  
Selling, general and administrative(1)
    294.0       91.9       0.7       53.7       440.3  
Loss on sale of product rights
    2.2       -       -       -       2.2  
Reorganization costs
    2.7       -       -       4.8       7.5  
Integration and acquisition costs
    2.1       -       6.9       -       9.0  
Total operating expenses
    499.8       213.3       8.0       58.5       779.6  
Operating income/(loss)
    231.4       103.5       (6.0 )     (45.6 )     283.3