SHIRE PLC - 10-K - : Management's discussion and analysis of financial condition and results of operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Company's consolidated financial statements contained in Part IV in this Annual Report on Form 10-K.

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

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

Shire focuses on treatments and services for symptomatic conditions in areas of high medical need, so patients experience a noticeable and ongoing improvement in their lives. Through deep understanding of patients' needs, the Company develops and provides healthcare in the areas of: · Behavioral Health and Gastro Intestinal conditions; · Rare Genetic Diseases; and · Regenerative Medicine; as well as other symptomatic conditions treated by specialist physicians.

Shire's in-licensing and acquisition efforts are focused on products in specialist markets with strong intellectual property protection or other forms of market exclusivity and global rights. Shire believes that a carefully selected and balanced portfolio of products with strategically aligned and relatively small-scale sales forces will deliver strong results.

Substantially all of the Company's revenues, expenditures and net assets are attributable to the R&D, manufacture, sale and distribution of pharmaceutical products within three reportable segments: SP, HGT and RM. The Company also earns royalties (where Shire has out-licensed products to third parties) which are recorded as revenues.

Revenues are derived primarily from two sources - sales of the Company's own products and royalties: · 94% (2011: 93%) of total revenues are derived from product sales, of which 64% (2011: 66%) are within SP, 32% (2011: 31%) are within HGT and 4% (2011: 3%) are within RM; and · 5% of total revenues are derived from royalties (2011: 6%).

The markets in which the Company conducts its business are highly competitive and highly regulated.

There is increasing legislation both in the US and the rest of the world which is placing downward pressure on the net pricing of pharmaceutical products and medical devices. For example the US government passed healthcare reform legislation in 2010 which included an increase in Medicaid rebate rates and extended Medicaid rebates to those products provided through Medicaid managed care organizations. The legislation also imposed excise fees to be paid by both pharmaceutical manufacturers (from 2011) and medical device companies (from 2013). The impact of these recent changes to US healthcare legislation, and other healthcare reforms in the rest of the world, has not to date had a material impact on the Company's results of operations.

The health-care industry is also experiencing: · pressure from governments and healthcare providers to keep prices low while increasing access to drugs; · increasing challenges from third party payors for products to have demonstrable clinical benefit, with pricing and reimbursement approval becoming increasingly linked to a product's clinical effectiveness and impact on overall costs of patient care; · increased R&D costs, because development programs are typically larger and take longer to get approval from regulators; · challenges to existing patents from generic manufacturers; · governments and healthcare systems favoring earlier entry of low cost generic drugs; and · higher marketing costs, due to increased competition for market share.

47--------------------------------------------------------------------------------Shire's strategy has been developed to address these industry-wide competitive pressures. This strategy has resulted in a series of initiatives in the following areas: Markets Historically, Shire's portfolio of approved products has been heavily weighted towards the North American market. The acquisition in 2005 of TKT and the consequent establishment of the Company's HGT business, together with the acquisitions of New River Pharmaceuticals in 2007 (which brought full rights to ADHD product VYVANSE), Jerini AG ("Jerini") in 2008 (which brought the HAE product FIRAZYR), EQUASYM in 2009 (which facilitated Shire's immediate access to the European ADHD market) and Movetis NV ("Movetis") in 2010 (which brought EU rights to RESOLOR). The acquisition of ABH in 2011 (which subsequently became RM), and FerroKin Biosciences in 2012 (which brought a new hematology drug to the SP portfolio) provided Shire with platforms to increase its presence in Europe and the rest of the world ("RoW"), thereby working towards diversifying the risk associated with reliance on one geographic market. In 2012 the SP and HGT businesses derived 15% and 75%, respectively, of their product sales from outside of the US. Currently all RM product sales are generated in the US. Shire has ongoing commercialization and late-stage development activities, which are expected to further supplement the diversification of revenues in the future, including the following: · continued launch of VYVANSE in Brazil (marketed as VENVANSE) and the potential approval and launch of VYVANSE in Mexico; · approval of ELVANSE/TYVENSE in certain countries in the EU for treatment of ADHD in children; · filing in 2012 of an application to expand the label of FIRAZYR in the EU to include the treatment of attacks of ACE-inhibitor induced Angioedema; · filing in 2012 of an application in Europe for the VPRIV label to be updated with data regarding the impact of VPRIV on certain parameters of bone disease in Type 1 Gaucher patients; · INTUNIV Phase 3 clinical program to support submission of an MAA in the EU; and · continued roll-out of DFU in Canada and RESOLOR in the EU.

R&D Over the last five years Shire has focused its R&D efforts on products in its core therapeutic areas and concentrated its resources on obtaining regulatory approval for later-stage pipeline products within these core therapeutic areas.

In addition to continued efforts in its late stage pipeline for the ADHD, GI, HGT and RM therapeutic areas, Shire has also progressed work on an earlier stage pipeline.

Evidence of the successful progression of the late stage pipeline can be seen in the granting of approval and associated launches of the Company's products over the last five years. In this time several products have received regulatory approval including: in the US, INTUNIV in 2009, VPRIV in 2010, and FIRAZYR in 2011; in the EU, VPRIV in 2010 and ELVANSE/TYVENSE in 2012; in Canada, VYVANSE in 2010 and DERMAGRAFT in 2012.

Shire's strategy is focused on the development of product candidates that have a lower risk profile. As Shire further expanded its earlier phase pipeline, R&D costs in 2012 included expenditure on several pre-clinical to Phase 3 studies for products in development as well as Phase 3(b) and Phase 4 studies to support recently launched products in the SP and HGT businesses, together with the development of new projects in the SP, HGT and RM businesses. For a discussion of the Company's current development projects see ITEM 1: Business.

Patents and Market Exclusivity The loss or expiration of patent protection or regulatory exclusivity with respect to any of the Company's major products could have a material adverse effect on the Company's revenues, financial condition and results of operations, as generic products may enter the market. Companies selling generic products often do not need to complete extensive clinical studies when they seek registration of a generic or biosimilar product and accordingly, they are generally able to sell the Company's products at a much lower price.

As expected, in 2009 Teva and Impax commenced commercial shipments of their authorized generic versions of ADDERALL XR, which led to lower sales of branded ADDERALL XR compared to the period prior to the authorized generic launch. As discussed in ITEM 1: Business, in June 2012 the FDA reached a decision on the Citizen Petition for ADDERALL XR which was filed in October 2005. The FDA also approved an ANDA for a generic version of ADDERALL XR. Sales of AXR decreased in 2012 due to the launch of a new generic product.

In 2011 authorized generic and generic versions of the Company's CARBATROL and REMINYL products respectively were launched, which led to lower sales of these branded products compared to the period before loss of exclusivity.

Shire is engaged in various legal proceedings with generic manufacturers with respect to its VYVANSE, INTUNIV, FOSRENOL, LIALDA and ADDERALL XR patents. For more detail of current patent litigation, see ITEM 3: Legal 48 -------------------------------------------------------------------------------- Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

Business Development Shire seeks to focus its business development activity on the acquisition and in-licensing of products which offer a good strategic fit and have the potential to deliver demonstrable value to all of the Company's stakeholders.

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

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

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

Collaboration and licensing activity Shire has also entered into a number of collaboration and license agreements, including: · A collaboration and license agreement with Sangamo to develop therapeutics for hemophilia and other monogenic diseases based on Sangamo's ZFP technology in 2012; · An exclusive license in markets outside of North America for the ActRIIB class of molecules being developed by Acceleron in 2010. The collaboration with Acceleron will initially focus on further developing HGT-4510 (also called ACE-031) for the treatment of patients with DMD.

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

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

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

On January 23, 2013 Shire announced that it had decided to proceed with a collective dismissal and business closure at its site in Turnhout, Belgium. This decision follows the conclusion of an information and consultation process.

Shire will continue to sell RESOLOR in Europe and the supply of RESOLOR for patients in Europe who rely on the medicine will not be affected. The collective dismissal and business closure of the Turnhout site is not expected to have a material impact on the Company's consolidated financial position and results of operations in future periods.

49--------------------------------------------------------------------------------Results of operations for the years to December 31, 2012 and 2011 Financial highlights for the year to December 31, 2012 are as follows: · Product sales in 2012 were up 12% to $4,407 million (2011: $3,950 million). On a Constant Exchange Rate ("CER") 1 basis, which is a Non GAAP measure, product sales were up 13%.

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

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

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

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

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

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

Total revenues The following table provides an analysis of the Company's total revenues by source: Year to December 31, 2012 2011 Change $'M $'M % Product sales 4,406.7 3,950.2 +12 % Royalties 241.6 283.5 -15 % Other revenues 32.9 29.7 +11 % Total 4,681.2 4,263.4 +10 % 50-------------------------------------------------------------------------------- Product sales Year to Year to December 31, December 31, Product sales Non-GAAP CER US prescription Exit market 2012 2011 growth growth growth1 share1 $'M $'M % % % % SP Behavioral Health VYVANSE 1,029.8 805.0 +28 +28 +17 17 ADDERALL XR 429.0 532.8 -19 -19 -11 5 INTUNIV 287.8 223.0 +29 +29 +34 5 EQUASYM 29.2 19.9 +47 +53 n/a 2 n/a 2 GI LIALDA / MEZAVANT 399.9 372.1 +7 +8 +5 22 PENTASA 265.8 251.4 +6 +6 -5 14 RESOLOR 11.8 6.1 +93 n/a n/a 3 n/a 3 General Products FOSRENOL 172.0 166.9 +3 +6 -19 4 XAGRID 97.2 90.6 +7 +14 n/a 2 n/a 2 Other product sales 112.4 147.8 -24 -23 n/a n/a 2,834.9 2,615.6 +8 HGT ELAPRASE 497.6 464.9 +7 +11 n/a 3 n/a 3 REPLAGAL 497.5 475.2 +5 +10 n/a 2 n/a 2 VPRIV 306.6 256.2 +20 +23 n/a 2 n/a 2 FIRAZYR 116.3 33.0 +252 +258 n/a 2 n/a 2 1,418.0 1,229.3 +15 RM DERMAGRAFT 153.8 105.3 +46 +46 4 n/a 2 n/a 2 Total RM product sales 153.8 105.3 +46 Total product sales 4,406.7 3,950.2 +12 (1) Data provided by IMS. Exit market share represents the average US market share in the month ended December 31, 2012.

(2) IMS NPA Data not available.

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

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

Specialty Pharmaceuticals VYVANSE - ADHD VYVANSE product sales grew strongly (28%) in 2012 as a result of higher prescription demand, due to growth in US ADHD market (+9%) and VYVANSE's share of that market, and as a result of a price increase taken in 2012. These 51 --------------------------------------------------------------------------------positive factors, together with lower sales deductions in 2012, more than offset the effect of higher retailer destocking in 2012 compared to 2011 and some shipment slippage at the end of the fourth quarter.

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

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

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

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

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

Litigation proceedings relating to the Company's INTUNIV patents are in progress. For further information see ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

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

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

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

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

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

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

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

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

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

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

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

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

Royalties Year to Year to December 31, December 31, 2012 2011 Change $'M $'M % 3TC and ZEFFIX 91.6 82.7 +11 % ADDERALL XR 70.3 107.1 -34 % 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 53--------------------------------------------------------------------------------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.

54 --------------------------------------------------------------------------------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.

55 --------------------------------------------------------------------------------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 CER1 basis, 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 Company's total revenues by source: Year to December 31, 2011 2010 Change $'M $'M % 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 56-------------------------------------------------------------------------------- Product sales Year to Year to December 31, December 31, Product sales Non-GAAP CER US prescription Exit market 2011 2010 growth growth growth1 share1 $'M $'M % % % % SP 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 95.5 105.6 -10 -13 n/a n/a 2,615.6 2,219.2 +18 HGT 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 RM DERMAGRAFT 105.3 - n/a 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.

57-------------------------------------------------------------------------------- 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 ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K ADDERALL XR - ADHD ADDERALL XR product sales 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.

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

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 ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

LIALDA/MEZAVANT - Ulcerative colitis The growth in product sales for LIALDA/MEZAVANT 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 ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

PENTASA - Ulcerative colitis 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 ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

58 -------------------------------------------------------------------------------- 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 ITEM 3: Legal Proceedings and Note 17, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K.

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 saw 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 2010 Change $'M $'M % ADDERALL XR 107.1 100.3 +7 3TC and ZEFFIX 82.7 154.0 -46 FOSRENOL 46.5 26.8 +74 Others 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 for 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. This dispute was resolved in 2012. See the 2012 royalty discussion above for further details.

59 --------------------------------------------------------------------------------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 60-------------------------------------------------------------------------------- Shire's holding in Vertex Pharmaceuticals, Inc. ("Vertex") (Shire received these shares as partial consideration for its investment in Virochem Pharma, Inc.

("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 favourable 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.

Financial condition at December 31, 2012 and 2011 Cash & cash equivalents Cash and cash equivalents increased by $862.2 million to $1,482.2 million (December 31, 2011: $620.0 million). Cash generated by operating activities of $1,382.9 million was offset by the cost of acquiring FerroKin, other capital expenditure, the purchase of shares (both by the employee benefit trust ("EBT") and under the share buy-back program) and dividend payments.

Other intangible assets, net Other intangible assets have decreased by $104.9 million to $2,388.1 million (December 31, 2011: $2,493.0 million). Additions in the year of $281.6 million, principally relating to intangible assets acquired with FerroKin and from Pervasis and the license acquired from Mt. Sinai School of Medicine of New York University, were offset by intangible asset amortization and impairment charges of $194.8 million and $197.9 million respectively.

Accounts payable and accrued expenses Accounts payable and accrued expenses have increased by $131.0 million to $1,501.5 million (December 31, 2011: $1,370.5 million) mainly due to the recognition of liabilities in relation to the settlement of litigation with Impax Laboratories Inc. and the agreement in principle reached with the US Government regarding the investigation into the sales and marketing of ADDERALL XR, DAYTRANA and VYVANSE.

Convertible bonds Convertible bonds - current liabilities have decreased by $1,100 million due to the reclassification of the Company's $1,100 million 2.75% convertible bonds due 2014 and convertible into fully paid ordinary shares of Shire plc (the "Bonds") from current to non-current liabilities in 2012 as the Company is no longer required to redeem the Bonds within twelve months of the balance sheet date (see "Liquidity and Capital Resources", below in this ITEM 7).

Other non-current liabilities Other non-current liabilities increased by $97.3 million to $241.6 million (December 31, 2011: $144.3 million) due primarily to the recognition of non-current contingent consideration payable totaling $120.4 million related to the FerroKin and Pervasis business combinations and the license agreement with Mt. Sinai.

61--------------------------------------------------------------------------------Liquidity and capital resources General The Company's funding requirements depend on a number of factors, including the timing and extent of its development programs; corporate, business and product acquisitions; the level of resources required for the expansion of certain manufacturing and marketing capabilities as the product base expands; increases in accounts receivable and inventory which may arise with any increase in product sales; competitive and technological developments; the timing and cost of obtaining required regulatory approvals for new products; the timing and quantum of milestone payments on collaborative projects; the timing and quantum of tax and dividend payments; the timing and quantum of purchases by the EBT of Shire shares in the market to satisfy awards granted under Shire's employee share plans; the timing and quantum of purchases of Shire shares under the share buy-back program; and the amount of cash generated from sales of Shire's products and royalty receipts.

An important part of Shire's business strategy is to protect its products and technologies through the use of patents, proprietary technologies and trademarks, to the extent available. The Company intends to defend its intellectual property and as a result may need cash for funding the cost of litigation.

The Company finances its activities through cash generated from operating activities; credit facilities; private and public offerings of equity and debt securities; and the proceeds of asset or investment disposals.

Shire's balance sheet includes $1,482.2 million of cash and cash equivalents at December 31, 2012. Substantially all of Shire's debt relates to its $1,100 million 2.75% convertible bonds due 2014 (the "Bonds"). The Bonds were potentially redeemable at the option of Bondholders at their principal amount including accrued and unpaid interest on May 9, 2012 (the "Put Option"), and remain redeemable following the occurrence of a change of control of Shire. On April 9, 2012 the deadline for Bondholders to choose to exercise the Put Option passed. No elections from the Bondholders were received by this date and the Bonds are now due on the Final Maturity date. In addition, Shire has a revolving credit facility of $1,200 million which matures in 2015 (the "RCF"), which is currently undrawn.

Shire 2.75% Convertible Bonds due 2014 On May 9, 2007 Shire issued the Bonds and the net proceeds of the issuance, after deducting the commissions and other direct costs of issue, totaled $1,081.7 million. In connection with the Scheme the Trust Deed was amended and restated in 2008 in order to provide that, following the substitution of Shire plc in place of Old Shire as the principal obligor and issuer of the Bonds, the Bonds would be convertible into ordinary shares of Shire plc.

The Bonds were issued at 100% of their principal amount, and unless previously purchased and cancelled, redeemed or converted, will be redeemed on May 9, 2014 (the "Final Maturity Date") at their principal amount.

The Bonds bear interest at 2.75% per annum, payable semi-annually in arrears on November 9 and May 9. The Bonds constitute direct, unconditional, unsubordinated and unsecured obligations of the Company, and rank pari passu and ratably, without any preference amongst themselves, and equally with all other existing and future unsecured and unsubordinated obligations of the Company.

The Bonds may be redeemed at the option of the Company, at their principal amount together with accrued and unpaid interest if: (i) at any time after May 23, 2012 if on no less than 20 dealing days in any period of 30 consecutive dealing days the value of Shire's ordinary shares underlying each Bond in the principal amount of $100,000 would exceed $130,000; or (ii) at any time conversion rights have been exercised, and/or purchases and corresponding cancellations, and/or redemptions effected in respect of 85% or more in principal amount of Bonds originally issued. The Bonds are repayable in US dollars, but also contain provisions entitling the Company to settle redemption amounts in Pounds sterling, or in the case of the Final Maturity Date or any change of control Shire, by delivery of the underlying ordinary shares and a cash top-up amount.

The Bonds are convertible into ordinary shares during the conversion period, being the period from June 18, 2007 until the earlier of: (i) the close of business on the date falling fourteen days prior to the Final Maturity Date; (ii) if the Bonds have been called for redemption by the Company, the close of business fourteen days before the date fixed for redemption; (iii) the close of business on the day prior to a Bond holder giving notice of redemption in accordance with the conditions; and (iv) the giving of notice by the trustee that the Bonds are accelerated by reason of the occurrence of an event of default.

Upon conversion, the Bond holder is entitled to receive ordinary shares at the conversion price of $32.83 per ordinary share, (subject to adjustment as outlined below).

The conversion price is subject to adjustment in respect of (i) any dividend or distribution by the Company, (ii) a change of control and (iii) customary anti-dilution adjustments for, inter alia, share consolidations, share splits, spin-off events, rights issues, bonus issues and reorganizations. The initial conversion price of $33.5879 was adjusted to $33.17 with effect from March 11, 2009 as a result of cumulative dividend payments during the period from October 2007 to April 2009 inclusive, 62 -------------------------------------------------------------------------------- and was further adjusted to $32.83 with effect from March 11, 2011 as a result of cumulative dividend payments during the period April 2009 to April 2011 inclusive. The ordinary shares issued on conversion will be delivered credited as fully paid, and will rank pari passu in all respects with all fully paid ordinary shares in issue on the relevant conversion date.

Revolving Credit Facilities Agreement On November 23, 2010 the Company entered into a committed multicurrency revolving and swingline facilities agreement with a number of financial institutions, for which Abbey National Treasury Services Plc (trading as Santander Global Banking and Markets), Bank of America Securities Limited, Barclays Capital, Citigroup Global Markets Limited, Lloyds TSB Bank plc and The Royal Bank of Scotland plc acted as mandated lead arrangers and bookrunners (the "new RCF"). The new RCF is for an aggregate amount of $1,200 million and cancelled the Company's then existing committed revolving credit facility (the "old RCF"). The new RCF, which includes a $250 million swingline facility, may be used for general corporate purposes and matures on November 23, 2015.

The interest rate on each loan drawn under the new RCF for each interest period is the percentage rate per annum which is the aggregate of the applicable margin (ranging from 0.90 to 2.25 per cent per annum) and LIBOR for the applicable currency and interest period. Shire also pays a commitment fee on undrawn amounts at 35 per cent per annum of the applicable margin.

Under the new RCF it is required that (i) Shire's ratio of Net Debt to EBITDA (as defined within the new RCF agreement) does not exceed 3.5 to 1 for either the 12 month period ending December 31 or June 30 unless Shire has exercised its option (which is subject to certain conditions) to increase it to 4.0 to 1 for two consecutive testing dates; (ii) the ratio of EBITDA to Net Interest (as defined in the new RCF agreement) must not be less than 4.0 to 1, for either the 12 month period ending December 31 or June 30, and (iii) additional limitations on the creation of liens, disposal of assets, incurrence of indebtedness, making of loans, giving of guarantees and granting security over assets. These financial and operating covenants have not had, and are not expected to have, an effect on the Company's financial position and liquidity.

On entering into the new RCF in November 2010 the Company paid arrangement costs of $8.0 million, which have been recorded as deferred charges, with amortization of these costs to the Company's income statement over the contractual term of the new RCF.

The availability of loans under the new RCF is subject to customary conditions.

The full terms are set out in Exhibit 10.28 to this Annual Report on Form 10-K.

Financing Shire anticipates that its operating cash flow together with available cash, cash equivalents and the RCF will be sufficient to meet its anticipated future operating expenses, share buy-back program, capital expenditures, tax and interest payments, lease obligations and milestone payments as they become due over the next twelve months.

If the Company decides to acquire other businesses, it expects to fund these acquisitions from existing cash resources, the RCF and possibly through new borrowings and the issue of new equity if necessary.

Share buy-back program Shire has a strong balance sheet and continued robust cash generation, and considers efficient use of capital on behalf of shareholders an important objective. Therefore, during the year to December 31, 2012 the Company commenced a share buy-back program, for the purpose of returning funds to shareholders, of up to $500 million through both direct purchases of ordinary shares and through the purchase of ordinary shares underlying ADRs.

During the year ending December 31, 2012 the Company made on-market repurchases totaling 3,631,571 Ordinary Shares at a cost of $106.4 million (excluding transaction costs). This represents 0.65% of the issued share capital of the Company as at the year end. The program covers purchases of Ordinary Shares for cancellation or to be held as treasury shares, in accordance with the authority renewed by shareholders at the Company's AGM on April 24, 2012 when the Company was authorized to make market purchases of up to 56,253,208 of its own Ordinary Shares. That authority will expire at the 2013 AGM and in accordance with usual practice a resolution to renew it for another year will be proposed.

63--------------------------------------------------------------------------------Sources and uses of cash The following table provides an analysis of the Company's gross and net debt (excluding restricted cash), as at December 31, 2012 and 2011: 2012 2011 December 31, $'M $'M Cash and cash equivalents1 1,482.2 620.0 Shire 2.75% Convertible bonds 1,100.0 1,100.0 Other debt 9.3 8.2 Total debt 1,109.3 1,108.2 Net cash/(debt) 372.9 (488.2 ) (1) Substantially all of the Company's cash and cash equivalents are held by foreign subsidiaries (i.e, those subsidiaries incorporated outside of Jersey, Channel Islands, the jurisdiction of incorporation of Shire plc, Shire's holding company). The amount of cash and cash equivalents held by foreign subsidiaries has not had, and is not expected to have, a material impact on the Company's liquidity and capital resources.

Cash flow activity Net cash provided by operating activities for the year to December 31, 2012 increased by $309.3 million or 29% to $1,382.9 million (2011: $1,073.6 million) as higher cash receipts from gross product sales and improved cash collections for aged European receivables more than offset higher operating expenses and sales deduction payments in the year.

Net cash provided by operating activities for the year to December 31, 2011 increased by $118.7 million or 12% to $1,073.6 million (2010: $954.9 million).

Higher cash receipts from gross product sales and lower cash tax payments were offset by the timing and quantum of both sales deduction and operating expenditure payments, and lower royalty receipts in 2011 compared to 2010.

Net cash used in investing activities was $271.0 million in the year to December 31, 2012, principally relating to the expenditure on property, plant and equipment of $149.6 million and the cash paid (net of cash acquired) of $97.0 million for the acquisition of FerroKin ($94.5 million) and Pervasis ($2.5 million). Capital expenditure on property, plant and equipment primarily includes expenditure of $65.0 million on computer software and hardware due to SAP upgrade and construction and leasehold improvements at different Company sites of $45.2 million.

Net cash used in investing activities was $809.2 million in the year to December 31, 2011, principally relating to the cash paid (net of cash acquired) of $725.0 million for the acquisition of ABH and expenditure on property, plant and equipment of $194.3 million, offset by proceeds of $94.7 million received on the disposal of substantially all of Shire's holding in Vertex. Capital expenditure on property, plant and equipment includes $110.0 million on construction work at HGT's facility at Lexington Technology Park ("LTP").

Net cash used in financing activities was $244.3 million for the year to December 31, 2012, principally due to the purchase of shares by the EBT, the purchase of shares under the share buy-back program and dividend payments, offset by the tax benefit associated with the exercise of stock options.

Net cash used in financing activities was $195.4 million for the year to December 31, 2011, principally due to dividend payments, the purchase of shares by the EBT and the repayment of debt acquired with ABH, offset by the tax benefit associated with the exercise of stock options.

Outstanding Letters of credit At December 31, 2012, the Company had irrevocable standby letters of credit and guarantees with various banks totaling $38.2 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.

64--------------------------------------------------------------------------------Cash Requirements At December 31, 2012 the Company's cash requirements for long-term liabilities reflected on the Balance Sheet and other contractual obligations were as follows: Payments due by period Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years $'M $'M $'M $'M $'M Convertible bonds(i) 1,145.4 30.3 1,115.1 - - Operating leases obligation (ii) 244.3 49.6 61.0 40.8 92.9 Purchase obligations (iii) 806.8 670.1 127.7 4.4 4.6 Other long-term liabilities reflected on the Balance Sheet (iv) 230.2 - 159.3 37.8 33.1 Total 2,426.7 750.0 1,463.1 83.0 130.6 (i) Shire's $1,100 million principal amount of 2.75% convertible bonds due 2014 and the interest on the Bonds has been included based on their contractual payment dates. The principal amount of $1,100 million has been included within payments due in one to three years based on the Final Maturity Date of the Bonds. 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 certain exceptions. 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 December 31, 2012. Further details are included within Liquidity and capital resources: Shire 2.75% Convertible Bonds due 2014 above.

(ii) The Company leases certain land, facilities, motor vehicles and certain equipment under operating leases expiring through 2021.

(iii) Purchase obligations include agreements to purchase goods, investments or services (including clinical trials, contract manufacturing and capital equipment), including open purchase orders, that are enforceable and legally binding and that specify all significant terms. Shire expects to fund these commitments with cash flows from operating activities.

(iv) Unrecognized tax benefits and associated interest and penalties of $58.9 million are included within payments due in one to three years.

The contractual obligations table above does not include certain milestones and other contractual commitments where payment is contingent upon the occurrence of events which are yet to occur (and therefore payment is not yet due). At December 31, 2012 the most significant of the Company's milestone and contractual commitments which are contingent on the occurrence of future events are as follows: (i) Collaboration with Acceleron for ActRIIB class of molecules On September 9, 2010 Shire announced that it had expanded its HGT pipeline by acquiring an exclusive license in markets outside of North America for the ActRIIB class of molecules being developed by Acceleron. The collaboration will initially focus on further developing HGT-4510 (also called ACE-031), the lead ActRIIB drug candidate, which is in development for the treatment of patients with Duchenne muscular dystrophy ("DMD"). The Phase 2a trial is on hold and clinical safety is under review. HGT-4510 and the other ActRIIB class of molecules have the potential to be used in other muscular and neuromuscular disorders with high unmet medical need.

In the year to December 31, 2010 Shire made an upfront payment of $45 million to Acceleron which has been expensed to R&D.

In the year to December 31, 2012 Shire's share of R&D costs under this collaboration agreement was $4.5 million (2011: $10.1 million; 2010: $2.7 million) which were expensed to R&D. Shire will pay Acceleron up to a further $165.0 million, subject to certain development, regulatory and sales milestones being met for HGT-4510 in DMD, up to an additional $288 million for successful commercialization of other indications and molecules, and royalties on product sales.

65--------------------------------------------------------------------------------Shire and Acceleron will conduct the collaboration through a joint steering committee, with subcommittees including a joint manufacture committee, and a joint patent committee to monitor the development of HGT-4510 and other compounds.

(ii) Research Collaboration with Santaris Pharma A/S ("Santaris") on Locked Nucleic Acid ("LNA") Drug Platform On August 24, 2009 Shire announced that it had entered into a research collaboration with Santaris, to develop its proprietary LNA technology in a range of rare diseases. LNA technology has the benefit of shortened target validation and proof of concept, potentially increasing the speed and lowering the cost of development. As part of the joint research project Santaris will design, develop and deliver pre-clinical LNA oligonucleotides for Shire-selected orphan disease targets, and Shire will have the exclusive right to further develop and commercialize these candidate compounds on a worldwide basis.

In the year to December 31, 2009 Shire made an upfront payment to Santaris of $6.5 million, for technology access and R&D funding, which was expensed to R&D.

In the year to December 31, 2012 Shire paid success milestones and other support costs of $3.0 million (2011: $2.5 million; 2010: $4.0 million) and $8.1 million (2011: $5.3 million; 2010: $2.3 million) to Santaris respectively, which were expensed to R&D. Shire has remaining obligations to pay Santaris $13.5 million subject to certain success criteria, and development and sales milestones up to a maximum of $69.0 million for each indication. Shire will also pay single or double digit tiered royalties on net sales of the product.

Shire and Santaris have formed a joint research committee to monitor R&D activities through preclinical lead candidate selection at which point all development and commercialization costs will be the responsibility of Shire.

(iii) Collaboration and license agreement with Sangamo to develop therapeutics for hemophilia 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 ZFP technology. Sangamo is responsible for all activities through submission of Investigational New Drug Applications 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.

In the year to December 31, 2012 Shire made an upfront payment to Sangamo of $13.0 million, for technology access and R&D funding, which was expensed to R&D.

In the year to December 31, 2012 Shire's share of R&D costs under this collaboration agreement was $8.9 million (2011: $nil; 2010: $nil) which were expensed to R&D. Shire may be required to pay research, regulatory, development and commercial milestone payments up to a maximum of $213.5 million and to pay royalties on net sales of the product.

(iv) Acquisition of 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 totaled $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. For further details refer to Part IV ITEM 15: Exhibits and Financial Statement Schedules, Note 3 of this Annual Report on Form 10-K.

(v) Acquisition of certain assets & liabilities of 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 $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. For further details refer to Part IV ITEM 15: Exhibits and Financial Statement Schedules, Note 3 of this Annual Report on Form 10-K.

66 --------------------------------------------------------------------------------Off-balance sheet arrangements There are no off-balance sheet arrangements, aside from the collaborations containing contractual commitments and milestones which are contingent on future events as outlined above, that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Foreign currency fluctuations A number of the Company's subsidiaries have a functional currency other than the US Dollar. As such, the consolidated financial results are subject to fluctuations in exchange rates, particularly in the Euro, Swiss Franc and Pound Sterling against the US Dollar.

The accumulated foreign currency translation differences at December 31, 2012 of $85.1 million are reported within accumulated other comprehensive income in the consolidated balance sheet and foreign exchange losses for the year to December 31, 2012 of $3.5 million are reported in the consolidated statements of income.

At December 31, 2012, the Company had outstanding swap and forward foreign exchange contracts to manage the currency risk associated with intercompany transactions and specific external receivables. For further information, see ITEM 7A: Quantitative and qualitative disclosures about market risk in this Annual Report on Form 10-K. At December 31, 2012 the fair value of these contracts was a net liability of $1.7 million.

Concentration of credit risk Financial instruments that potentially expose Shire to concentrations of credit risk consist primarily of short-term cash investments, derivative contracts and trade accounts receivable (from product sales and from third parties from which the Company receives royalties). Cash is invested in short-term money market instruments, including money market and liquidity funds and bank term deposits.

The money market and liquidity funds in which Shire invests are all triple A rated by both Standard and Poor's and by Moody's credit rating agencies.

The Company is exposed to the credit risk of the counterparties with which it enters into derivative instruments. The Company limits this exposure through a system of internal credit limits which vary according to ratings assigned to the counterparties by the major rating agencies. The internal credit limits are approved by the Board and exposure against these limits is monitored by the corporate treasury function. The counterparties to these derivatives contracts are major international financial institutions.

The Company's revenues from product sales in the US are mainly governed by agreements with major pharmaceutical wholesalers and relationships with other pharmaceutical distributors and retail pharmacy chains. For the year to December 31, 2012 there were three customers in the US that accounted for 50% 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 Company's financial condition and results of operations.

A substantial portion of the Company's accounts receivable in countries outside of the United States is derived from product sales to government-owned or government-supported healthcare providers. The Company's recovery of these accounts receivable is therefore dependent upon the financial stability and creditworthiness of the relevant governments. In recent years 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 continued to receive remittances in relation to government-owned or government-supported healthcare providers in all the Relevant Countries in the year to December 31, 2012, including receipts of $118.7 million and $142.3 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, 2012.

67 --------------------------------------------------------------------------------Inflation Although at reduced levels in recent years, inflation continues to apply upward pressure on the cost of goods and services which are used in the business.

However, the Company believes that the net effect of inflation on its revenues and operations has been minimal during the past three years.

Critical accounting estimates The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States ("US GAAP") and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of intangible assets, sales deductions, income taxes (including provisions for uncertain tax positions and the realization of deferred tax assets), provisions for litigation and legal proceedings, contingent consideration receivable from product divestments 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.

(i) Valuation of intangible assets In accordance with US GAAP the Company classifies intangible assets into three categories: (1) finite lived intangible assets, which are amortized over their estimated useful lives; (2) intangible assets with indefinite lives, which are not subject to amortization; and (3) goodwill.

At December 31, 2012 the carrying value of the Company's finite lived intangible assets was $2,157.1 million (2011: $2,373.2 million; 2010: $1,839.2 million), the carrying value of the Company's indefinite lived intangible assets was $231.0 million (2011: $119.8 million; 2010: $139.7 million), and the carrying value of the Company's goodwill was $644.5 million (2011: $592.6 million; 2010: $402.5 million). The Company's indefinite lived intangible assets relate solely to IPR&D assets acquired through business combinations.

a) Initial valuation of intangible assets acquired through business combinations The Company accounts for business combinations using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the fair value of consideration given and the fair value of any noncontrolling interest over the fair values of the identifiable assets and liabilities acquired is recorded as goodwill. The determination of estimated fair values of acquired intangible assets, as well as the useful economic life ascribed to finite lived intangible assets, requires the use of significant judgement. The use of different estimates and assumptions to those used by the Company could result in a materially different valuation of acquired intangible assets, which could have a material effect on the Company's results of operations.

Initial valuation of finite lived intangible assets At December 31, 2012 the carrying value of the Company's finite lived intangible assets was $2,157.1 million (2011: $2,373.2 million; 2010: $1,839.2 million), primarily representing the following products: VYVANSE ($770.2 million), DERMAGRAFT product technology ($650.9 million), REPLAGAL ($263.5 million), FIRAZYR ($209.1 million) and RESOLOR ($126.8 million).

The fair values of all finite lived identifiable intangible assets, for commercialized products and developed product technologies, acquired through business combinations have been determined using an income approach on a project-by-project basis using the multi-period excess earnings method. The multi-period excess earnings method starts with a forecast of all expected future net cash flows which a market participant could have either generated or saved as a result of ownership of the intellectual property, customer relationships, product technologies and other intangible assets. These cash flows are then adjusted to present value by applying a market participant discount rate that reflects the risk factors that a market participant would associate with the cash flows (to the extent the underlying cash flows have not similarly been risk adjusted). The forecast of future cash flows requires various assumptions to be made. These valuations are based on information at the time of the acquisition of the identifiable intangible assets, and the expectations and assumptions that (i) have been deemed reasonable by the Company's management and (ii) are based on information, expectations and assumptions that would be available to and made by a market participant. No assurance can be given, however, that the underlying assumptions or events associated with such valuations will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows, and dependent on the outcome of future events or circumstances impairment losses (as outlined below) may result. The use of different estimates and assumptions to those used by the Company could result in a materially different valuation of finite lived 68-------------------------------------------------------------------------------- intangible assets. However, as the valuation process for intangible assets involves a number of inter-relating assumptions, the Company does not consider it meaningful to quantify the sensitivity of the valuation of intangible assets to changes in any individual assumption.

Initial valuation of indefinite lived intangible assets (IPR&D) IPR&D represents the fair value assigned to incomplete technologies and development projects that the Company has acquired through business combinations or asset acquisitions, which at the date of the relevant acquisition have not reached technological feasibility or which have no alternative future use.

Prior to January 1, 2009 the fair value ascribed to such technologies or development projects was immediately expensed to the consolidated statements of income in the year of acquisition. Additionally, non-refundable fees paid on the in-licensing of products that have not yet received regulatory approval and have no alternative future use have been expensed and presented within R&D in the consolidated statements of income.

For those business combinations which closed subsequent to January 1, 2009 IPR&D has been recorded as indefinite lived intangible assets. At the time of each initial acquisition, the Company recorded indefinite lived IPR&D assets of $166 million and $25 million on the acquisition of FerroKin and the acquisition of certain assets and liabilities from Pervasis, respectively in 2012, and recorded IPR&D assets of $139 million on the acquisition of Movetis in 2010.

The fair value of IPR&D assets is determined using the income approach on a project-by-project basis using the multi-period excess earnings method. The fair value of the acquired IPR&D assets has been based on the present value of probability adjusted incremental cash flows which a market participant would expect to be generated by the IPR&D projects after the deduction of contributory asset charges for other assets employed in these projects. This method incorporates an evaluation of the probability of success of each development project, and applying an appropriate market participant discount rate commensurate with the project's stage of completion, the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.

The major risks and uncertainties associated with the timely completion of the acquired IPR&D projects consist of the ability to confirm the safety and efficacy of the technology based on the data from ongoing clinical trials, and obtaining the necessary regulatory approvals. The use of different estimates and assumptions to those used by the Company could result in a materially different valuation of IPR&D. However, as the valuation process for IPR&D involves a number of inter-relating assumptions, the Company does not consider it meaningful to quantify the sensitivity of the valuation of IPR&D to changes in any individual assumption.

The valuation of IPR&D has been based on information that existed at the time of the acquisition of the relevant development project, and utilized expectations and assumptions that (i) have been deemed reasonable by the Company's management, and (ii) are based on information, expectations and assumptions that would be available to and made by a market participant. However, no assurance can be given that the underlying assumptions or estimates associated with the valuation of IPR&D will occur as projected. If certain of the IPR&D projects fail during development, are abandoned, or do not receive the relevant regulatory approvals, the Company may not realize the future cash flows that it has estimated nor recover the value of the R&D investment made subsequent to acquisition of the relevant project. If such circumstances occur, the Company's future operating results could be materially adversely impacted.

b) Subsequent measurement of intangible assetsFinite lived intangible assets - estimation of amortization charges and impairment losses Management's estimate of the useful life of its finite lived intangible assets considers, amongst other things, the following factors: (i) the expected use of the finite lived intangible asset by the Company; (ii) any legal, regulatory, or contractual provisions that may limit or extend the useful life; (iii) the effects of demand and competition, including the launch of generic products; and (iv) other general economic and/or industry specific factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels).

The Company reviews the useful life of its intangible assets subject to amortization at each reporting period, and revises its estimate of the useful life if warranted by events or circumstances. Any future changes to the useful life of the Company's finite lived intangible assets could result in higher or lower amortization charges in future periods, which could materially affect the Company's results from operations.

The Company reviews its finite lived intangible assets for impairment using a "two-step" approach, whenever events or circumstances suggest that the carrying value of its finite lived intangible assets may not be recoverable. Under step one, 69-------------------------------------------------------------------------------- if the undiscounted cash flows resulting from the use and ultimate disposition of the finite lived intangible asset (based on entity specific assumptions) are less than its carrying value, the intangible asset is considered not to be recoverable. The impairment loss is determined under step two as the amount by which the carrying value of the intangible asset exceeds its fair value (based on market participant assumptions).

Events or circumstances that could suggest that the Company's finite lived intangible assets may not be recoverable, and which would lead to an evaluation of the recoverability of the relevant asset, include but are not limited to, the following: (i) changes to a product's commercialization strategy; (ii) the loss of patent protection, regulatory exclusivity or challenge or circumvention by competitors of the Company's regulatory exclusivity patents; (iii) the development and marketing of competitive products, including generic entrants into the marketplace; (iv) changes to the product labels, or other regulatory intervention; (v) sustained government pressure on prices and, specifically, competitive pricing; (vi) the occurrence of significant adverse events in respect to the Company's products; (vii) a significant deterioration in a product's operating performance compared to expectations; and (viii) an expectation that the intangible asset will be divested before the end of its previously estimated useful life.

The occurrence of any such events or circumstances could adversely affect the Company's estimates of the future net cash flows generated by its finite lived intangible assets. The Company has recognized impairment losses of $126.7 million, to write-down its RESOLOR finite lived intangible assets to their fair value in the year to December 31, 2012 (2011: $nil; 2010: $42.7 million, which related to the DAYTRANA intangible asset as a result of divestment to Noven) (See ITEM 15 of PART IV: Exhibits And Financial Statement Schedules and Note 12, "Other intangible assets, net" to the consolidated financial statements set forth in this Annual Report on Form 10-K for details). Dependent on future events or circumstances, the Company's operating results could be materially and adversely affected by future impairment losses relating to its finite lived intangible assets.

Indefinite lived intangible assets (IPR&D) - estimation of impairment losses The Company reviews its indefinite lived intangible assets (which currently only relate to IPR&D assets) for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Indefinite lived assets are reviewed for impairment using a "one-step" approach, which compares the fair value of the indefinite lived asset (based on market participant assumptions) with its carrying amount. An impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value of the relevant indefinite lived intangible asset.

Events or circumstances that could suggest that the Company's IPR&D assets may not be recoverable, and which would lead to an evaluation of the relevant asset for impairment, include those factors considered for finite lived intangible assets (outlined above) as well as any adverse changes to the technological or commercial viability of the IPR&D projects, which could include abandonment or declines in the estimated commercial potential of the relevant IPR&D project.

The occurrence of any such events or circumstances could adversely affect the Company's estimates of the future net cash flows generated by, and the fair value of, its indefinite lived intangible assets.

After the identification of any such events or circumstances, and the resultant impairment reviews, the Company recognized impairment losses of $71.2 million in the year to December 31, 2012 (2011:$16.0 million; 2010: $nil) to write-down its RESOLOR IPR&D assets to their fair value (See ITEM 15 of PART IV: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES and Note 12, "Other intangible assets, net" to the consolidated financial statements set forth in this Annual Report on Form 10-K for details). Dependent on future events or circumstances, the Company's operating results could be materially and adversely affected by future impairment losses relating to its indefinite lived intangible assets.

Goodwill - estimation of impairment losses The Company reviews goodwill for impairment at least annually, or more frequently if events or circumstances indicate the carrying amount of goodwill may not be recoverable. Goodwill is reviewed for impairment at the reporting unit level, which for the Company is at the same level as its operating segments of SP, HGT and RM At December 31, 2012 goodwill of $291.1 million (December 31, 2011: $243.5 million) is held in the SP segment, $154.5 million (December 31, 2011: $152.1 million) in the HGT segment and $198.9 million (December 31, 2011: $197.0 million) is held in the RM segment.

The Company reviews goodwill for impairment using a "two step" approach. Step one requires a comparison of the fair value of each of the Company's reporting units with its carrying value, including goodwill. If the carrying value of each individual reporting unit exceeds its estimated fair value, goodwill included within that reporting unit is considered 70 -------------------------------------------------------------------------------- impaired, in which case Step two is performed. Under Step two, if the carrying amount of a reporting unit's goodwill exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

The Company determines the fair value of its reporting units (and if required in any Step two evaluation, the fair value of its goodwill) through a present value technique, principally using the income approach. The determination of fair value of the Company's reporting units requires the use of significant judgment and assumptions, which include, amongst other things, the estimation of future forecast cash flows and an appropriate discount rate used to determine the fair value of each of the Company's reporting units.

The Company's annual goodwill impairment review performed as at October 1, 2012, 2011 and 2010 indicated that the estimated fair value of each of the Company's reporting units exceeded their carrying values. Goodwill was, therefore, not considered impaired. However, dependent on future events or circumstances, the Company's operating results could be materially and adversely affected by any future impairment losses relating to its goodwill.

(ii) Sales Deductions Sales deductions consist of statutory rebates to State Medicaid and other government agencies, contractual rebates with Managed Care Organizations ("MCOs"), product returns, sales discounts (including trade discounts), wholesaler chargebacks, and allowances for coupon and patient assistance programs. These deductions are recorded as reductions to revenue in the same period as the related sales. Estimates of future obligations are derived from historical experience adjusted to reflect known changes in the factors that impact such reserves. On the balance sheet the Company records wholesaler chargebacks and trade discounts as a reserve against accounts receivable, whereas all other sales deductions are recorded within current liabilities.

The Company has the following significant categories of sales deductions, all of which involve estimates and judgments which the Company considers to be critical accounting estimates, and require the Company to use information from external sources: Medicaid and Managed Care Rebates Statutory rebates to State Medicaid agencies and contractual rebates to MCOs under managed care programs are based on statutory or negotiated discounts to the selling price. Medicaid rebates generally increase as a percentage of the selling price over the life of the product (if prices increase faster than inflation.).

As it can take up to six months for information to reach the Company on actual usage of the Company's products in managed care and Medicaid programs and on the total rebates to be reimbursed, the Company maintains reserves for amounts payable under these programs relating to sold products.

The amount of these reserves is based on historical experience of rebates, the timing of payments, the level of reimbursement claims, changes in prices (both normal selling prices and statutory or negotiated prices), changes in prescription demand patterns, projected product returns and the levels of inventory in the distribution channel. Adjustments are made for known changes in these factors.

Shire's estimates of the level of inventory in the distribution channel are derived from product-by-product inventory data provided by wholesalers and results of independently commissioned retail inventory surveys.

Revisions or clarification of guidelines from the CMS related to State Medicaid and other government program reimbursement practices with retroactive application can result in changes to management's estimates of the rebates reported in prior periods.

The accrual estimation process for Medicaid and managed care rebates involves in each case a number of interrelating assumptions, which vary for each combination of product and Medicaid agency or MCO. Accordingly, it would not be meaningful to quantify the sensitivity to change for any individual assumption or uncertainty. However, Shire does not believe that the effect of these uncertainties, taken as a whole, significantly impacts the Company's financial condition or results of operations.

Aggregate accruals for Medicaid and MCO rebates at December 31, 2012, 2011 and 2010 were $640.5 million, $612.6 million and $549.9 million, or 15%, 16% and 18%, respectively of net product sales. Historically, actual rebates have not varied significantly from the reserves provided.

Product Returns The Company typically accepts customer product returns in the following circumstances: (a) expiration of shelf life; (b) product damaged while in the possession of Shire; (c) under sales terms that allow for unconditional return (guaranteed sales); or (d) following product recalls or product withdrawals.

Returns are generally accepted up to one year after expiration date of the relevant product. The Company typically refunds the sales price paid by the customer by issuance of a credit, rather than cash refund or exchanges from inventory, and the returned product is destroyed.

71 --------------------------------------------------------------------------------Shire estimates the proportion of recorded revenue that will result in a return by considering relevant factors, including: (i) past product returns activity; (ii) the duration of time taken for products to be returned; (iii) the estimated level of inventory in the distribution channel; (iv) product recalls and discontinuances; (v) the shelf life of products; (vi) the launch of new drugs or new formulations; and (vii) the loss of patent protection or new competition.

Shire's estimates of the level of inventory in the distribution channel are based on product-by-product inventory data provided by wholesalers and results of independently commissioned third party retail inventory surveys.

Returns reserves for new products and for those products with generic competition generally require a higher level of estimation than those for established products without generic competition.

For shipments made to support the commercial launch of a new product (which can include guaranteed sales), the Company's policy is to defer recognition of the sales revenue until there is evidence of end-patient acceptance of the new product (primarily through third-party prescription data). For shipments after launch under standard terms (i.e. not guaranteed sales), the Company's initial estimates of sales return accruals are primarily based on the historical sales returns experience of similar products shortly after launch. Once sufficient historical data on actual returns of the product are available, the returns provision is based on this data and any other relevant factors as noted above.

The Company estimates returns reserves for products with generic competition based on historical sales, product utilization and rebate data, which are modified through the use of management judgment to take into account many factors, including, but not limited to, current market dynamics, changes in contract terms, changes in sales trends and product pricing.

The accrual estimation process for product returns involves, in each case, a number of interrelating assumptions, which vary for each combination of product and customer. Accordingly, it would not be meaningful to quantify the sensitivity to change for any individual assumption or uncertainty. However, Shire does not believe that the effect of uncertainties, as a whole, significantly impacts the Company's financial condition or results of operations.

At December 31, 2012, 2011 and 2010, provisions for product returns were $90.5 million, $88.8 million, and $69.8 million or 2%, 2% and 2% respectively, of net product sales. Historically, actual returns have not varied significantly from the reserves provided.

(iii) Income Taxes In accounting for uncertainty in income taxes, management is required to develop estimates as to whether a tax benefit should be recognized in the consolidated financial statements, based on whether it is more likely than not that the technical merits of the position will be sustained based on audit by the tax authorities. The measurement of the tax benefit recognized in the consolidated financial statements is based upon the largest amount of tax benefit that, in management's judgment, is greater than 50% likely to be realized based on a cumulative probability assessment of the possible outcomes. In accounting for income tax uncertainties, management is required to make judgments in the determination of the unit of account, the evaluation of the facts, circumstances and information in respect of the tax position taken, together with the estimates of amounts that the Company may be required to pay in ultimate settlement with the tax authority.

Shire operates in numerous countries where its income tax returns are subject to audit and adjustment by local tax authorities. As Shire operates globally, the nature of the uncertain tax positions is often very complex and subject to change and the amounts at issue can be substantial. Shire develops its cumulative probability assessment to measure uncertain tax positions using internal expertise, experience and judgment, together with assistance from professional advisors. Original estimates are refined as additional information becomes known. For example, in the year to December 31, 2012 the Company released certain provisions for uncertain tax positions totaling $14.2 million, primarily following the conclusion of prior year audits: these releases were partially offset by the recognition of additional provisions for uncertain tax positions of $20.9 million in relation to ongoing compliance management for current and prior years.

Any outcome upon settlement that differs from the recorded provision for uncertain tax positions may result in a materially higher or lower tax expense in future periods, which could significantly impact the Company's results of operations or financial condition. However, the Company does not believe it is possible to reasonably estimate the potential impact of any such change in assumptions, estimates or judgments and the resultant change, if any, in the Company's provision for uncertain tax positions, as any such change is dependent on factors such as future changes in tax law or administrative 72 -------------------------------------------------------------------------------- practice, the amount and nature of additional taxes which may be asserted by the taxation authorities, and the willingness of the relevant tax authorities to negotiate a settlement for any such position.

At December 31, 2012 the Company recognized a liability of $278.8 million for total unrecognized tax benefits (2011: $265.5 million) and had accrued $119.6 million (2011: $114.5 million) for the payment of interest and penalties. The Company is required in certain tax jurisdictions to make advance deposits to tax authorities on receipt of a tax assessment. These payments are either offset against the income tax liability or establish an income tax receivable but do not reduce the provision for unrecognized tax benefits.

The Company has significant deferred tax assets due to various tax attributes, including net operating losses ("NOLs"), tax credits (from Research and Development and Investment Tax Credits) principally in the Republic of Ireland, the US, Belgium, Germany and the UK. At December 31, 2012 the Company had deferred tax liabilities of $740 million (2011: $714 million; 2010: $433 million) and gross deferred tax assets of $764 million (2011: $667 million; 2010: $569 million), against which the Company had recorded valuation allowances of $269 million (2011: $212 million; 2010: $200 million).

The realization of these assets is not assured and is dependent on the generation of sufficient taxable income in future periods. Management is required to exercise judgment in determining whether it is more likely than not that it would realize these deferred tax assets. Where there is an expectation that on the balance of probabilities there will not be sufficient taxable profits to utilize these tax attributes a valuation allowance is held against these deferred tax assets. If actual events differ from management's estimates, or to the extent that these estimates are adjusted in the future, any changes to the valuation allowance could significantly impact the Company's financial condition and results of operations.

(iv) Litigation and legal proceedings The Company has a number of lawsuits pending. The Company's principal pending legal and other proceedings are disclosed in ITEM 3: Legal Proceedings and Note 19, "Commitments and Contingencies, Legal proceedings" to the consolidated financial statements set forth in this Annual Report on Form 10-K. 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 during each accounting period as additional information becomes known. In instances where the Company is unable to develop a reasonable estimate of loss, no loss contingency provision is recorded at that time. As information becomes known a loss contingency provision is recorded when a reasonable estimate can be made. The estimates are reviewed quarterly and the estimates are changed when expectations are revised. An outcome that deviates from the Company's estimate may result in an additional expense or release in a future accounting period. At December 31, 2012 provisions for litigation losses, insurance claims and other disputes totaled $130.5 million (December 31, 2011: $36.9 million; 2010: $33.8 million).

The outcomes of these proceedings are not always predictable and can be affected by various factors. For those legal and other proceedings for which it is considered at least reasonably possible that a loss has been incurred, the Company discloses the possible loss or range of possible loss in excess of the recorded loss contingency provision, if any, where such excess is both material and estimable. The estimation of the likelihood, amount and range of any loss arising from these proceedings requires significant judgment. Any revisions in the Company's estimates, or outcomes upon settlement that deviate from the Company's best estimate may result in an additional or lesser expense in a future accounting period, which could materially impact the Company's financial condition or results of operations.

(v) Contingent consideration receivable from product divestments Consideration receivable by the Company on the divestment of product rights typically includes up-front receipts and/or milestones and royalties which are contingent on the outcome of future events (with such milestones and royalties being, for example, based upon the future sales performance of the divested product). Contingent consideration occasionally represents a significant proportion of the economic value receivable by the Company for a divested product. In these situations the Company initially recognizes this contingent consideration as an asset at its divestment date fair value, with re-measurement of this asset to its then current fair value at subsequent balance sheet dates.

At December 31, 2012 the Company has contingent consideration assets of $38.3 million (2011: $37.8 million; 2010: $61.0 million), related to the divestment of DAYTRANA to Noven in October 2010. The fair value of this contingent consideration receivable has been estimated using the income approach (using a discounted cash flow method). This discounted cash flow approach uses significant unobservable Level 3 inputs (as defined in US GAAP) including: forecast future relevant sales of the divested product; the number of years over which such sales will be generated; the relevant contractual royalty rates associated with such sales; an appropriate discount rate to be applied in calculating the present value of forecast future cash inflows; and assumed weightings applied to differing revenue scenarios used to derive a probability weighted fair value. Significant judgment has been employed by the Company in developing these estimates 73-------------------------------------------------------------------------------- and assumptions, both at the date of divestment and in developing assumptions in subsequent periods. If actual events differ from management's estimates, or to the extent that these estimates are adjusted in the future, the Company's financial condition and results of operations could be affected in the period of any such change of estimate.

(vi) Contingent consideration payable Contingent consideration payable represents the fair value of future amounts the Company may be required to pay in conjunction with the FerroKin and Pervasis business combinations and the license acquired from Mt Sinai. The amount of consideration ultimately payable under these arrangements is dependent on the achievement of certain future development, regulatory and sales milestones and/or the level of future royalties payable for the relevant licensed product.

The fair value of the Company's contingent consideration payable at December 31, 2012 was $136.4 million (December 31, 2011: $nil).

The Company re-measures its contingent consideration payable to fair value each accounting period. Any changes to the fair value of contingent consideration payables in respect of the FerroKin and Pervasis business combinations is recorded to integration and acquisition costs in the Company's consolidated income statement. Any changes to the fair value of contingent consideration payable in respect of the license acquired from Mt Sinai is recorded as an increase / (decrease) to the associated intangible asset, with a prospective adjustment to intangible asset amortization in periods subsequent to any such change.

The Company estimates the fair value of contingent consideration payable using the income approach, based on a discounted cash flow method. The discounted cash flow method uses significant unobservable Level 3 inputs (as defined under US GAAP), including: the probability of, and period in which, the relevant milestone event is expected to be achieved; the discount rate to be applied in calculating the present value of the relevant milestone or royalty; and the amount of royalties payable based on forecast net sales of the relevant product.

Significant judgment is employed by the Company in developing these fair values estimates. If actual events differ from management's estimates or to the extent that these estimates are adjusted in the future, the Company's financial condition and results of operations could be materially affected in the period of any such change of estimate.

Recent accounting pronouncements update See Note 2(x) to the consolidated financial statements contained in ITEM 15: Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on the Company's financial condition, results of operations and cash flows.

74 --------------------------------------------------------------------------------Financial Information Relating to the Shire IAS Trust The results of operations and the financial position of the IAS Trust are included in the Consolidated Financial Statements of the Company. An explanation of the IAS Trust is included in ITEM 5: Market for Registrant's common equity, related stockholder matters and issuer purchases of equity securities of this Annual Report. Separate, audited financial statements of the IAS Trust are included in ITEM 15: Exhibits and Financial Statement Schedules of this Annual Report.

For the year to December 31, 2012 the IAS Trust recorded income before tax of $81.5 million (2011: $67.6 million; 2010: $58.3 million). This income reflected dividends received on the Income Access Share.

At December 31, 2012 the IAS Trust had total equity of $nil. In future periods, to the extent that dividends are unclaimed on the expiry of dividend checks, or to the extent they are returned unpresented, the IAS Trust will record a liability for these unclaimed dividends.

The movements in cash and cash equivalents of the IAS Trust consist of dividends received on the Income Access Share, (2012: $81.5 million, 2011: $67.6 million; 2010: $58.3 million), and distributions made on behalf of Shire to shareholders (2012: $81.5 million, 2011: $67.6 million; 2010: $58.3 million).

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