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

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

  • Product sales in 2011 were up 26% to $3,950 million (2010: $3,128 million). On a constant exchange rate (“CER”)(1) basis, which is a Non GAAP measure, product sales were up 24%.
  • Product sales growth was generated from across the portfolio, particularly VYVANSE (up 27% to $805 million), ADDERALL XR (up 48% to $533 million), REPLAGAL (up 35% to $475 million), ELAPRASE (up 15% to $465 million), LIALDA/MEZAVANT (up 27% to $372 million) and VPRIV (up 79% to $256 million). Product sales in 2011 also benefited from $105 million of DERMAGRAFT sales made subsequent to the acquisition of ABH.
  • Total revenues in 2011 exceeded $4 billion for the first time, increasing by 23% (Non GAAP CER: up 21%) to $4,263 million (2010: $3,471 million). The strong product sales growth more than offset decreased royalties and other revenues, down 9% due to lower 3TC and ZEFFIX royalties.
  • Operating income was up 40% to $1,109 million (2010: $794 million), as total revenues grew at a faster rate than R&D and SG&A expenditure. Operating income in 2010 included impairment charges recorded on the divestment of DAYTRANA and an up-front payment of $45 million to Acceleron.
  • Diluted earnings per Ordinary Share were up 43% to 150.9c (2010: 105.3c) due to higher operating income and a lower effective tax rate in 2011 of 21% (2010: 24%).

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

Total revenues

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

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

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Product sales


 
Year to
December 31, 2011
$’M
Year to
December 31, 2010
$’M
Product sales growth
%
Non GAAP CER growth
%
US prescription growth(1)
%
Exit market share(1)
%
SPECIALTY PHARMACEUTICALS            
ADHD            
VYVANSE 805.0 634.2 +27 +27 +21 17
ADDERALL XR 532.8 360.8 +48 +47 +11 7
INTUNIV 223.0 165.9 +34 +34 +78 4
EQUASYM 19.9 22.0 -10 -14 n/a(2) n/a(2)
DAYTRANA - 49.4 n/a(4) n/a(4) n/a(4) n/a
GI            
LIALDA/MEZAVANT 372.1 293.4 +27 +26 +9 21
PENTASA 251.4 235.9 +7 +7 -2 14
RESOLOR 6.1 0.3 n/a n/a n/a(3) n/a(3)
General products             
FOSRENOL 166.9 182.1 -8 -11 –16 5
XAGRID 90.6 87.3 +4 -1 n/a n/a(2)
CARBATROL 52.3 82.3 -36 -36 -30 10
Other product sales 23.8 105.6 -10 -13 n/a n/a
  2,615.6 2,219.2 +18      
HUMAN GENETIC THERAPIES            
REPLAGAL 475.2 351.3 +35 +30 n/a(3) n/a(3)
ELAPRASE 464.9 403.6 +15 +12 n/a(2) n/a(2)
VPRIV 256.2 143.0 +79 +76 n/a(2) n/a(2)
FIRAZYR 33.0 11.1 +197 +188 n/a(2) n/a(2)
  1,229.3 909.0 +35      
REGENERATIVE MEDICINE            
DERMAGRAFT 105.3 - n/a n/a(5) n/a(2) n/a(2)
Total RM product sales 105.3 - n/a      
Total product sales 3,950.2 3,128.2 +26      
(1) Data provided by IMS Health National Prescription Audit (“IMS NPA”). Exit market share represents the average US market share in the month ended December 31, 2011.
(2) IMS NPA Data not available.
(3) Not sold in the US in the year to December 31, 2011.
(4) The Company divested DAYTRANA to Noven effective October 1, 2010.
(5) DERMAGRAFT was acquired by Shire on June 28, 2011.

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Specialty Pharmaceuticals

VYVANSE – ADHD

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

Litigation proceedings regarding VYVANSE are ongoing. Further information about this litigation can be found in Note 20 “Commitments and Contingencies” to the consolidated financial statements.

ADDERALL XR – ADHD

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

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

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

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

Litigation proceedings regarding ADDERALL XR are ongoing. Further information about this litigation can be found in Note 20 “Commitments and Contingencies” to the consolidated financial statements.

INTUNIV – ADHD

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

Litigation proceedings relating to the Company’s INTUNIV patents are in progress. For further information see Note 20 “Commitments and Contingencies” to the consolidated financial statements.

LIALDA/MEZAVANT – Ulcerative colitis

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

Litigation proceedings regarding LIALDA/MEZAVANT are ongoing. Further information about this litigation can be found in Note 20 “Commitments and Contingencies” to the consolidated financial statements.

PENTASA – Ulcerative colitis

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

FOSRENOL – Hyperphosphatemia

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

Litigation proceedings regarding Shire’s FOSRENOL patents are ongoing. Further information about this litigation can be found in Note 20 “Commitments and Contingencies” to the consolidated financial statements.

Human Genetic Therapies

REPLAGAL – Fabry disease

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

Litigation proceedings regarding REPLAGAL are ongoing. Further information about this litigation can be found in Note 20 “Commitments and Contingencies” to the consolidated financial statements.

ELAPRASE – Hunter syndrome

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

VPRIV – Gaucher disease

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

FIRAZYR – HAE

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

Regenerative Medicine

DERMAGRAFT – DFU

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

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

Royalties

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

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

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

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Cost of product sales

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

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

For the year to December 31, 2011 cost of product sales included depreciation of $39.8 million (2010: $38.1 million).

R&D

R&D expenditure for the year to December 31, 2011 increased to $770.7 million (20% of product sales), compared to $661.5 million in the corresponding period in 2010 (21% of product sales).

R&D in 2010 included an up-front payment of $45.0 million (representing 1% of product sales) on entering the collaboration with Acceleron for development of the ActRIIB class of molecules. Excluding this up-front payment, R&D increased by $154.2 million in 2011, reflecting the Company’s continued investment in a number of targeted R&D programs, including new uses for VYVANSE, Sanfilippo and other development programs. In addition, R&D in 2011 also included a full year of Movetis’s development programs and ABH’s expenditure in the second half of 2011, an impairment charge of $16.0 million (2010: $nil) in respect of certain IPR&D assets and the adverse impact of foreign exchange in 2011 compared to 2010.

For the year to December 31, 2011 R&D included depreciation of $25.2 million (2010: $19.0 million) and an impairment charge of $16.0 million (2010: $nil).

SG&A

SG&A expenses increased to $1,751.4 million (44% of product sales) for the year to December 31, 2011 from $1,526.3 million (49% of product sales) in the corresponding period in 2010.

In 2010 SG&A included an impairment charge of $42.7 million to write down the DAYTRANA intangible asset to its fair value less costs to sell, prior to the divestment of DAYTRANA to Noven. Excluding this impairment charge SG&A increased by $267.8 million as the Company supported the growth of its existing and recently launched products along with developing its international infrastructure. SG&A in 2011 also included a full year of Movetis’s operating costs, ABH’s expenditure in the second half of 2011 and the adverse impact of foreign exchange in 2011 compared to 2010.

For the year to December 31, 2011 SG&A also included depreciation of $63.1 million (2010: $62.1 million) and intangible asset amortization of $165.0 million (2010: $133.5 million).

Reorganization costs

For the year to December 31, 2011 Shire recorded reorganization costs of $24.3 million (2010: $34.3 million) relating to the transfer of manufacturing from its Owings Mills facility to a third party and the establishment of an international commercial hub in Switzerland.

Integration and acquisition costs

For the year to December 31, 2011 Shire recorded integration and acquisition costs of $13.7 million (2010: $8.0 million), which related to the acquisition and integration of ABH ($13.6 million) and the integration of Movetis ($8.3 million), offset by an adjustment to contingent consideration payable for EQUASYM ($8.2 million). In 2010 integration and acquisition costs primarily related to the acquisition of Movetis.

Interest expense

For the year to December 31, 2011 Shire incurred interest expense of $39.1 million (2010: $35.1 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.

Other income/(expense), net

For the year to December 31, 2011 the Company recognized other income, net of $18.1 million (2010: $7.9 million). Other income in the year to December 31, 2011 included a gain of $23.5 million arising on the disposal of substantially all of Shire’s holding in Vertex (Shire received these shares as partial consideration for its investment in ViroChem following ViroChem being acquired by Vertex). Other income in the year to December 31, 2010 included a gain of $11.1 million arising on the disposal of Shire’s investment in Virochem.

Taxation

The effective rate of tax in 2011 was 21% (2010: 24%). The effective tax rate in 2011 is lower than 2010 due to favorable changes in profit mix in 2011, including the full year effect in 2011 of the Company’s establishment of an international commercial hub in Switzerland in the fourth quarter of 2010, together with the effect of certain expenses in 2010 (including the up-front payment to Acceleron) being incurred in territories with a tax rate lower than Shire’s effective tax rate.

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