On August 3, 2017 Shire plc (Shire) (LSE: SHP, NASDAQ: SHPG) reported unaudited results for the three months ended June 30, 2017 (Press release, Shire, AUG 3, 2017, View Source [SID1234520009]). Schedule your 30 min Free 1stOncology Demo! Flemming Ornskov, M.D., M.P.H., Shire Chief Executive Officer, commented:
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"During the second quarter, we delivered strong top-line growth of 7% on a pro forma basis, generating product sales of $3.6 billion. Our Immunology franchise grew by 18%, and we saw significant contributions across our broad and diverse portfolio. Shire remains ahead of schedule to deliver at least $700 million in cost synergies from the Baxalta integration by Year 3. The Q2 performance resulted in strong operating cash flow of $1.2 billion and enabled us to reduce Non GAAP net debt by $880 million in the quarter.
"We also continue to drive the late-stage clinical pipeline. In Q2 we announced positive topline data from our Phase 3 pivotal trial of SHP643 in HAE, and anticipate submission of the BLA in late 2017 or early 2018. MYDAYIS, a once-daily treatment for patients with ADHD, received US FDA approval and will be launched in September.
"We are at an exciting inflection point, with both our rare disease and neuroscience businesses performing strongly and each having significant growth potential over the coming years. The strength and scale of our business provides us with the opportunity to further optimize our franchise portfolio – one of our key priorities communicated earlier this year. By year end, we expect to complete a formal evaluation of the full range of strategic options for the neuroscience franchise, including the potential for its independent public listing.
"As we enter the second half of 2017, we are focused on generating strong organic growth while continuing to deliver on our key priorities – launching more than 80 products globally by leveraging our expanded commercial platform, progressing our late-stage pipeline, integrating Baxalta, and paying down debt. We have updated our 2017 full year guidance and remain very confident about Shire’s long-term prospects."
Financial Highlights Q2 2017(1) Growth(1) Non GAAP CER(1)(2)
Product sales $3,592 million +55% +56%
Product sales excluding legacy Baxalta $1,882 million +7%
Total revenues $3,746 million +54% +56%
Operating income from continuing operations $399 million +315%
Non GAAP operating income(2) $1,492 million +53% +54%
Net income margin(3)(4) 6% 13ppc
Non GAAP EBITDA margin(2)(4) 43% 1ppc
Net income $240 million N/M
Non GAAP net income(2) $1,135 million +47%
Diluted earnings per ADS(5) $0.79 N/M
Non GAAP diluted earnings per ADS(2)(5) $3.73 +10% +11%
Net cash provided by operating activities $1,223 million +107%
Non GAAP free cash flow(2) $1,064 million +130%
(1) Results include Baxalta Inc. (Baxalta) (acquired on June 3, 2016), unless otherwise noted. Percentages compare to equivalent 2016 period.
(2) The Non GAAP financial measures included within this release are explained on pages 28 – 29, and are reconciled to the most directly comparable financial measures prepared in accordance with US GAAP on pages 22 – 24.
(3) US GAAP net income as a percentage of total revenues.
(4) Percentage point change (ppc).
(5) Diluted weighted average number of ordinary shares 913 million.
Product sales growth
Delivered product sales growth of 55% with the inclusion of legacy Baxalta sales.
Achieved combined pro forma product sales growth of 7%; legacy Shire product sales growth of 7% and legacy Baxalta pro forma product sales growth of 8%.
Strong demand for our immunology products delivered 18% pro forma sales growth, with significant contributions from our subcutaneous immunoglobulin portfolio as well as GAMMAGARD LIQUID and our albumin products.
Earnings growth
Generated Non GAAP earnings per ADS of $3.73, underscoring continued focus on commercial excellence and operating efficiency.
Continued to progress Baxalta integration, while delivering $400 million in cost synergies in year 1 – exceeding our target of $300 million – which contributed to a Non GAAP EBITDA margin of 43% for the quarter; on-track to achieve at least $700 million in synergies by year 3.
Strong cash flow
Strong operating cash flow enabled $880 million reduction in Non GAAP net debt since March 31, 2017; remain on-track to achieve our year-end debt target.
Product and Pipeline Highlights
Regulatory updates
Received U.S. Food and Drug Administration (FDA) approval of MYDAYIS, a new once-daily treatment option for symptom control in Attention Deficit Hyperactivity Disorder (ADHD) patients 13 years and older.
Granted European Union (EU) Conditional Marketing Authorization for NATPAR (Parathyroid Hormone) for the treatment of patients with Chronic Hypoparathyroidism.
Received European Medicines Agency (EMA) validation of VEYVONDI [von Willebrand factor (Recombinant)] Marketing Authorization Application for treatment of von Willebrand Disease (VWD).
Submitted Investigational New Drug (IND) application to FDA for gene therapy candidate SHP654 for the treatment of hemophilia A.
Clinical and business development updates
Reported positive topline data for SHP643 (lanadelumab), which was acquired with Dyax Corp. (Dyax), an investigational treatment that reduced Hereditary Angioedema (HAE) monthly attack rate by 87% versus placebo in a Phase 3 26-week pivotal trial.
Entered into an agreement with Parion Sciences to develop and commercialize SHP659 (formerly known as P-321), an investigational epithelial sodium channel (ENaC) inhibitor for the potential treatment of Dry Eye Disease in adults.
Expanded broad antibody research platform through license agreement with Novimmune S.A. to develop and commercialize an innovative, differentiated bi-specific antibody in pre-clinical development for the treatment of hemophilia A and hemophilia A patients with inhibitors.
FINANCIAL SUMMARY – SECOND QUARTER 2017 COMPARED TO SECOND QUARTER 2016
Revenues
Product sales increased 55% to $3,592 million (Q2 2016: $2,322 million), primarily due to the inclusion of a full quarter of legacy Baxalta sales of $1,710 million in Q2 2017.
Product sales excluding legacy Baxalta increased 7% primarily due to growth from our Internal Medicine franchise, up 15%, as well as sales from our Ophthalmology franchise of $57 million.
Royalties and other revenues increased 44% to $154 million, as Q2 2017 benefited from a full quarter of additional revenue acquired with Baxalta, primarily related to contract manufacturing activities.
Operating results
Operating income increased 315% to $399 million (Q2 2016: $96 million), primarily due to the inclusion of a full quarter of Baxalta operating income and higher revenue from our Internal Medicine franchise, partially offset by higher amortization of acquired intangible assets and higher costs relating to licensing arrangements.
Non GAAP operating income increased 53% to $1,492 million (Q2 2016: $972 million), primarily due to the inclusion of a full quarter of Baxalta operating income and higher revenue from legacy Shire products.
Non GAAP EBITDA margin as a percentage of total revenues increased to 43% (Q2 2016: 42%), primarily due to lower research and development (R&D) and selling, general and administrative (SG&A) expenditures as a percentage of revenues, partially offset by a lower Non GAAP gross margin, primarily due to the inclusion of a full quarter of lower margin product franchises acquired with Baxalta.
Earnings per share (EPS)
Diluted earnings per American Depositary Shares (ADS) increased to $0.79 (Q2 2016: diluted losses per ADS of $0.71), primarily due to higher operating income due to the inclusion of a full quarter of Baxalta income and the impact of lower losses from discontinued operations related to the divested Dermagraft business.
Non GAAP diluted earnings per ADS increased 10% to $3.73 (Q2 2016: $3.38), as higher Non GAAP operating income more than offset the impact of additional shares issued as consideration for the Baxalta transaction.
Cash flows
Net cash provided by operating activities increased 107% to $1,223 million (Q2 2016: $591 million), primarily due to strong cash receipts from higher sales and operating profitability, partially offset by the timing of payments of accounts payable and other accruals.
Non GAAP free cash flow increased 130% to $1,064 million (Q2 2016: $463 million), driven by the growth in net cash provided by operating activities noted above, partially offset by an increase of $51 million in capital expenditures, primarily related to our continued investment in manufacturing operations.
Debt
Non GAAP net debt at June 30, 2017 decreased $1,143 million since December 31, 2016, to $21,296 million (December 31, 2016: $22,439 million). The decrease was primarily due to a $1,416 million net cash repayment of debt, partially offset by a lower cash balance. Non GAAP net debt represents aggregate long and short term borrowings of $21,209 million, and capital leases of $351 million, partially offset by cash and cash equivalents of $264 million.
OUTLOOK
Following the strong performance in the first half of the year, we are updating our guidance for 2017.
The guidance incorporates accelerated synergy capture as well as an updated view on our product sales, primarily due to a new generic LIALDA competitor. We have also revised our depreciation estimate to be $450 – $500 million, based on updates resulting from the Baxalta integration, and we have lowered our capital expenditure forecast to $800 – $900 million.
Non GAAP EPS has been upgraded by raising the midpoint of our guidance range by 10 cents to $15.00, driven by cost discipline and accelerated synergy capture.
The diluted earnings per ADS forecast assumes a weighted average number of 914 million fully diluted ordinary shares outstanding for 2017.
Our US GAAP diluted earnings per ADS outlook has been updated to reflect ongoing integration activities, which has accelerated the recognition of synergies, and the change in fair value of contingent consideration for SHP643 (lanadelumab) resulting from the positive topline Phase 3 results.
Full Year 2017 US GAAP Outlook Non GAAP Outlook(1)
Total product sales $14.3 – $14.6 billion $14.3 – $14.6 billion
Royalties & other revenues $600 – $700 million $600 – $700 million
Gross margin as a percentage of total revenue(2) 67.5% – 69.5% 74.5% – 76.5%
Combined R&D and SG&A $5.3 – $5.5 billion $4.9 – $5.1 billion
Net interest/other $500 – $600 million $500 – $600 million
Effective tax rate ~7% 16% – 17%
Diluted earnings per ADS(3) $5.65 – $6.05 $14.80 – $15.20
(1) For a list of items excluded from Non GAAP Outlook, refer to pages 28 – 29 of this release.
(2) Gross margin as a percentage of total revenues excludes amortization of acquired intangible assets.
(3) See page 24 for a reconciliation between US GAAP diluted earnings per ADS and Non GAAP diluted earnings per ADS.
RECENT DEVELOPMENTS
Corporate Strategy
Shire to assess strategic options for its Neuroscience franchise
With the acquisition and integration of Baxalta, Shire has solidified its leadership position in rare diseases with an unparalleled inline portfolio, innovative pipeline, and global commercial infrastructure. As part of the Board‘s ongoing commitment to optimize Shire’s portfolio and strategic focus, Shire is assessing strategic options for our Neuroscience franchise to derive even greater value from this franchise. These options may include the independent public listing of the Neuroscience franchise. Shire intends to complete this strategic review by year end.
Business Development
Shire enters into a licensing agreement for Novimmune bi-specific antibody
On July 18, 2017, Shire entered into a licensing agreement with Novimmune S.A. The license grants Shire exclusive worldwide rights to develop and commercialize an innovative, bi-specific antibody in pre-clinical development for the treatment of hemophilia A and hemophilia A patients with inhibitors.
Products
FIRAZYR for the treatment of HAE in Japan
On July 6, 2017, Shire submitted a Japanese New Drug Application to the Pharmaceutical and Medical Devices Agency in Japan for the treatment of HAE.
VEYVONDI for the treatment of adults affected by VWD
On June 22, 2017, Shire announced that the EMA validated the Marketing Authorization Application for VEYVONDI to prevent and treat bleeding episodes and peri-operative bleeding in adults (age 18 and older) diagnosed with VWD.
MYDAYIS for the treatment of ADHD
On June 20, 2017, Shire announced that the FDA has approved MYDAYIS (mixed salts of a single-entity amphetamine product), a once-daily treatment comprised of three different types of drug-releasing beads for patients aged 13 years and older with ADHD.
INTUNIV for the treatment of ADHD in Japan
On May 29, 2017, Shire’s partner in Japan, Shionogi & Co., Ltd, launched INTUNIV for the treatment of ADHD in children and adolescents from 6 to 17 years old.
Pipeline
SHP654 for the treatment of hemophilia A
On July 6, 2017, Shire announced the submission of an IND application to the FDA for SHP654, an investigational factor VIII (FVIII) gene therapy for the treatment of hemophilia A.
SHP643 for the treatment of HAE
On May 18, 2017, Shire announced positive topline Phase 3 results for the HELP Study, which evaluated the efficacy and safety of subcutaneously administered lanadelumab in patients 12 years of age or older with HAE. The study met its primary endpoint and all secondary endpoints.
SHP647 for the treatment of ulcerative colitis
On May 17, 2017, Shire announced the publication of positive Phase 2 results for the TURANDOT Study. The study met its primary endpoint, demonstrating significantly greater remission rates in patients receiving the anti-MAdCAM antibody. Shire continues to work towards the initiation of a pivotal Phase 3 trial for SHP647 in the second half of 2017.
SHP680 for the treatment of multiple neurological conditions
Shire is advancing clinical development of SHP680, targeting indications for multiple neurological conditions with high unmet need. SHP680 is a new chemical entity prodrug of d-amphetamine, which has previously been studied in Phase 1 clinical trials, demonstrating a unique PK profile. It belongs to a class of molecules with an established and well understood safety profile.
Board Changes
In accordance with Shire’s normal succession planning, the Company announces that the following Non-Executive Directors will retire from the Board with effect from the conclusion of the 2018 Annual General Meeting ("AGM"):
William M. Burns, Senior Independent Director
David Ginsburg, Chairman of the Science & Technology Committee
Anne Minto, Chairman of the Remuneration Committee
Al Stroucken, Non-Executive Director, will assume the position of Chairman of the Remuneration Committee effective August 3, 2017. Anne Minto will continue to serve as a member of the Remuneration Committee to enable a period of transition until her retirement from the Board. Anne will fully support Al in the shareholder consultation process ahead of the publication of the new Directors’ Remuneration Policy that will be put forward for shareholder approval at the 2018 AGM. The Board, supported by the Nomination & Governance Committee, will continue to evaluate Board and committee membership, including succession plans for the roles of Senior Independent Director and Chairman of the Science & Technology Committee, and will announce further changes once finalized.
Dividend
In respect of the six months ended June 30, 2017, the Board resolved to pay an interim dividend of 5.09 U.S. cents per Ordinary Share (2016: 4.63 U.S. cents per Ordinary Share).
Dividend payments will be made in Pounds Sterling to holders of Ordinary Shares and in U.S. Dollars to holders of ADSs. A dividend of 3.85(1) pence per Ordinary Share (2016: 3.51 pence) and 15.27 U.S. cents per ADS (2016: 13.89 U.S. cents) will be paid on October 20, 2017, to shareholders on the register as of the close of business on September 8, 2017.
Holders of Ordinary Shares are notified that, in order to receive UK sourced dividends via Shire’s Income Access Share arrangements ("IAS Arrangements"), they need to have submitted a valid IAS Arrangements election form to the Company’s Registrar, Equiniti, by no later than 5pm (BST) on September 22, 2017. Holders of Ordinary Shares are advised that:
any previous elections made using versions of the IAS Arrangements election form in use prior to February 16, 2016, and any elections deemed to have been made prior to April 28, 2016, are no longer valid; and
if they do not elect, or have not elected using the newly formatted IAS Arrangements election forms published on or after February 16, 2016, to receive UK sourced dividends via Shire’s IAS Arrangements, their dividends will be Irish sourced and therefore incur Irish dividend withholding tax, subject to applicable exemptions.