Shire Beats, Ups Earnings Outlook - Analyst Blog

Shire plc (SHPGY) posted earnings of $1.16 per American Depositary Share (ADS) during the third quarter of 2010, beating the Zacks Consensus Estimate of 98 cents and the year-ago earnings of 49 cents per ADS. Higher revenues accounted for the strong performance.

Revenues

Quarterly revenues increased 31% year over year to $874 million, well above the Zacks Consensus Estimate of $847 million. Increased product sales and higher royalties helped boost revenues.

Product sales went up 32% to $794 million, while royalties increased 27% to $76.5 million. Royalty revenue mainly comprises income earned on the sale of the authorized generic version of Adderall XR, 3TC and Zeffix. During the third quarter, Shire received royalties from Impax Laboratories Inc. (IPXL) for Adderall XR and from GlaxoSmithKline plc (GSK) for 3TC and Zeffix.

Product sales include sales of Vyvanse (up 17% to $151.2 million), Elaprase (up 7% to $96.8 million), Replagal (up 91% to $92.1 million), Lialda (up 16% to 76 million) and Adderall XR (up 41% to $99.7 million). Recently launched Intuniv and Vpriv delivered sales of $37.3 million and $49.5 million, respectively.

Expenses

During the quarter, research and development (R&D) expenses increased 2.9% to $148.5 million. The increase resulted from continued investment in the R&D pipeline.

Selling, general and administrative (SG&A) expenses amounted to $302.4 million, up 13.1%. The costs that Shire incurred to market the recently launched products led to an increase in SG&A expenses.

Outlook

For fiscal 2010, Shire expects earnings of about $4.20 per ADS, up from the previous expectation of $4.00 per ADS, and representing a year-over-year growth of 20%. The guidance includes the financial effect of the company's acquisition of Movetis NV and the divestment of Daytrana. The Zacks Consensus Estimate for 2010 earnings is $4.23 per share.

Gross margin for fiscal 2010 is expected in the range of 86%–87%, in line with the fiscal 2009 margin. Further, following the acquisition of Movetis, Shire expects combined R&D and SG&A expenses to grow slightly above 10% year over year.

The company expects total revenue growth during the fourth quarter to decline from the prior year. Additionally, Adderall XR sales as well as royalty income are expected to be lower in the fourth quarter of 2010, as compared with the year-ago quarter.

For 2011, Shire is anticipating impressive earnings growth. The company reiterated its projected average rate for sales growth in the mid-teens from 2009 through 2015.

Deal Termination

During the third quarter, Shire ended its partnership with Glaxo for the marketing of attention deficit hyperactivity disorder (ADHD) treatment Vyvanse in the United States. Per the terms of the termination agreement, no payment was made or is due to Glaxo since the agreed-upon sales of the drug were not achieved. The termination of the co-promotion agreement is not expected to affect future US sales of Vyvanse.

Shire and Glaxo had entered into a three-year co-promotion agreement for the commercialization of Vyvanse in March 2009 with the aim of improving the drug's recognition and efficacy in treating ADHD adult patients. The two companies had agreed to share profits above an agreed-upon, undisclosed baseline figure.

Glaxo filed a lawsuit against Shire demanding compensation following the termination of the deal. Shire views Glaxo‘s demand for compensation frivolous given that required sales thresholds were not met.

Positive Data

Shire reported positive mid-stage trial data on Vyvanse in patients with residual symptoms of depression following treatment with Forest Laboratories Inc.'s (FRX) Lexapro (escitlopram) for major depressive disorder (MDD).

Shire plans to initiate phase III trials with Vyvanse as adjunctive therapy to primary MDD treatments in mid 2011 following discussions with the regulatory bodies for setting the development program parameters.

Movetis Update

During the third quarter, the company acquired 99.2% of the outstanding shares of Movetis for €19.00 per share (€428 million/$592 million) through a tender offer. The company now plans to wrap up the remaining 0.8%, with the target of having 100% ownership of Movetis by the end of 2010.

We believe the acquisition of Movetis will not only broaden Shire's portfolio with the addition of Resolor (marketed in the EU for the treatment of chronic constipation in women), it will also expand its ex-US business overall.

Shire had noted during the initial announcement of the merger that the deal will start contributing to its revenues immediately after completion of the acquisition, and will be accretive to earnings after 2012.

Our Take

We currently have a Zacks #2 Rank (short-term Buy rating) on Shire. We note that Shire's ADHD franchise is shifting from Adderall XR to Vyvanse, with third quarter sales of the latter up 17%. Additionally, the latest ADHD drug, Intuniv, could position the company well with an incremental commercial opportunity in the children and adolescent group.

Longer term, we have a Neutral recommendation on Shire. We believe that Shire needs to expand its pipeline in order to maintain growth beyond 2015, as there are very few projects to be launched thereafter.

 
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