Shire Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Shire PLC (SHPG)


Q1 2013 Earnings Call

May 02, 2013 8:00 am ET


Eric Rojas - Director of Investor Relations for North America

Flemming Ornskov - Chief Executive Officer, Head of Human Genetic Therapies and Director

Graham C. Hetherington - Chief Financial Officer, Principal Accounting Officer and Director


William Tanner - Lazard Capital Markets LLC, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Liav Abraham - Citigroup Inc, Research Division

Peter Verdult - Morgan Stanley, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Nicolas Guyon-Gellin - Exane BNP Paribas, Research Division

David G. Buck - The Buckingham Research Group Incorporated

James D. Gordon - JP Morgan Chase & Co, Research Division


Good afternoon, ladies and gentlemen, and welcome to the Shire 2013 First Quarter Results Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded.

I am now pleased to hand over to you, Eric Rojas. Please begin your meeting, sir.

Eric Rojas

Great. Thanks. Good morning, and good afternoon, everyone. Thank you for joining us today for Shire's first quarter 2013 financial results. You should have all received our press release and should be viewing our presentation via our website on If you're unable to access the press release or our website, please contact Souheil Salah and our Investor Relations team at +44 1256 894 160, and he will be happy to assist you. Our speakers today are Flemming Ornskov and Graham Hetherington.

Before we begin, I would refer you to Slide 2 of our presentation, and remind you that any statements made during this call, which are not historical statements, will be forward-looking statements and as such, will be subject to risks and uncertainties, which if they materialize can materially affect our results.

Today's agenda is on Slide 3. Flemming will make some opening remarks, and Graham will continue with the financial overview and update Shire's 2013 outlook. And lastly, Flemming will talk about our core strategy and key priorities of the business going forward before opening up the call for your questions. [Operator Instructions] Sarah Elton-Farr and I are happy to follow up with you after the call.

With that, I'll hand over the call over to Flemming.

Flemming Ornskov

Thank you, Eric, and good morning, and good afternoon. It's an honor to be here as Chief Executive Officer of Shire. Two days into the post, I'm very pleased to be leading this great organization, which has such a strong history of grace. It's a new phase in its development, and I can see a very promising future ahead.

I spent the last 4 months learning about the business. We formed our plans for how to move forward, and I look forward to sharing these with you today. Graham will walk you through the first quarter results in a few minutes. I will then explain to you how we are going to drive this business and how you'll see Shire continuing to successfully deliver both good revenue and earnings growth in the years to come. In the past, Shire has delivered growth significantly above the industry levels of mid-single digit, and we intend that this will be the case in the future.

Moving to Slide 5. Our cost strategy to deliver growth will be to focus on developing and marketing innovative specialty medicines to meet significant unmet patient needs.

On Slide #6, you will see I have set 2 key priorities for the organization to ensure we continue our upwards trajectory. Number one, to drive optimum performance from our currently marketed products; and number two, to build our future assets both through R&D and business development.

On Slide 7, you will see how we are going to do this. We will do this through simplifying our business structure, optimizing the commercial execution of our portfolio, driving innovation and focusing on the operating leverage of the business. I will tell you more about our plans after Graham has taken you through the quarter's financials and, not least, the guidance for 2013. Graham?

Graham C. Hetherington

Thank you, Flemming. Good morning, and good afternoon, everyone. I'll be covering a number of items today, and I'll address the following key dynamics. First, the delivery of double-digit earnings growth in the quarter, while increasing our investment in R&D; second, our continued delivery of operating leverage and the underlying cash generation of our business; third, product sales, which grew below our own and your expectations in the quarter. I'll be talking you through how we expect 1% growth in the first quarter to progress to the mid to high single-digit growth we're expecting for the full year. And finally, reiteration of our confidence in delivering earnings growth in line with current consensus earnings expectations for 2013.

On Slide 9, you can see that we've delivered again double-digit earnings growth this quarter. Product sales were up 1% compared against the strong set of comparatives in the first quarter of 2012. Our performance this quarter was held back by commercial challenges currently impacting DERMAGRAFT and REPLAGAL, which we're actively addressing. We also saw the temporary impact of uneven ordering patterns which affected the sales of ELAPRASE in the quarter.

Overall, our portfolio continues to perform well. And while we do have challenges we're addressing, I'm encouraged by the start we've made to the year. You will see an improved rates of product sales growth through the rest of this year as our portfolio continues to deliver growth, and we benefit from an easing of comparatives over the second half of the year.

Royalties and other revenues were down 30% as expected due to lower ADDERALL XR royalties received from Impax. As a result, total revenues were marginally down on 2012 at $1.2 billion. EBITDA was up 9% and non-GAAP earnings per ADS were up 10% to $1.63.

We've noted at the base of the slide our U.S. GAAP operating income, which was down 56% in the quarter due to an impairment of goodwill relating to our Regenerative Medicine business. We've reassessed the likely lifetime sales of DERMAGRAFT. And as a result, U.S. GAAP requires us to recall this impairment charge. Without this charge, we'd have delivered double-digit growth in U.S. GAAP operating income in the quarter.

Turning now to Slide 10 and our product sales performance. As you can see on the Chart, 5 of our top 10 products delivered double-digit sales growth. VYVANSE was up 15% to almost $300 million. While we've seen prescription growth slowed down in recent months, we're putting in place plans to ensure a successful back-to-school season later in the year.

ELAPRASE continues to see the number of patients on therapy grow around the world, and this will be reflected in growth for the rest of the year. The decline in the first quarter was down only to ordering patterns in Latin America, which will unwind in the second quarter.

LIALDA sales were over $100 million, and we exited the first quarter with a market share of around 23%, up nearly 2 percentage points from this time last year. I'd like to take this opportunity to reinforce our confidence in the longevity of this product.

VPRIV was up 14%, as we continue to see growth in the number of patients on therapy. INTUNIV continues to perform well, with U.S. prescriptions up 12%. Volume ships for INTUNIV -- volumes shipped for INTUNIV was slightly impacted by destocking in the retail channel, which reduced net sales by about $6 million. FIRAZYR has again delivered strong growth, up $22 million, as the momentum from its U.S. launch continues.

I'd now like to expand on 3 key factors that have held back total product sales growth this quarter. REPLAGAL was down $20 million, driven primarily by the impact of the timing of orders in Latin America, which should unwind in the second quarter. We were also impacted by the return of competition in the Fabry market in Europe, and we're actively ensuring that REPLAGAL remains competitive in that market. We're still benefiting from continued growth of new naïve patients around the world.

DERMAGRAFT was down $30 million, as sales continued to be impacted by the ongoing restructuring of the sales and marketing team. Whilst we'd lowered our expectations for sales in 2013 and the longer-term growth of DERMAGRAFT has been delayed, we expect the product to return to year-on-year growth in the second half of the year. Reestablishing this growth remains the #1 priority for our Regenerative Medicine business unit.

And finally, ADDERALL XR. Product sales were down $11 million due to lower U.S. prescriptions experienced since their introduction of a new generic competitor in the second quarter last year. Our U.S. market share has remained at just over 5% since its generic launch, and we remain confident that branded ADDERALL XR can continue to compete successfully in its market.

Turning now to Slide 11. You can see that we've delivered significant operating leverage in the first quarter. Even with our increased investment in R&D, our EBITDA margin improved to 34% in the quarter. Combined R&D and SG&A reduced by 6%, with SG&A significantly lower, down 16% on last year. About half of the reduction in SG&A year-on-year reflects the relatively high level of spending we saw in the first quarter of last year, which included higher legal costs and the INTUNIV direct-to-consumer campaign.

We also saw the benefit this quarter of our continued cost management and the flow through of actions we kicked off last year targeted at discretionary non-frontline spend. As you'll see from our guidance, we expect full year SG&A to only be marginally down year-on-year.

Let's take a look at our cash flow on Slide 12. Our business continues to be cash generative, with cash generation of $257 million this quarter after making a payment of $48 million to settle the litigation with Impax. Higher tax and interest payments, which were up $67 million compared to last year, held back our free cash flow this quarter to $113 million. We made upfront payments of $77 million on the acquisition of Lotus tissue repair and Premacure, and purchased $71 million of shares under our $500 million share buyback program. We've now bought back over $220 million of the shares. We ended the quarter with gross cash of nearly $1.5 billion and a net cash position of $0.3 billion. We continue to have a strong and flexible funding position, which enables us to consider growth and value-enhancing transactions, while completing the current share buyback program.

Finally, let's review our full year outlook for 2013 on the next slide. You can see that taking everything together, we're confident in delivering earnings growth in line with current consensus earnings expectations for 2013. For product sales, we now expect growth in the mid to high single digits, which is slightly lower than we've previously guided as a result of a couple of dynamics. First, DERMAGRAFT. We've seen a more pronounced short-term impact from the ongoing sales force reorganization, and sales for the full year will be lower than in 2012. We expect DERMAGRAFT to return to year-on-year growth in the second half.

Second, REPLAGAL. We expect REPLAGAL to recover from its first quarter decline, with full year sales more in line with 2012 levels. Looking forward, we continue to have confidence in good growth for REPLAGAL as the diagnoses and treatments of new Fabry patients continues, and the impact of renewed competition in Europe reduces.

Turning to ELAPRASE. As I explained earlier, we expect the run rate of sales to improve and for the product to post double-digit growth for the full year.

Overall, we expect the rates of growth in total product sales to improve during the next 3 quarters, as our portfolio continues to deliver growth and, importantly, as we benefit from an easing of comparatives over the second half of the year.

To reinforce this last point, if I take just 3 products, REPLAGAL, DERMAGRAFT and ADDERALL XR, in Q4 2012, their combined quarterly product sales was $76 million lower than in Q1 last year.

We continue to expect royalties and other revenues to be 30% to 40% lower in 2013, and our non-GAAP gross margin on product sales will be at a similar level to 2012. We expect low to mid-teen growth in R&D. We're continuing to invest in our pipeline to progress our late stage clinical trials and recently acquired assets.

As a result of lower SG&A in the first quarter, and with enhanced rigor in managing our cost base, we strongly believe we can grow more efficiently. We now expect SG&A for the full year to be marginally lower than 2012. With this, we now expect low single-digit growth of combined R&D and SG&A, which will ensure continued operating leverage for the full year.

Our core effective tax rate remains in the range of 18% to 20%. Taken together, all of these dynamics mean that we remain confident in delivering earnings growth in line with current consensus earnings expectations for 2013.

And with that, I'll hand you back to Flemming.

Flemming Ornskov

Thank you, Graham. For those of you who have followed Shire over the years, you know that Shire has never stood still, has constantly sought to reinvent itself and always emerged stronger. I have found Shire people are talented, tough and determined, and the culture is one of bravery, innovation and, most importantly, focused on delivering results for patients in an ethical manner.

In learning about Shire, I have seen an excellent business model that has delivered consistent growth over the past decade. I can see that the specialty focus has been very successful, and that using this model, Shire has built up leading franchises within patient uses through providing innovative products where need is great.

As we enter the next stage in the company's evolution, we will build on these strengths. We will continue to maximize the valuable assets we have; we will innovate to identify new opportunities that will drive the business in the future; we will work faster and harder to innovate and deliver the growth that will ultimately make Shire into an even stronger, specialty biopharmaceutical business.

So how are we going to do this? Moving to Slide 15. As I said, our strategy will be to focus on delivering and marketing innovative specialty medicines to meet significant unmet patient needs. This is not a dramatic change. It's our sweet spot. And in calling this out, I believe it clarifies and sharpens our direction. It tells you where we will compete and when and what we will be 100% focused on. It takes us back to the basics of what enabled Shire to build and grow in the first place.

Let me emphasize 3 words in this strategy statement: focus, marketing and innovative.

Focus. This is key. I will ensure that everything we do and every resource we have is aligned to delivering profitable growth. We will relentlessly drive execution of results and prioritize our resources. We will only invest in what we believe will generate sustainable growth.

Marketing. We will continue to build brands around medicines that deliver value through meeting patients' unmet needs. We need to be even more custom-oriented and deliver even better results by always remaining compliant.

Innovative. We will continue to innovate. Innovation is in our DNA, and Shire has grown by developing and marketing differentiated and innovative products. Innovation will be core to our pipeline and to the way we approach our marketing. But innovation isn't about increasing R&D spend. Innovation is about ensuring that the products we develop are novel, that they have a competitive profile and that they meet a previously unmet patient need. We will always be on the lookout for innovation that will meet patient needs and it must deliver value to payers. Me-toos are not for me or for anyone at Shire.

Now on Slide 16. I reiterate my 2 clear strategic priorities. Number one is to drive optimum performance from our currently marketed products. From now on, we'll call these our In-Line products. Number two is to build our future assets, both through R&D and business development. This is about our pipeline.

These priorities will be underpinned by a simplification of our business structures, as you can see on Slide 17. The historic structure of 3 autonomous fully integrated division that has served Shire well in the past has started to limit our ability to have a laser focus on commercial execution and has also begun to constrain the choice of new gross driving investment opportunities outside the natural bias of these divisions.

Moving forward, we will have a structure that enables us to deliver the 2 legs of our strategy in the most effective way for Shire today. We will have an In-Line team and a Pipeline team, supported by a single technical operations group and simplified smaller service-providing corporate functions. I will share both the new In-Line and Pipeline leadership teams, which will each be comprised of experts from across Shire. We will ensure strong communication and teamwork between the commercial and R&D teams.

Now to Slide 18. Let me talk first about In-Line. In order to optimize all current commercial opportunities, we will form focused business units with accountability for product sales and marketing strategy. We will have initially 5 of these commercially focused business units, each built around a specialist therapeutic area. The 5 will be: Rare Diseases, comprising our former HGT business products; Neuroscience, comprising the ADHD treatments VYVANSE and INTUNIV; Gastrointestinal diseases; Regenerative Medicine; and Internal Medicine, comprising Shire's products that are profitable, but due to their life cycle stage, may not involve significant promotion apart from the new geographies. These are FOSRENOL, XAGRID and ADDERALL XR.

This new business unit structure will give us scalability and the flexibility to grow into new specialist areas without adding costly new infrastructure. We expect to form new business units as our pipeline assets reach the appropriate stage of development, a critical mass or when new commercial assets are acquired. Examples could be ophthalmology and or hematology as recent investments mature.

This commercially focused business unit structure is a significant move away from the former integrated divisional structure. The business units will be charged with delivering commercial excellence for our current marketed products, and they will develop innovative ways of marketing our products, and that's all they will be focused on. Their goal will be to optimize revenue and our cash generation, which will then be reinvested into either further commercial resourcing or the pipeline for further future growth. The leaders of the business units will comprise the new Shire In-Line leadership team.

We will also be increasing the focus of our In-Line team on effective selling and marketing. We've already added new sales representatives to our teams, selling REPLAGAL in Europe, and we are realigning those selling VYVANSE in the U.S.

Moving to Slide 19. The new Shire pipeline team will ensure we deliver innovation and value for the future to effectively developing and prioritizing our internally as well as our externally sourced development programs. They will be accountable for delivering competitive, innovative products for the business units for commercialization and will include leaders from our R&D, strategy and business development teams.

We will be moving towards establishing a single R&D organization, and we will rebalance our R&D investments to focus on delivery of later stage candidates. In the past few years, the company's R&D spend has been increasingly moving towards early stage assets. We will shift that to later stage development, and will pursue preclinical development primarily in the rare disease space. Our business development team will focus on finding later stage development programs or end market products in our defined specialist areas, and the majority of our R&D resources will be switched to drive forward the promising later stage clinical assets.

On Slide 20, you will see some of the very specific actions that I'll be expecting our In-Line leaders to deliver on, focus on growing sales for rare disease treatments and increasing the competitive markets; identify and operationalize market expansion initiatives in ADHD, and ensure a flawless progressive launch of Elvanse in Europe; continue optimizing the sales performance and profitability of GI and internal medicine products; and return DERMAGRAFT to significant growth.

And on Slide 21, you can see some of the actions that I'll be expecting from our pipeline leaders: bringing additional rigor to the prioritization of our pipeline investments; execute smart business development deals to increase the proportion of late stage assets in our portfolio; and identify new specialty therapy areas, which leverage our strength and where we can compete and win.

Already in 2013, we are investing in creating future value for our shareholders. You've seen that we've made 3 acquisitions in the first 3 months of this year with Lotus Tissue Repair, Premacure and SARcode Biosciences. We have some exciting new assets in new therapeutic areas that promise to bring additional new growth to the Shire portfolio.

Moving to Slide 22. As many of you know, I have specific commercial experience in ophthalmology, and in joining Shire, I discovered experts within the company, too. Two weeks ago, we completed the acquisition of SARcode Biosciences, a deal that I'm particularly excited about. It's a growing market, served by specialist physicians and provides a potentially innovative product lifitegrast for signs and symptoms of dry eye disease, which we anticipate launching as early as 2016 naturally subject to the regulatory process.

Currently, there are no regulatory approved treatments indicated for improving symptoms of dry eye disease, a chronic and debilitating ocular disease affecting approximately 25 million people in the U.S. The worldwide dry eye prescription market was worth approximately $1.5 billion in 2012, and is growing at a compound annual growth rate of 8%.

The Premacure acquisition brings us a Phase II product for the prevention of a rare condition affecting premature babies, which, in severe cases, can lead to blindness. There are potentially 30,000 to 40,000 addressable patients worldwide per year, so this is a significant unmet need.

These acquisitions are a demonstration of our focus on building our research and development pipeline with new, well-differentiated assets to help drive the continued growth of the company. They are also examples of the type of deals that we can pursue more easily given the new realigned structure as they would have fallen outside of the priorities of the former divisions.

Now to Slide 23. As we bring in new prospects, we have to be disciplined in assessing our investments, and we are doing that right now. We have recently completed a review of all our Phase III programs. For example, we recently decided to discontinue the Phase III trial for LDX, VYVANSE in the U.S., in negative symptoms of schizophrenia. We already have strong programs investigating LDX in both binge eating disorder and major depressive disorder, which we are very excited about.

The NSS program did not, however, have the optimal balance of risk and return, and we believe we have other opportunities with stronger business cases for us. Just to be clear, no other Phase III program have been impacted by this review. We will regularly review the assets we're investing in for prudent pipeline management to ensure we are prioritizing the most valuable potential projects.

We have several pipeline milestones through the coming months, as you can see on Slide 24. In particular, the Phase III major depressive disorder data for LDX early next year, and the iron chelating program 602 will report at a similar time.

Turning to Slide 25. Shire's historic sales strengths has been largely based on the U.S. market, with international revenue contributed mainly by the Rare Disease portfolio. So in essence, Shire's recent growth, with the exception of Rare Diseases, has come from operating in the geographical markets, where overall growth rates are slower.

We believe that there are significant new growth opportunities for our existing products in new geographies, such as Asia Pacific. Last month for example, we announced the establishment of a Shire KK, an official subsidiary office in Japan, the second largest pharmaceutical market in the world. This significant step represents Shire's commitment to building a more significant business in Japan. We actually already have 4 products marketed there and flow-through [ph] partnerships, and we have partnerships agreed for the development of LIALDA and VYVANSE. Although our revenues are modest, now at less than $200 million, the potential to grow is significant.

China also represents a promising opportunity for Shire. It's one of the world's largest pharmaceutical markets and there's an increasingly growing specialty market. We recently opened a small R&D office in China, and we launched FOSRENOL through a partnership last summer. We are using this experience to learn about this dynamic and growing market, and we're currently evaluating our options for expanding more of our business into China.

And in Latin America, we also see further growth opportunities. Our business is Brazil is growing substantially. Brazil is now the second largest market in the world for ELAPRASE, behind the U.S., which is making a real difference to the life of Hunter patients in that country.

Brazil is also an important market for REPLAGAL, and more recently, we have launched both FIRAZYR and VPRIV here. Taken as a whole, Brazil is now the fifth largest country for our Rare Disease business and the largest outside the U.S. and major European markets.

VYVANSE was also launched in Brazil in 2010, and the sales are growing as we increased awareness of ADHD in the country.

Now to Slide 26. Shire is a growth story, and I've told you, we will be investing in that growth, in new products, in innovation and in expansion into new markets and geographies. Our new aligned business organization will enable us to be more efficient and to ensure that we continue to manage our costs well, enabling us to invest in our business and drive returns.

Our new structure will remove complexity, unlock new creativity and drive more value. Our new operating philosophy and model will enable us to move fast and continue to be very dynamic, nimble organization that has delivered such impressive growth over the past decade. We will be one company with one philosophy, one uniting strategy and one goal, to grow our business for the benefit of patients and our shareholders.

I will be an active and involved leader, focused on driving growth, productivity and innovation against our clear strategy. We are replacing the former leadership team structure with the new smaller executive committee comprised of myself, Graham Hetherington, our CFO; and Tatjana May as General Counsel. I will chair the new In-Line and Pipeline leadership teams. These will be the engines accountable for driving future growth.

This simple structure will enable us to be more agile, make decisions in a more expedient manner and will reduce duplication. This structure will provide the rigor and focus on the 2 key strategic priorities of the business, optimizing the performance of our In-Line products and building our pipelines through focused R&D and business development.

Importantly, this structure is also scalable to provide for entry into new specialist areas, which leverage our strengths and will bring future growth. And it also gives us the freedom to withdraw more quickly and easily from markets that are not delivering on growth promises or from pipeline projects that do not deliver on our growth objectives.

When will all this happen, you may ask. We begin right away. Key internal talent has already been identified and earmarked for several of the business unit leader roles and the In-Line team, and our R&D and business development leaders are excited about this new structure.

One thing you will quickly learn about me and my style is that I will move quickly when the right route is clear, and I intend to lead Shire rapidly to regain the momentum and growth reputation that has been part of its DNA since day 1. The company has so many qualities, so many opportunities to build on. I'm excited about the opportunities that lie ahead, and I know that 5,000-plus Shire colleagues and employees around the world are ready to respond and continue to grow this company.

We're addressing the short-term dip in product sales growth this quarter by focusing on improving productivity for the balance of the year. We will continue to provide the support for the business to grow, increase the firepower available to our In-Line sales and marketing teams and provide investment for our Pipeline team.

2013 will be a good year for Shire, as we continue to expect earnings to be in line with current consensus expectations. But our sights are set well beyond that. With a clear strategy, a razor-sharp focus on 2 priorities and the talent and the determination within Shire, we will continue to grow and be an exciting company for you to invest in. As I've said earlier, in the past, Shire has delivered growth significantly above the industry levels of mid-single digits, and we intend that this will be the case in future. I look forward to providing you with regular updates on our progress in quarters to come.

Thank you very much. And now let's take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question from the telephone line comes from the line of Bill Tanner from Lazard Capital Markets.

William Tanner - Lazard Capital Markets LLC, Research Division

I have a couple of ones on DERMAGRAFT, one is sort of detailed, and one that is a bigger picture. One, as it relates to the detailed one, Flemming, Graham did mention that the company had reassessed a lifetime DERMAGRAFT potential. Curious as to whether you could provide some color on that. And then as it relates to Slide 18, the Regenerative Medicine bucket, the only asset in there is DERMAGRAFT, and I'm curious if you could comment on what you'd need to see or would you need to see that product recovering before you contemplate adding other assets to that bucket.

Flemming Ornskov

Thank you very much. Great questions. So on the first question about the prospects for DERMAGRAFT, the key priority for me and the team has been to basically stabilize the situation. As you know, when we acquired Advanced BioHealing, we also acquired a number of challenges, particularly in the way sales and marketing was conducted, and we also acquired an OIG investigation. So what we've been focused on is basically replacing most of the sales organization, putting the procedures and policies in place, make sure we're compliant. It has taken a bit longer than we have anticipated. We think this quarter is, so to speak, the nadir that we have called. And whether 90% of the sales force and sales organization and support now in place, I look forward to seeing some growth. The last few weeks, that is in April, have shown that we have increased shipping. But for me, the key thing is to wait a few quarters and then I will have a better assessment of the prospect [ph] for DERMAGRAFT. I have also, together with the executive committee, decided that DERMAGRAFT should be in an individual business unit. It's a separate business model, it's a separate customer group and for now, it's the only product we have. We have one Pipeline product there, VASCUGEL, but we will evaluate -- as we see DERMAGRAFT grow, we will evaluate the need to build that business further or not.


Our next question comes from the line of Keyur Parekh from Goldman Sachs.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

I have 2, if I may, one for Flemming and one for Graham. Flemming, you mentioned kind of the new commercial structure, and kind of what allows you to do is to have a laser focus from a revenue perspective why it's providing smaller service organization. I'm wondering if you might be able to kind of give us some more detail on what you expect that to mean from a financial perspective both on the revenue line and on the cost line. And secondly, Graham, you mentioned kind of you are confident about protecting the exclusivity for LIALDA kind of for a long time to come. I suspect we will get a hearing in the court case against Actavis over the next few weeks. Can you just give us a sense for why you have confidence on the exclusivity for LIALDA going forward.

Flemming Ornskov

Thanks very much. Great questions. So to my question, if I may take that first, the purpose, among others, to have this laser-focused commercial strategy and to have business units that are focused around key commercial units is basically that I want to ensure that in terms of marketing and sales, there is a laser focus. People are not distracted about big strategic issues, thinking about R&D and take-offs. And what I hope to bring is, as Graham outlined, in order for us to get to what Graham said is the mid- to high single-digits revenue growth this year, we will have to also, in the second half and in the following quarters, to have very strong growth. So I will be spending my time with these business unit leaders, focusing on appropriate sales forces, make sure we have the right incentives in place. I've already started that in the ADHD franchise. I've also looked at that with REPLAGAL in Europe. So what you will hopefully see is that I, together with the business unit leaders at the In-Line committee, will only be talking in that context of marketing and sales, and hopefully, that will drive higher growth. In terms of the cost, this has not been the driver for any of the activities here. This is about growth, this is about prioritization, so I have no specific comment on cost expectations. Graham?

Graham C. Hetherington

Well, in terms of LIALDA, we look at it from 3 perspectives, and the first one is the first to file against LIALDA is Zydus. And Keyur, as you note, the lawsuit between ourselves and that party has been administratively closed. And therefore, that is, I think, a significant block to any entrants to the market. And just to remind those on the call that before -- because Zydus is the first to file, any other filer has to obtain both approval of their ANDA and also to win on appeal before the Zydus' exclusivity can be triggered. And getting approval of the ANDA, we believe, is extremely challenging because the new FDA standards are, we believe, very rigorous and difficult to meet. We have completed the trial with Watson. We expect a decision soon, and our legal team are confident that we will prevail. And within all of that process, we came to a view that we had sufficient cite with papers that were filed with the court, which gave us the confidence to believe that Watson's ANDA fails to meet the bioequivalence guidelines, and I know the IR team here would be happy to point anybody to the paperwork and the court documentation which educates us in that view. So it's that package which gives us the confidence about the sustainability of LIALDA for foreseeable future.


Our next question comes from the line of Liav Abraham from Citigroup.

Liav Abraham - Citigroup Inc, Research Division

Two questions, please. Firstly, on the ADHD market, where we've seen slower growth in the first quarter. I'd be interested in your thoughts on this and the reasons for the slower market growth. Is this an increased penetration? And do you anticipate the slow growth to continue going forward? And then with respect to VYVANSE growth relative to the market, historically, VYVANSE is growing significantly ahead of the market in terms of volume. That wasn't the case this quarter. It grew pretty much in line with the market. Again, I'd be interested in your thoughts on that for the remainder of the year. And then secondly, on costs, you've given us, Flemming, some color regarding 2013. As you outline your strategy, how are you thinking about both SG&A and R&D costs post-2013? Is it fair to assume that given the new simplified business structure, we can continue to see a significant operating leverage, particularly on the SG&A line?

Flemming Ornskov

Thanks, Liav. Great questions, so maybe we just look at the facts on the ADHD market. So I think that the adult market is growing over 9% and the pediatric market is growing about 3.1%. The average growth was about 6.2%. We have about a 16.8%, 17% market share. It is true that in this quarter, we did not grow faster than the market, and we have seen that before. There could be several things that you could consider. If you look at that particular quarter, it had, as you know, first part of the spring holiday, typically, that decreases the prescriptions for VYVANSE. That could be one thing. The other thing, as you may be aware of, the company made some adjustment on the sales force in the last part of 2012 and, in reality, took significant share of voice away from detailing. I will be reinstating that, and we'll be relaunching a very strong campaign back-to-school that will impact the second part of the year. So probably less promotional exposure. Secondly, some specifics to holiday periods, and I will address the issue that I can address, which is the promotional activities that we have. As we grow, and this is the growth agenda that I have laid out, I'm absolutely sure that there will be opportunities to leverage SG&A as we go forward, but this is not a prime driver. For me, the key thing is to get back to a very strong also top line growth.


Our next question comes from the line of Peter Verdult from Morgan Stanley.

Peter Verdult - Morgan Stanley, Research Division

Peter Verdult, Morgan Stanley. I've been hopping between 2 conference calls, so apologies if they -- if I already missed this. But number one, with VYVANSE's new uses, are we still expecting the major depression data early in 2014? Maybe Flemming or Graham, a quick comment as well on REPLAGAL in Europe and how we should be thinking about REPLAGAL longer term. Are you essentially stating that this product is now x growth, or do you still see growth given the share gains that Sanofi are achieving among them? And then, again, a very quick one on cost. Are the savings that we're seeing right now, is that low-hanging fruit, or is there -- is it something more painful that it happened to do this year to adjust the cost base? From your sense, how much flexibility there is going forward?

Flemming Ornskov

Thanks very much. I hope the alternative call you were on was exciting as this one here. But let me take the 3 questions. The last one I'll probably pass to Graham. So your first question pertains to major depressive disorder and the data. Yes, the expectation is, and also looking at the latest enrollment for both of the trials, that we should be on track to the first half and, hopefully, the first quarter of 2014. Binge eating is a trial that should be about a year later, but is actually enrolling pretty fast. I don't know if that means that we significant will be move forward that, but it probably speaks to a significant interest among the physicians because that's a fast enrolling trial right now. REPLAGAL in Europe, I think there are a number of things you have to look at when you look at the first quarter. They were abnormalities in terms of, you can say, overall in the REPLAGAL numbers, there were issues regarding Latin American order. In Europe, I think there are 2 facts we have to keep in mind. We still capture new patient share. The other thing that is very important is that if you look at the patients on REPLAGAL, 70% have never been on anything else, so they only know, and I'm sure they're very satisfied with REPLAGAL. And what we've seen is that we have 80% -- we've retained 80% of the patients that, so to speak, came over to us due to Genzyme's manufacturing issues, so -- and we've also seen that the loss has slowed down, so we're pretty confident that we -- both in new patient acquisitions but probably also in terms of not losing more from the 80% market share we have, we are now about 70%, that we don't lose much more. But we will have to reinforce our commercial rigor and activities and spend in Europe to maintain that position. And finally, on cost, I think Graham will take that.

Graham C. Hetherington

Let me scope this. In the first quarter, SG&A year-on-year was about $70 million lower than the first quarter last year. We believe about half of that relates to higher costs in SG&A in the first quarter of 2012, and let's be specific about it. In the first quarter last year, we had a direct-to-consumer campaign behind INTUNIV, which was a one-off promotional investment of about $20 million. And we can see about $15 million worth of relatively one-off legal-related expenses, specifically an accrual behind the Mt. Sinai discussion that was taking place at the time. So that means that only half of the decrease relates to this year. And as I've said in my -- when I was talking earlier, that was directed at discretionary expenditure and in no way impacted frontline investment. Our guidance for the full year is for SG&A to be slightly down in the full year compared to 2012. For us to get to that, it means SG&A will be directionally flat in Q2 through to 4 compared to last year. And if you take that against the Q1 baseline, it means it gives us the opportunity to actually increase costs on the SG&A line going -- compared to Q1 by about 7% going forward. So we're showing restraint, but we're able to continue to increase SG&A, which will support the focus that we have on investing behind the commercialization of our assets.


Our next question comes from the line of Ken Cacciatore from Cowen.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just a question on some of the pipeline programs. First, on SPD 602, Flemming, I was wondering if you could clarify some of the data released or discuss in a little more detail that program, the data that we're going to be getting? And I see you don't have on here yet enrollment of a second study or head-to-head study, and maybe timing of that data release. So maybe can you just give a little bit more details around SPD 602? And also on the Premacure retinopathy program, it seems like it's a fairly substantial-sized Phase II. Wondering if you have positive results that, that could be considered a pivotal, and maybe a little bit of discussion on actual potential size of product. I know you gave a little bit of detail, but maybe discuss in a little bit more detail on that.

Flemming Ornskov

Okay, 2 good questions. So maybe on SPD 602. So there, as you know, there's 2001 -- 201, 202, 203, and these studies are ongoing, and we should be having interim data from the 201 in June of this year. And also, in 201, as we have looked at that, we probably will add an arm that has BID dosing as well. As you know, these products and also with the Exjade, they have to be dosed, titrated in a very particular manner, so that they clear iron both from the heart and from the liver. So we probably will add BID dosing. 203, we'll then have the BID dosing included, and we think that we probably will get the package for Phase II mid-2014. That's what we expect. So I would say still a very attractive, very interesting program. We will most likely have in the program comparative data against Exjade where, I would say, in the final considerations about how best to do that also in light of potentially have to look at adding BID as well. So if you look at the Premacure compound that we acquired, yes, it is a significant program. We have not had specific discussions with the regulatory authorities, whether this would be one or the only, or one of several pivotal programs. I would say that there are about 14,000 to 16,000 preterm infants in the U.S. that are affected by this devastating disease. As you know, this is low oxygen content it triggers that you have release of HF, and it leads to basically blindness because of the infection of retina. So this is basically, so to speak, a curing therapy. So about 1,000 to 1,500 of these preemies, typically the early of them will require therapy that puts enough exposure of retina impact. Having worked in that area for several years, I know how devastating that is. So I'm absolutely sure that if we are able with this compound to get data that shows a stabilization improvement, that there would be a significant market. But we've not given a specific forecast.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Okay. Just one follow-up on the dry eye as well. Is that -- the data that we would get next year, the Phase III data, would that be a complete package for approval if that data is successful?

Flemming Ornskov

Yes. So there's 2 OPUS studies, and this is the study that will be the second pivotal study. And Opus 2, which we started in December 2012, that's a randomized trial 12-week study, and we hear also have signs and symptoms, it's about 700 patients and we expect top line sometime in 2014. There has -- I would say, it's going okay. Of course, when you transfer from one company to another, there always is a risk. We've not seen that, that it slows a bit down, but that's a key focus on us. We also have another safety study called SONATA that also started in 2012, that was also a 1-year study. So I would say that with this and the initial Phase I -- Phase III data that were there that shows signs but not symptoms, we expect that that's a full package that we can submit, and that's also why we have been optimistic about 2016 as a launch date. But it looks good so far.


Our next question comes from the line of Nicolas Guyon-Gellin from Exane BNP Paribas.

Nicolas Guyon-Gellin - Exane BNP Paribas, Research Division

Actually, I have 2. The first one is regarding cash allocation. What is your overall position regarding share buyback? And whereas you mentioned some bolt-on deals, what would you consider as a large acquisition and how far are you prepared to go? And the second question is on the pipeline. One, you haven't touched on the 2 intrathecal program, i.e., Sanfilippo A and Hunter CNS. How confident are you with regards to these 2 potential opportunities?

Flemming Ornskov

So I think the first question was kind of in 2 parts. It was M&A, and then it was our ability to put cash or other on the table in terms of doing M&A. So when we look at M&A, maybe I'd take a step back and say, Shire, as I've said, has had a strategy and we will continue that strategy of using business development and M&A as a key source for sourcing of external innovation. Size is not something we look at as a criteria. We look at return on investment, shareholder value and strategic fit. And we look for opportunities within the therapeutic areas where we are, and we've also said that ophthalmology and hematology are other areas of interest to us. But we do not comment specifically on ongoing projects or any specific size that we target or not target and sizes, so to speak, as secondary in this opportunity. I think we have significant financial firepower to do meaningful deals, and we can have a long discussion about what meaningful is. As to the 2 intrathecal programs, the one for Hunter has, as we've said, that is later in the year, up to some regulatory consultations. Hopefully, we'll go into the pivotal trials. We had good data there. That's where we had the interim surrogate endpoint of GAGs where we saw a very good data. So we anticipate that, that will go, and we plan to have that go into pivotal programs. And as to the Sanfilippo intrathecal programs there, we have to have interactions with FDA and EMA, and then we will also thinking about pivotal trials for these Phase IIb trials -- I mean, Phase IIb trials after that. But we need regulatory interactions on that.


Our next question comes from the line of David Buck from Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

A couple of quick questions, I guess. First, for Flemming on -- and maybe for Graham on INTUNIV. Can you talk a little bit about the decision on allowing generic entry for next year? And maybe for Graham, how we should be thinking about the tail of that product and cost avoidance opportunities there. Secondly, for DERMAGRAFT, the Regenerative business unit, can you talk about -- and it looks like it may be bottoming, but the level of sales, obviously, is significantly below what it was a year ago when it was annualizing at close to $200 million. I'm curious what -- how much of that is just lack of sales focus, and how much of it is demand and repeat demand not being there, since it was at a higher level? And just finally, in terms of the new structure, Flemming, can you talk a little bit about what you're doing to prevent disruption, and how you're avoiding -- you mentioned it's not for cost savings, but how are you going to be avoiding some disruption in the business units as they combine?

Flemming Ornskov

Okay. So 3 great questions. So INTUNIV, yes, I think our experience with generic challenges is, of course, that uncertainty is better than lack of certainty. We had intense discussion with Watson, and we felt that the agreement we reached was mutual beneficial to both parties. That means, of course, that we have to plan for the fact that there will be an entrant in December of next year. And of course, we are preparing for that and we will mitigate that also on cost and other sides. But I'll let Graham comment on that, if there's any additional comments afterwards. The other thing is just in terms of DERMAGRAFT, yes, sales are significantly below expectations, but we have just gotten 90% of the sales and support organization in place. We have, of course, had upset customers because there was an interruption of coverage with them with our sales organization. So we're basically getting back to business, and we've lost 2 or 3 quarters of actual growth opportunities. So what we hope is that we can call the nadir and that we now -- and as what we've seen over the last few weeks, we see more ordering that we now, with most of the sales force in place, we now, over the next 2 to 3 quarters, can actually see what the potential of this product is. Yes, disruption, you will also -- always expect if there are some reorganization. You should see the e-mails I got today, tons of e-mail saying, "Flemming, we should have done that months ago. This is great. We can get more aligned with the customer. I love the structure." So, so far I don't see too many disruptive e-mails from my colleagues.

Graham C. Hetherington

If I can just add on, INTUNIV, I think it's inevitable with the generics launching in December that we will start to see an impact in the second half of next year as wholesalers destock the branded product. We have 3 foils. We have -- or hedges against this. And the cost is only one. First, tactically, we are in receipt of a royalty during the first 6 months, and it is a significant royalty during the first 6 months of the launch. Secondly, the most important hedge against the loss of INTUNIV, it's a growth of the rest of the portfolio, and that's -- it's why it is so important that Flemming is reinforcing the focus on us being a growth business and why -- how we're taking a laser focus to drive that. And the third element, yes, is cost management. But we will be doing that within the cost context to growing a business, and we will explore the opportunities of simplifying the organization to ensure that we have an optimal cost base going forward.

Flemming Ornskov

Finally, we can also add, if you look at the history of Shire, even with significant generic competition, Shire has maintained very strong shares for its products. I think we have a very strong contracting organization and I think we can continue to be strong also on that side and maintaining a very good share.


Our next question comes from the line of James Gordon from JPMorgan.

James D. Gordon - JP Morgan Chase & Co, Research Division

One on international and one on profitability. On international, the idea of investing in Asia and Lat Am, what would Shire's competitive advantages be here versus larger companies or well-established with sales infrastructure and big balance sheet? Is it going to be actually buying new products to be selling in Asia and Lat Am, or just spending more selling existing Shire products in those countries? And another part on the international, what sort of expectation would be fair for Elvanse by next year in Europe? And then also just a question on profitability, so you have the 5 business units now. Are you going to give us the profitability of those business units like what you're doing at the moment for the 3 you had previously? And how long would you tolerate a business unit not being profitable for? So is there -- I assume Regenerative Medicine is still not profitable. When would you hope it would become profitable?

Flemming Ornskov

So 3 good questions. I think on Elvanse, I don't think we can give any specific update on guidance on that. What we've seen is that the scales are still small. We've basically only really seen data in the first quarter from U.K. We're now launching in the Scandinavian countries. It has taken a bit longer because in addition to the approval, which we secured through mutual recognition end of last year, we've now gone through and very successfully gone through in securing national approvals, so to speak, and getting on the formularies and getting reimbursement. And also getting over, some countries did not have set-up scheduling, which is required. So I think later in the year, we'll be in a better position to give you an update on that. Right now, it's not significant and meaningful in terms of sales.

Graham C. Hetherington

Let me just give a little bit more color there. I think that we will see negligible dollar revenues being recognized this year. We will be selling product we already have, but that will be filling the pipeline as much as anything else. I think the revenues in 2014, I would categorize as being still relatively small. And I would characterize 2015 would be the year when we might start to see some incremental growth coming out of VYVANSE in Europe.

Flemming Ornskov

And as to Regenerative Medicine, the prospects of Regenerative Medicine, I think we've answered that a number of times. I think it's way too early to decide. We've made a significant investment in acquiring Advanced BioHealing. I think our focus at least for now, should be on stabilizing the business which we have, and now on growing the business and give the teams that are working incredibly hard to get that going, that they would basically be supported by us. And I think, as I said, in a few quarters, we'll have a better idea about that. You'd spoke broadly about international. I think we only spoke about Brazil, which is a very profitable and well-going market for us that we'd like to invest more. We spoke about Japan. As I've said, we have, I think, 4 products from Shire on the market there, not by us. But we now have plans and collaborations and opportunities to launch several of our products. It's the world's second biggest, one of the most profitable pharmaceutical markets. And we think that either in collaboration on -- or through our sales that we have an opportunity there. China is going to be the world's second pharmaceutical market. There is -- everybody, you talk about that's in China today is in the primary care market. I was there very actively with Bayer as well, one of the big players. There is an evolving specialty market in China as the pharmaceutical market matures. That's what we are focusing on. I think Shire has the aspiration to be one of world's leading specialty pharmaceutical companies. I imagine we also want to be in the world's second largest pharmaceutical market over time. So we feel there's a good strategic fit. Longer term, it will incur some costs, but that's an investment that we feel, on a limited scale, we're willing to take.

So with that, I think I really want to thank for all the excellent questions and for your patience and for your continued interest in Shire, and continue to have a good day. Thanks a lot.


This now concludes our webcast. You may now disconnect your lines. Thank you.

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