7817 Annual Report 2009.qxd - Shire

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84 Shire plc Annual Report and Accounts 2009Notes to the consolidated financial statements In millions of US dollars, except where indicated3 CRITICAL ACCOUNTING ESTIMATES continuedShire’s estimate of the level of inventory in the distribution channel is based on product-by-product inventory data provided by wholesalers, third-partyprescription data and, for some product return provisions, market research of retail pharmacies.Returns reserves for new products generally require a higher level of estimation than estimates for established products. For shipments made tosupport the commercial launch of a new product (which can include guaranteed sales) the Group’s policy is to defer recognition of the sales revenueuntil there is evidence of end-patient acceptance of the new product (primarily through third-party prescription data). For shipments after launch understandard terms (i.e., not guaranteed sales), the Group’s initial estimates of sales return accruals are primarily based on the historical sales returnsexperience of similar products shortly after launch. Once sufficient historical data on actual returns of the product are available, the returns provisionis based on this data and any other relevant factors as noted above. In the year to December 31, 2009 the Group launched INTUNIV, for the treatmentof ADHD in children and adolescents in the US. The Group recognized revenue of $5.4 million in 2009 and at December 31, 2009 had recordeddeferred revenue on the balance sheet representing gross sales of $38.8 million relating to launch shipments of INTUNIV.The accrual estimation process for product returns involves in each case a number of interrelating assumptions, which vary for each combinationof 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 Group’s financial condition or results of operations.At the balance sheet date, provisions for product returns were $62.7 million in 2009, $47.1 million in 2008 and $39.5 million in 2007, or 2%, 2%and 2%, respectively, of net product sales. Historically, actual returns have not varied significantly from the reserves provided.(iv) Income taxesIn accounting for uncertainty in income taxes, management is required to develop estimates as to whether a tax benefit should be recognized in theconsolidated financial statements, based on whether it is more likely than not that the technical merits of the position will be sustained based on auditby the tax authorities. The measurement of the tax benefit recognized in the consolidated financial statements is based upon the largest amountof tax benefit that, in management’s judgement, is greater than 50% likely to be realized based on a cumulative probability assessment of the possibleoutcomes. In accounting for income tax uncertainties, management is required to make judgements in the determination of the unit of account, theevaluation of the facts, circumstances and information in respect of the tax position taken, together with the estimates of amounts that the Group maybe 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. Because Shire operatesglobally, the nature of the uncertain tax positions is often very complex and subject to change and the amounts at issue can be substantial. Shiredevelops its cumulative probability assessment of the measurement of uncertain tax positions using internal expertise, experience and judgement,together with the assistance from professional advisors. Original estimates are refined as additional information becomes known. For example, duringthe year to December 31, 2009 the Group recognized additional interest expense of $21.3 million on its provision for uncertain tax positions followingthe receipt of new information on the amount of interest that may be payable upon settlement of the relevant tax position.Any outcome upon settlement that differs from the recorded provision for uncertain tax positions may result in a materially higher or lower tax expensein future periods, which could significantly impact the Group’s results of operations or financial condition. However, Shire does not believe it possible toreasonably estimate the potential impact of any such change in assumptions, estimates or judgements and the resultant change, if any, in our provisionfor uncertain tax positions, as any such change is dependent on factors such as changes in tax law or administrative practice, the amount and natureof additional taxes which may be asserted by the taxation authorities, and the willingness of the relevant tax authorities to negotiate a settlement to anysuch position.At December 31, 2009 the Group recognized a liability of $254.0 million for total unrecognized tax benefits (2008: $228.7 million) and had accrued$111.5 million (2008: $76.2 million) for the payment of interest and penalties. The Group is required in certain tax jurisdictions to make advance depositsto tax authorities on receipt of a tax assessment. These payments are offset against the income tax liability but do not reduce the provision forunrecognized tax benefits.The Group has significant deferred tax assets due to various tax attributes including, net operating losses (‘NOLs’), tax credits (from Research andDevelopment, Investment Tax Credits and Alternative Minimum Tax) principally in the Republic of Ireland, the US, Germany and the UK. The realizationof these assets is not assured and is dependent on the generation of sufficient taxable income in future periods. Management is required to exercisejudgement in determining whether it is more likely than not that it would realize these deferred tax assets, based upon the availability of prudent andfeasible tax planning strategies and estimates of future taxable income in the various jurisdictions in which these NOLs and other tax attributes exist.Where there is an expectation that on the balance of probabilities there will not be sufficient taxable profits to utilize these tax attributes a valuationallowance is held against these deferred tax assets. If actual events differ from management’s estimates, or to the extent that these estimates areadjusted in the future, any changes to the valuation allowance could significantly impact the Group’s financial condition and results of operations.At December 31, 2009, the Group had deferred tax liabilities of $448 million and gross deferred tax assets of $515 million, against which the Grouphad recorded valuation allowances of $149 million.At December 31, 2008, the Group had deferred tax liabilities of $504 million and gross deferred tax assets of $472 million, against which the Grouphad recorded valuation allowances of $119 million.At December 31, 2007, the Group had deferred tax liabilities of $510 million and gross deferred tax assets of $587 million, against which the Grouphad recorded valuation allowances of $105 million.
Shire plc Annual Report and Accounts 2009853 CRITICAL ACCOUNTING ESTIMATES continued(v) Litigation and legal proceedingsThe Group has a number of lawsuits pending that relate to intellectual property infringement claims, and in September 2009 the Group receiveda subpoena from the US Department of Health and Human Services Office of the Inspector General seeking production of documents related to thesales and marketing of ADDERALL XR, DAYTRANA and VYVANSE, see Note 24 for further details. Shire records a loss contingency provision forprobable losses when management is able to reasonably estimate the loss. Where the estimated loss lies within a range and no particular amountwithin that range is a better estimate than any other amount, the minimum amount is recorded. In other cases management’s best estimate of the lossis recorded. These estimates are developed substantially earlier than the ultimate loss is known, and the estimates are refined each accounting period,as additional information becomes known. Best estimates are reviewed quarterly and estimates are changed when expectations are revised. Anyoutcome upon settlement that deviates from Shire’s best estimate may result in an additional or lesser expense in a future accounting period, whichcould materially impact the Group’s financial condition and results of operations.On November 5, 2008 the Group announced that it had successfully settled all aspects of the TKT appraisal rights litigation with all parties. Shire paidthe same price of $37 per share originally offered to all TKT shareholders at the time of the July 2005 merger, plus interest. The settlement representsa total payment of $567.5 million, representing consideration at $37 per share of $419.9 million and an interest cost of $147.6 million. Prior to reachingthis settlement, the Group accrued interest based on a reasonable estimate of the amount that may be awarded by the Court to those formerTKT shareholders who requested appraisal. This estimate of interest was based on Shire’s cost of borrowing. Between the close of the merger andNovember 5, 2008 the Group applied this interest rate on a quarterly compounding basis to the $419.9 million of consideration to calculate its provisionfor interest.Upon reaching agreement in principle with all the dissenting shareholders, the Group determined that settlement had become the probable mannerthrough which the appraisal rights litigation would be resolved. Under current law, (although not applicable in this case because the merger wasentered into before the relevant amendment to the law became effective) the court presumptively awards interest in appraisal rights cases at astatutory rate that is five percentage points above the Federal Reserve discount rate (as it varies over the duration of the case). In connection with thesettlement, the Group agreed to an interest rate that approximates to this statutory rate. Based on the settlement, the Group amended the method ofdetermining its interest provision to reflect this revised manner of resolution, and recorded additional interest expense of $73.0 million in its consolidatedfinancial statements for the year to December 31, 2008 on reaching settlement with the dissenting shareholders.4 BUSINESS COMBINATIONSBusiness combinations completed subsequent to January 1, 2009EQUASYM IR and XLOn March 31, 2009 the Group acquired the worldwide rights (excluding the US, Canada and Barbados) to EQUASYM IR and XL for the treatmentof ADHD from UCB Pharma Limited (‘UCB’) for cash consideration of $72.8 million. Included within the recognized purchase price for the acquisitionis further consideration of $18.2 million, which may become payable in 2010 and 2011 if certain sales targets are met. This acquisition has broadenedthe scope of Shire’s ADHD portfolio and facilitated immediate access to the European ADHD market as well as providing Shire the opportunity to enteradditional markets around the world.The acquisition of EQUASYM IR and XL has been accounted for as a business combination. The purchase price has been allocated on a preliminarybasis to the currently marketed products acquired ($73.0 million), IPR&D ($5.5 million), other liabilities ($0.7 million) and goodwill ($13.2 million).Business combinations completed prior to January 1, 2009Jerini acquisitionOn July 3, 2008 the Group announced that it was launching a voluntary public takeover offer for all outstanding shares in Jerini, a German corporation,at a price of EUR 6.25 per share. By August 6, 2008 the Group had acquired 80.1% of the voting interests in Jerini for a cash consideration of$456.3 million. By December 31, 2008 the Group had acquired 98.6% of the voting interests in Jerini for a cash consideration of $556.5 million,represented by Jerini shares, ($539.8 million), the cash cost of cancelling Jerini stock options ($9.4 million) and direct costs of acquisition ($7.3 million).By December 31, 2009 the Group had acquired the rights to the remaining 1.4% of the voting interests in Jerini for additional cash consideration of$10.5 million including direct acquisition costs, such that the Group owned 100% of Jerini. The acquisition added Jerini’s hereditary angioedema (’HAE’)product FIRAZYR to Shire’s portfolio.The acquisition of Jerini has been accounted for as a purchase business combination. The assets acquired and the liabilities assumed from Jerini havebeen recorded at the date of acquisition at their fair value. Consolidated financial statements and reported results of operations of Shire issued afterthe acquisition of a majority holding reflect these values, with the results of Jerini included from August 1, 2008, for convenience purposes, in theconsolidated statements of operations. Between acquiring the Group’s controlling voting interest in early August 2008 and December 31, 2009, theGroup acquired the remaining voting interests totaling 19.9% of Jerini’s issued share capital. The additional voting interests have been accounted foras step-acquisitions using the purchase method of accounting.The purchase price was allocated on a preliminary basis to the fair value of assets acquired and liabilities assumed. The final fair values of assetsacquired and liabilities assumed was determined in July 2009, and the adjustment in the second quarter of 2009 to recognize assumed liabilitiesis detailed in section (c) below.
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