Financial review

Another strong year for Shire with 12% growth in product sales and 14% growth in Non GAAP earnings which have driven particularly strong cash generation.

Results of operations for the years to December 31, 2012

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

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

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

ADDERALL XR product sales were down 19% to $429 million primarily due to lower prescription volumes following the approval of a new generic version of ADDERALL XR in the second quarter of 2012. Reported product sales were also impacted by the accounting for the settlement of the Impax Laboratories, Inc. (“Impax”) litigation (See Note 18 for further details).

  • Total revenues increased by 10% (up 12% on a Non GAAP CER basis) as the growth in product sales was partially offset by lower royalties and other revenues (down 12%), primarily ADDERALL XR royalties following the launch of a new generic competitor in the second quarter of 2012. The decline in ADDERALL XR royalties was partially offset by the recognition of one-time royalty income of $38 million following resolution of a disagreement with GSK and ViiV relating to royalty payments for 3TC and ZEFFIX.
  • Operating income in 2012 was down 14% to $949 million (2011: $1,109 million) primarily resulting from charges to impair intangible assets for RESOLOR in the EU ($198 million). The impairments were due to lower actual and projected performance for the product given the increasingly challenging European reimbursement environment. Operating income in 2012 was also impacted by a charge of $58 million in relation to the agreement in principle with the US Government to resolve a previously disclosed civil investigation. Further information about litigation proceedings can be found in Note 18 Commitments and contingencies. Excluding these charges operating income in 2012 was up by 9%.
  • Diluted earnings per Ordinary Share decreased by 13% to $1.31 (2011: $1.51) primarily due to the lower operating income, partially offset by a lower effective tax rate of 18% (2011: 21%).

(1) The Company’s management analyzes product sales and revenue growth for certain products sold in markets outside of the US on a constant exchange rate (“CER”) basis, so that product sales and revenue growth can be considered excluding movements in foreign exchange rates. Product sales and revenue growth on a CER basis is a Non GAAP financial measure (“Non GAAP CER”), computed by comparing 2012 product sales and revenues restated using 2011 average foreign exchange rates to 2011 actual product sales and revenues. This Non GAAP financial measure is used by Shire’s management, and is considered to provide useful information to investors about the Company’s results of operations, because it facilitates an evaluation of the Company’s year on year performance on a comparable basis. Average exchange rates for the year to December 31, 2012 were $1.59:£1.00 and $1.29:€1.00 (2011: $1.60:£1.00 and $1.39:€1.00).

Total revenues

The following table provides an analysis of the Group’s total revenues by source:

Year to December 312012 $’M2011 $’MChange %
Product sales 4,406.7 3,950.2 +12%
Royalties 241.6 283.5 -15%
Other revenues 32.9 29.7 +11%
Total 4,681.2 4,263.4 +10%
Product sales
 Year to December 31, 2012
$’M
Year to December 31, 2011
$’M
Product sales growth
%
Non GAAP CER growth
%
US prescription growth(1)
%
Exit market share(1)
%
SP
Behavioral Health            
VYVANSE 1,029.8  805.0 +28 +28 +17 17
ADDERALL XR 429.0 532.8 -19 -19 -11 5
INTUNIV 287.8 223.0 +29 +29 +34 5
EQUASYM 29.2 19.9 +47 +53 n/a(2) n/a(2)
GI            
LIALDA/MEZAVANT 399.9 327.1 +7 +8 +5 22 
PENTASA 265.8 251.4 +6 +6 -5 14
RESOLOR 11.8 6.1 +93 n/a n/a(3) n/a(3)
General Products            
FOSRENOL 172.0 166.9 +3 +6 -19 4
XAGRID 97.2 90.6 +7 +14 n/a(2) n/a(2)
Other product sales 112.4 148.7 -24 -23 n/a n/a
  2,834.9 2,615.6 +8      
HGT
ELAPRASE 497.6 464.9 +7 +11 n/a(3) n/a(3)
REPLAGAL 497.5 475.2 +5 +10 n/a(2) n/a(2)
VPRIV 306.6 256.2 +20 +23 n/a(2) n/a(2)
FIRAZYR 116.3 33.0 +252 +258 n/a(2) n/a(2)
  1,418.0 1,229.3 +15      
RM
DERMAGRAFT 153.8 105.3 +46 +46(4) n/a(2) n/a(2)
Total  4,406.7 3,950.2 +12 0 0 0

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

(2) IMS NPA Data not available.

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

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

Specialty Pharmaceuticals

VYVANSE – ADHD

VYVANSE product sales grew strongly (28%) in 2012 as a result of higher prescription demand, due to growth in US ADHD market (+9%) and VYVANSE’s share of that market, and as a result of a price increase taken in 2012. These positive factors, together with lower sales deductions in 2012, more than offset the effect of higher retailer destocking in 2012 compared to 2011 and some shipment slippage at the end of the fourth quarter.

Litigation proceedings regarding VYVANSE are ongoing. Further information about this litigation can be found in Note 18.

ADDERALL XR – ADHD

ADDERALL XR product sales decreased (-19%) in 2012 as a result of lower US prescription demand following the introduction of a new generic competitor and the impact of the accounting for the legal settlement with Impax, which reduced reported product sales by $42 million in 2012, in addition to the effect of product destocking in 2012 compared to stocking in 2011 and, higher sales deductions. These negative factors were partially offset by the benefit of a price increase taken during 2012.

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

Further information about litigation proceedings regarding ADDERALL XR, and the Impax settlement, can be found in Note 18.

INTUNIV – ADHD

INTUNIV product sales were up 29% compared to 2011, primarily driven by strong growth in US prescription demand (up 34% compared to 2011), together with price increases taken during 2012. These positive factors were partially offset by lower stocking in 2012 and higher sales deductions in 2012 compared to 2011.

Litigation proceedings relating to the Company’s INTUNIV patents are in progress. For further information, see Note 18.

LIALDA/MEZAVANT – Ulcerative colitis

The growth in product sales for LIALDA/MEZAVANT (7%) in 2012 was primarily driven by higher market share in the US and a price increase taken since the fourth quarter of 2011, the effects of which were partially offset by product destocking in 2012 compared to a small amount of product stocking in 2011 and higher sales deductions in 2012. Growth in US net product sales was partially offset by the impact of lower priced imports into certain European markets.

Litigation proceedings regarding LIALDA/MEZAVANT are ongoing. Further information about this litigation can be found in Note 18.

PENTASA – Ulcerative colitis

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

FOSRENOL – Hyperphosphatemia

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

Litigation proceedings regarding Shire’s FOSRENOL patents are ongoing. Further information about this litigation can be found in Note 18.

Human Genetic Therapies

ELAPRASE – Hunter syndrome

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

REPLAGAL – Fabry disease

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

Litigation proceedings regarding REPLAGAL are ongoing. Further information about this litigation can be found in Note 18.

VPRIV – Gaucher disease

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

FIRAZYR – HAE

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

Regenerative Medicine

DERMAGRAFT – DFU

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

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

Royalties
 Year to
December 31,
2012 $’M
Year to
December 31,
2011 $’M
Change %
3TC and ZEFFIX 91.6 82.7 +11%
ADDERALL XR 70.3 107.1 -34%
FOSRENOL 53.3 46.5 +15%
Other 26.4 47.2 -44%
Total 241.6 283.5 -15%

Royalties from 3TC and ZEFFIX include one-time royalty income of $38 million in respect of prior periods due to resolution of the disagreement between Shire, GSK and ViiV as to how the royalty rate for these products should be applied. This one-time income more than offset the underlying decline in 3TC and ZEFFIX royalties as a result of increased competition and the expiry of patents in certain territories in 2012.

Royalties from ADDERALL XR in 2012 were significantly impacted by the lower royalty rate payable on sales of authorized generic ADDERALL XR by Impax, following the launch of a new generic version of ADDERALL XR in late second quarter of 2012.

FOSRENOL royalties increased primarily due to higher royalties received on sales in Japan.

Other royalties decreased primarily due to increased generic competition.

Cost of product sales

Cost of product sales increased to $645.4 million for the year to December 31, 2012 (15% of product sales), up from $588.1 million in the corresponding period in 2011 (2011: 15% of product sales). The costs of product sales as a percentage of product sales remained constant as the impact of lower gross margins in 2012 was offset by the fair value adjustment relating to DERMAGRAFT inventories and costs incurred on the transfer of manufacturing from Owings Mills in 2011 which were not repeated in 2012.

For the year to December 31, 2012 cost of product sales included depreciation of $31.5 million (2011: $39.8 million) and amortization of $0.7 million (2011: $1.7 million).

R&D

R&D expenditure increased to $965.5 million for the year to December 31, 2012 (22% of product sales), compared to $770.7 million in the corresponding period in 2011 (20% of product sales). In the year to December 31, 2012 R&D included up-front payment of $13.0 million to Sangamo, $10.0 million to acquire the US rights for prucalopride (marketed in certain countries in Europe as RESOLOR) and IPR&D impairment charges in respect of RESOLOR of $71.2 million (2011: $16.0 million). Excluding these costs R&D increased by $100.6 million or 20% in the year to December 31, 2012 due to the Company’s continued investment in a number of targeted R&D programs, particularly new uses of LDX and recently acquired assets including SPD602 for iron overload (acquired with FerroKin). R&D in 2012 also included a full year of ABH’s R&D costs (ABH was acquired in late June 2011).

R&D in the year to December 31, 2012 included depreciation of $22.5 million (2011: $25.2 million).

SG&A

SG&A expenditure increased to $2,114.0 million (48% of product sales) for the year to December 31, 2012 from $1,751.4 million (44% of product sales) in the corresponding period in 2011. In the year to December 31, 2012 SG&A increased by $362.6 million, or 21%, as 2012 included higher intangible asset amortization, the impact of impairment charges and higher legal and litigation costs, which included a charge of $57.5 million in relation to the agreement in principle with the US Government and settling the litigation related to the termination of co-promotion agreement for VYVANSE.

Impairment charges of $126.7 million relate to RESOLOR intangible assets as the actual and projected performance for RESOLOR has been adversely affected by the challenging European reimbursement environment. Shire has evaluated alternative sales and marketing strategies for RESOLOR in response to these challenges but has judged that projected profitability levels will continue to be below the level forecast at the time of the acquisition of Movetis.

For the year to December 31, 2012 SG&A included depreciation of $59.8 million (2011: $63.1 million) and amortization of $194.1 million (2011: $165.0 million).

(Gain)/loss on sale of product rights

For the year to December 31, 2012 Shire recorded a gain on sale of product rights of $18.1 million (2011: loss of $6.0 million) following re-measurement of the contingent consideration receivable from the divestment of DAYTRANA.

Integration and acquisition costs

For the year to December 31, 2012 Shire recorded integration and acquisition costs of $25.2 million (2011: $13.7 million), primarily associated with the acquisition of FerroKin and the integration of ABH. In 2011 integration and acquisition costs primarily related to the acquisition of ABH.

Interest expense

For the year to December 31, 2012 Shire incurred interest expense of $38.2 million (2011: $39.1 million). Interest expense principally relates to the coupon and amortization of issue costs on Shire’s $1,100 million 2.75% convertible bonds due 2014.

Taxation

The effective rate of tax in 2012 was 18% (2011: 21%). The effective tax rate in 2012 is lower than 2011 due to favorable changes in profit mix in 2012 and the benefit of the recognition of foreign tax credits.