Shire PLC (ADR) (SHPG) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: Shire PLC (SHPG)

Shire PLC (ADR) (NASDAQ:SHPG)

Q2 2013 Earnings Call

July 25, 2013 9:00 am ET

Executives

Eric Rojas - Senior Director of Investor Relations

Flemming Ornskov - Chief Executive Officer and Director

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

Analysts

Olivia Capra - Barclays Capital, Research Division

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Peter Verdult - Morgan Stanley, Research Division

David M. Steinberg - Deutsche Bank AG, Research Division

Kerry Holford - Crédit Suisse AG, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Liav Abraham - Citigroup Inc, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Nicolas Guyon-Gellin - Exane BNP Paribas, Research Division

Peter Welford - Jefferies LLC, Research Division

Operator

Good morning, good afternoon, ladies and gentlemen, and welcome to the Shire Second Quarter Results. [Operator Instructions] Just to remind you, this conference call is being recorded. And today, I am pleased to present Eric Rojas, Senior Director. Please begin your meeting, sir.

Eric Rojas

Thanks, Dmitri. Good morning and good afternoon, everyone. Thank you for joining us today for Shire's Second Quarter 2013 Financial Results.

You should have all received our press release and should be viewing our presentation via our website on shire.com. If you are 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 talk about Shire's performance and strategy progression, and Graham will continue with a financial overview and our upgraded 2013 guidance. And finally, Fleming will make some concluding remarks and open up the call for your questions. [Operator Instructions] Sarah Elton-Farr and I are happy to follow up with you after the call.

I'll now hand the call over to Flemming.

Flemming Ornskov

Thank you, Eric, and also, good morning and good afternoon from me. I'm very pleased to be here today to talk about our good performance this quarter and how we are progressing with our strategy. You'll see that our business is in great shape. We're delivering good product sales, generating a healthy profit and cash flow, and we're investing in our exciting and valuable pipeline and key marketed products to deliver significant future revenues.I'm very pleased with the progress that we're making in building our growth-focused business.

In addition to covering our results today, I'm going to spend some time talking about our pipeline to give you a deeper insight into the future value we have here at Shire. In particular, our focus on our innovative treatments and development for dry eye disease and binge eating disorder.

Let's turn to Slide 5 and our results for the second quarter of this year. With the rate of product sales growth increasing to 7% in the quarter, you can see that we have a healthy portfolio of products in areas of key patient needs. And just as importantly, most of them have many years of growth ahead of them.

You have seen in our press release earlier today that we have upgraded our 2013 guidance. We anticipate that the rate of sales growth will continue to show improvement in the second half of this year, and we actually anticipate delivering full year double-digit non-GAAP earnings growth.

Moving to Slide 6. I told you in May that one of the key areas of focus at Shire will be optimizing our commercial excellence, and now I'm going to share with you some examples of how we are putting this into practice.

On Slide 7, you can see how, in our Neuroscience business unit, we are progressing with plans to reinvigorate growth in our ADHD sales in the U.S. As you may know, we had a change in strategy last year with some of our field force focused away from key prescribers. We quickly realized that, that was not an optimal allocation of resources, and we have rapidly changed our sales strategy back to calling on physicians. By September of this year, we will have 50 more sales rep addressing the prescribers. Some of these are new hires, some have been switched back to calling on doctors. Our total Neuroscience field force will be 450 reps, and we have introduced an enhanced incentive structure for our sales force. This strengthening of field force enables us to increase our coverage of the fast-growing adult market.

Moving to Slide 8. Importantly, we're also placing a renewed emphasis on the pediatric market, and this, in particular, in time for the forthcoming back-to-school season, the period between August and October, which provides the opportunity to capture 30% of this core ADHD patient population. We've created new marketing messages and material. We've equipped reps with iPad selling tools, and we have offerings to incur patient trial and compete very effectively with generic product in this category.

In addition, we've invested in direct-to-consumer and physician-directed advertising. We know from experience that this market responds well to promotional spend, and we're determined to capture greater share of this market and the prescriptions in this market. We are confident that this will fuel growth of the overall market, as well as our brand's market share.

Moving to Slide 9. In Europe, we continue to roll out ELVANSE, with launches on the way in the U.K., in Germany, in Denmark and in Ireland. In 2014, we plan for further launches in Spain, Sweden, Norway and Finland. Together, these 8 countries represent 75% of the potential ADHD market in the EU. This market will build slowly, but we are receiving positive feedback from physicians, and we're pleased with the progress so far, which is fully in line with our internal targets.

Onto Slide 10. In our GI business unit, LIALDA had a particular strong quarter. The 46% growth in sales can be partly attributed to our team's U.S. commercial strategy and their opportunism, with a competitor's decision to withdraw their product from the market, as well as the favorable positioning on a growing number of managed care formularies in the U.S. LIALDA's excellent reimbursement status continues to grow with managed care organizations.

For example, LIALDA was recently added as a preferred product with 2 of the largest plans -- health plans in the country. Graham will give you much more details behind the LIALDA sales number a bit later today. We do expect to see additional share growth for LIALDA in the U.S. during the remainder of 2013. We're also very pleased that this quarter, we were able to remove some of the uncertainties surrounding the patents for both INTUNIV and LIALDA.

Moving to Slide 11. In our rare disease portfolio, we've delivered excellent results with FIRAZYR. The 56% increase in FIRAZYR sales is driven primarily by our continued successful U.S. performance. U.S. patient feedback confirms the positive impact of providing portable, self-administered, on-demand treatment with FIRAZYR. FIRAZYR now has a high and a growing share of all treated U.S. acute attacks according to our market research.

Now to REPLAGAL on Slide 12. As you know, competition has returned to the Fabry market. But despite this, we remain the strong leader in our markets. In most Fabry treatment centers, we are retaining a majority of the patients that switch to REPLAGAL. Physician feedback is consistently positive of REPLAGAL's efficacy. It's favorable, even in genecity [ph] profile, and it's short and condition [ph] infusion time and in line with the growing in mind of published data that has been generating patients who have switched from Fabrazyme to REPLAGAL.

We are also adding more sales force resources, and the commercial team is focusing on REPLAGAL's key competitive attributes. We continue to see strong growth in new naïve patients starting on REPLAGAL around the globe. We expect our competitive commercial strategy will lead to higher revenues in the second half of this year. We're competing very effectively with REPLAGAL and VPRIV as evidenced by our growing global patient numbers in both the Fabry and Gaucher markets. So you can see that our business is delivering. It is well-managed and we're executing well.

To remind you on Slide 13, I said, when I talked to you in May, that we would focus on 2 priorities: Commercial excellence, which we call our In-Line; and bringing in and developing new assets, which we call our Pipeline. We are making good progress reorganizing to deliver these 2 priorities. The establishment of the focused In-Line and Pipeline committees is already leading to improved collaboration and cross-business unit teamwork.

And we made some significant leadership appointments. Kim Stratton joins us next week to lead our International Commercial Team. She had a stellar career at Novartis in a range of senior global leadership positions. And before that, she worked for Bristol-Myers Squibb, AstraZeneca and GSK.

Mark Enyedy joins us next month to head our Internal Medicine business unit. His career has been forced at Genzyme, Vertex and more recently, as CEO of Proteostasis Therapeutics. We also have very strong acting internal leaders now heading our Neuroscience and our Rare Disease business units, Scott Applebaum and Jeff Poulton.

I'm pleased with our progress on our strategy, but it's only early days. And what I'm really excited about is the way I see Shire talent from the former divisional organizations working together on maximizing our opportunities to deliver greater value and enhanced profitability across the whole Shire organization.

Now moving to Slide 14. I'd like to spend a few moments talking about our increasingly valuable and somewhat unrecognized pipeline. The reality is a very good story and one that stem [ph] has still not fully grasped. My goal today is to ensure that our investors know about this value and are aware of the future potential that we're developing. If you look at our pipeline, you can see that we now have 9, I repeat, 9 Phase III programs and 6 programs in Phase II, representing considerable future revenue potential for Shire. We are excited about the growing value in all our pipeline assets, and our pipeline committee's role is to ensure we prioritize the most promising and most innovative prospects for investment.

I'd now like to talk to you in a bit more depth about some of our exciting pipeline programs. First, let's focus in on lifitegrast for the indication of dry eye disease, as outlined on Slide 15. As you know, we acquired SARcode Bioscience earlier this year, bringing us lifitegrast, an innovative compound for the treatment of dry eye disease. Dry eye is an inflammatory disease of the ocular surface that results in symptoms of chronic discomfort and damage to the surface of the eye. It is debilitating, it impairs normal daily living, impacts relationships and affects self-confidence, as well as the ability to work effectively. It's actually the most common cause for patient visits to ophthalmologists, and it mainly affects the older population, in particular, women. The U.S. market alone for dry eye was worth $1.5 billion in 2012. With the aging population, estimates suggest this could be as much as $3 billion over the next decade. So it's a big opportunity. We estimate 9 million patients in the U.S. are candidates for our new therapy being moderate to severe sufferers of dry eye disease. Of these, we believe that less than 10% are currently on prescription therapy.

Currently, there's only one approved prescription medicine for dry eye: Allergan's drop, RESTASIS. This drop represents sales of $794 million in 2012. However, RESTASIS is approved only to increase tear production.

Moving to Slide 16. Lifitegrast is a novel, purpose-built, small molecule delivered conveniently as an eye drop. We believe that lifitegrast has the potential to be the next-generation branded treatment for dry eye disease as it could improve both the signs and the symptoms of this condition. Lifitegrast has strong intellectual property, with a composition of matter [ph] U.S. patent until May of 2026 and a method of treatment U.S. patent until May of 2029.

Now moving to Slide 17. Let me explain for those less familiar with this condition. The sign of dry eye disease is damage to the ocular surface as detected by corneal staining. The symptoms include extreme eye discomfort, a gritty sensation, sensitivity to light or blurred vision and dryness. These are measured using a patient-reported symptom score.

On to Slide 18. We look forward to seeing the Phase III data from the pivotal OPUS-2 trial and the SONATA safety trial, which will complete our studies for our FDA filing scheduled for quarter 4 2014. In OPUS-1, we achieved a statistically significant positive result on the signs of dry eye disease. We also achieved significance in a statistical manner with a second symptomatic endpoint eye dryness score. In OPUS-2, our core primary endpoint are both signs and symptoms as measured by eye dryness score. OPUS-2 is now fully enrolled, and we'll share data from that study with you in the first quarter of 2014. Naturally, like with any Phase III study, there's no guarantees of success.

Turning to Slide 19. Our program, looking at LDX, which, as you know, is a molecule in VYVANSE for binge eating disorder, is another very exciting opportunity. This is a huge unmet need, and according to physicians, there are few effective treatments available. The publication of DSM-5, the new global guideline for psychiatric diagnoses, in May of this year included binge eating disorder in its main section for the very first time. This is a significant progress and demonstrate that the seriousness of the disorder is increasingly acknowledged in the physician community and that the market is absolutely ready for a safe and effective treatment.

Moving to Slide 20. Estimates suggest that around 3 million people with binge eating disorder is in the U.S., and about 9 out of 10 of them are undiagnosed. Of those who are diagnosed, not all, are being treated. Health care practitioners are generally dissatisfied with the mixed results from the current treatment options that include counseling and cognitive behavioral therapy or off-label antidepressants and antipsychotic drugs.

On Slide 21, let me just give you some characteristics of a typical binge eating disorder patient. 70% of these patients are female and a significant number present with psychiatric comorbidities. These can be anxiety, mood or impulse control disorders. And many of them have been suffering with this condition for over 10 years. They cannot control their eating or the amount they eat. Their binge episodes are frequent. And of course, the distress that the binging causes is significant. These patients are significantly underserved today.

Moving on to Slide 22. At Shire, we have many years of experience in ADHD that can be applied to the binge eating market, too. So we believe binge eating disorder is an ideal space for Shire to apply its specialist experience, and we are excited about the potential for LDX to offer new hope for these patients, naturally also here, subject to the success of the Phase III clinical program and the filing. It's also worth noting that there is significant overlap in diagnosis by add-on [ph] psychiatrists of binge eating, ADHD and major depressive disorder. You can see that in the Venn demographic demonstrating this opportunity.

Let's move on to Slide 23. With the 2 pivotal Phase III binge eating disorder trials now fully enrolled, I'm pleased to say that our Phase III program is ahead of schedule. Recruitment of patients on the trials have been faster than we anticipated, and we've even heard anecdotal stories of numerous requests at some of the trial centers from patients who are very keen to get into these trials. We expect to have data in the first quarter of 2014, and I look forward to sharing these data with you.

As we look again at the big picture on Slide, now 24, you can see the range of and the depth of the programs that we're investing in. I've talked today about only 2 programs in detail. I'll spend more time on future quarterly calls talking in more details about some of the other Phase III pipeline program, such as LDX, VYVANSE for major depressive disorder. We are pleased with current progress on that program as well.

Our pipeline group is focused on development of our total portfolio through prioritized R&D and through external investment. Critically, we believe there's a strong opportunity to build on our expertise in rare diseases, and we intend to build an R&D center of excellence around this unique capability that we have in Massachusetts. We also actively engaged in assessing business development opportunities in this space.

Let me now touch briefly on a few additional late-stage programs that we're working on. FIRAZYR for the treatment of ACE inhibitor-induced angioedema. We had a successful meeting with the FDA in May where we agreed on the Phase III trial design, and we plan to initiate these studies later this year. In Europe, we anticipate a CHMP opinion on potential approval for FIRAZYR for this indication in Q4 of this year.

You would have seen recently in our press release that we have been pleased and are very pleased with the approval of INTUNIV in Canada where we'll have regulatory exclusivity until 2021. Our INTUNIV EU filing is on schedule for Q1 2014. SPD 555 for chronic constipation in the U.S. is Phase III ready. The filing would, however, depend on outcomes of discussions with the FDA that are scheduled to take place at the end of the year.

And of course, as you know, we're developing DERMAGRAFT for potential use in Epidermolysis Bullosa, a devastating rare skin disease. As part of our plans to grow in Japan, we have 2 programs in Phase III there, XAGRID and INTUNIV.

On Slide 25, you can see the significant clinical milestones over the next 18 months. So as you can see, we have a broad and deep pipeline that's well-balanced and has the opportunity to deliver considerable value in the years ahead.

Now let me hand over to Graham to take you through the details of our second quarter financials. Graham?

Graham C. Hetherington

Thank you, Flemming, and good morning, good afternoon, everyone. As you've seen, we've delivered a good set of results, which give us momentum as we enter the second half.

Today, I'd like to focus on the following 3 areas: first, the robust sales growth we've achieved this quarter, which keeps us on track to deliver mid- to high-single-digit product sales growth for the year; second, our continued delivery of operating leverage and the underlying cash generation of our business; and third, to update you on our upgraded guidance, which reflects our anticipation of delivering double-digit earnings growth in 2013.

On Slide 27, you can see the drivers behind our good second quarter performance. In the quarter, we delivered product sales of over $1.2 billion, and the rate of growth in product sales increased to 7%, up from the 1% we saw last quarter.

Royalties and other revenues were down 26% as expected, primarily due to lower royalties from ADDERALL XR. As a result, total revenues were up 6% at almost $1.3 billion in the quarter. EBITDA was up 8%, and earnings for ADS were up 6% to $1.79. EPS was slightly held back by higher tax rates in the quarter of 23% due to the timing of tax charges. And I'd like to reinforce that we continue to expect our core effective tax rate to be between 18% and 20% for the full year. We've generated $374 million of cash. This is down compared to a very strong set of quarterly comparatives in 2012, which I'll expand on in a moment.

Turning now to Slide 28 on our product sales performance. We've seen a good performance across the portfolio, and the majority of our top 10 products delivered double-digit growth. VYVANSE generated sales of $300 million, up 13%, with U.S. prescriptions up 7% and the benefit of a price increase taken last year. As Flemming outlined earlier, we've put plans in place to ensure a successful back-to-school season, and we expect even higher growth in the second half.

ELAPRASE sales were up 22%, as we benefited from the timing of shipments to Latin America, which I spoke to last time and an underlying increase in patient numbers. LIALDA was up an impressive 46%, and we exited the quarter with a market share of over 26%, up 4 percentage points from this time last year. We expect further, more moderate share gains in the second half. This quarter, we also saw growth in U.S. non-retail demand and also some stocking of about $8 million at the net sales level, principally, at wholesalers in anticipation of high future demand.

FIRAZYR has again delivered a strong performance, up $18 million or 56%, reflecting the product's global growth, particularly in the U.S. market. INTUNIV continues to perform well, up 31% to $90 million in the quarter. And while VPRIV sales were flat primarily due to relatively strong sales in the second quarter last year, we do see year-to-date VPRIV is now up 6% compared to 2012, reflecting the continued growth in the total number of patients on therapy.

I'd now like to expand on 3 products which have held back total product sales growth year-on-year in the quarter. First, REPLAGAL, which was 7% down in the quarter or 5% on a constant-currency basis. The return of competition to the Fabry market in Europe was a factor in this decline. Encouragingly, the impact of this competition in terms of switch rates is reducing. We continue to add new patients and are starting to see global net patient growth.

REPLAGAL can be affected by the timing of shipments, which can complicate year-on-year comparisons. So standing back, we began 2013 with quarterly sales of $114 million in the first quarter, and now, the second quarter. We expect similar levels of REPLAGAL sales in the third quarter, with a return to sequential growth by the end of the year.

DERMAGRAFT was down $30 million year-on-year. However, sales grew 21% compared to the low base last quarter, and we expect quarter-on-quarter growth to continue.

And finally, ADDERALL XR, where sales were down $22 million, primarily due to lower U.S. prescriptions following the introduction of a new generic competitor at the end of the second quarter last year. Our U.S. market share has remained at just over 5% since its generic event, and we remain confident that branded ADDERALL XR can continue to compete successfully in its market.

Turning now to Slide 29. You can see that we've delivered significant operating leverage with our EBITDA margin increasing by 3 percentage points to 35% in the first half, at a time while we have been increasing investment in R&D by 15% year-on-year. Combined R&D and SG&A decreased by 2% year-on-year, driven by sales and marketing costs. And SG&A as a result has been 10% lower than last year as we benefited from 2 specific factors. First, costs in the first half of 2012 last year, which were not repeated this year. These include high legal costs and spending on INTUNIV promotional campaigns. And second, the effective actions initiated in the second half of 2012, which we're now benefiting from, including the reorganization of some of our business, particularly in Europe. Over the balance of the year, our guidance reflects our plans for higher sales and marketing spend than we saw in the first half of 2013 as we increased commercial spending, particularly behind VYVANSE in the U.S.

Let's now take a look at our cash flow on Slide 30. Our business continues to be highly cash generative, and we generated $374 million of cash this quarter. As I mentioned earlier, cash generation was down versus the same period last year. This was the result of the timing this year of both receipts from large distributors in the U.S. and the timing of operating expense payments. Last year, the second quarter also benefited from significant cash receipts from Spanish government receivables.

Higher tax payments, up $62 million compared to last year, held back free cash flow this quarter to $241 million. We've also made an upfront payment of $151 million on the acquisition of SARcode. We also purchased 107 million of shares under our buyback program and have around $200 million of this program remaining. We ended the quarter with gross cash of $1.3 billion and net cash of about $200 million. We continue to have a strong and flexible funding position, which gives us capacity to invest in our strategic priorities of developing our organic pipeline, along with growth and value-enhancing transactions.

Finally, let's review our outlook for 2013 on Slide 31. As you have seen, we've upgraded our guidance to reflect our anticipation of delivering double-digit earnings growth in 2013. Looking at product sales, based on our actual performance to date and the trends we see for the remainder of the year, we continue to expect total product sales growth in the mid- to high-single digits. As Flemming mentioned earlier, the rates of product sales growth will show improvement over the balance of the year, as our portfolio continues to deliver growth this year and we benefit from easing comparatives in the second half.

We've narrowed our estimates for royalties and other revenues, which we now expect to be 35% to 40% lower in 2013 compared to last year. We continue to expect our gross margin on product sales to be at a similar level in 2012. R&D will grow in the low double-digits as we continue to invest in our pipeline to progress our late-stage clinical trials and our newly acquired assets.

Sales and marketing spend in the second half will increase as we invest behind VYVANSE and other commercial activities. As a result, SG&A for the full year is now expected to be 2% to 4% lower than last year. Taken together, we now expect R&D combined with SG&A to be only marginally higher than 2012, which will support operating leverage for the full year. As I said earlier, our core tax -- effective tax rate is forecast to remain in the range of 18% to 20%. And taking all of this together, these dynamics mean that we anticipate delivering double-digit earnings growth for the full year in 2013.

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

Flemming Ornskov

Thank you, Graham. So on our final slide, Slide 33. As you have seen and heard, Shire has a strategy for high growth. We have successfully reorganized ourselves to deliver on our future priorities. And we have kept our eye on the ball during this reorganization, as evidenced by our healthy sales growth for most of the portfolio.

Where we have challenges, we are already addressing these. The sharper focus on commercial excellence that I've announced in May is clearly ensuring this. But perhaps most importantly, we have a strong and sustainable business with products that meet patient needs today. We're simplifying our structure and our ways of working, also allowing us to be more cost-efficient. We're generating a healthy profit and healthy cash flow. We're investing in our exciting pipeline to develop innovative products with significant future revenue potential. And we have sufficient financial flexibility to execute value-enhancing M&A, a core and continued focus of the Shire strategy. Finally, we have upgraded our guidance. We now anticipate delivering full year double-digit non-GAAP earnings growth in 2013. I'm excited about the prospects for Shire, and I'm looking forward to updating you again at our next quarterly call in October. Thank you.

Now let's take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Olivia Capra from Barclays.

Olivia Capra - Barclays Capital, Research Division

I just want to know about your product sales guidance that you gave previously, specifically for REPLAGAL, recovering to flat for the full year? And kind of where you are in terms of that. And -- yes, that's okay for now. That's it.

Graham C. Hetherington

Olivia, the guidance we gave then, I think, was on the last quarter were, yes, at that point, we did expect to see full year flat. I think the sequential guidance that I've given here means -- and in particular the extent to which Q2 was lower than consensus means that at the full year, we will be low-single digits down year-on-year at the full year. But importantly, we will be exiting the year where our net patient gains are going to be exceeding any competitive impact that we've seen in Europe. So we'll be exiting the year in growth, but the full year will still be marginally down year-on-year.

Olivia Capra - Barclays Capital, Research Division

Okay, great. And just the same for DERMAGRAFT, I know a return to growth in the fourth quarter. Can you give us an idea of what that would look like on the full year? And that's it for me.

Graham C. Hetherington

At the moment, we're encouraged to be calling out -- one, you can see it's in the numbers that sequentially, we're now seeing growth. We can call the bottom. We are seeing progressive increases, both on a weekly, monthly and a quarterly basis. And as I called it out, sequentially, we expect to see growth through to the end of the year. The trajectory of that, I think it's too early to call. I think that consensus is not that far away from where we'd be expecting. But we're not going to give specific guidance on DERMAGRAFT.

Operator

Our next question comes from the line of Andrew Finkelstein from Susquehanna.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Could you talk any more about the opportunity going forward with LIALDA and potential share gains now that the conversion is largely complete? And then, what the expectations are if there's potentially generic 5 assay products in the market in the future.

Flemming Ornskov

Thanks very much for your question. As you know, this is a relatively low-growth GI market. So to see the very strong growth we've seen with LIALDA is, of course, to some extent, exceptional. It's also rare that there is a disruptive situation in the marketplace where a competitor decides to withdraw a product, in this case, ASACOL introducing their product. This has unsettled physicians and patients and opened an excellent opportunity for us. And our sales force, which consist of 97 representatives in the U.S., have taken this opportunity. And I think the very strong growth and the very strong sales you see is clearly coming from that. It is also clear that with the standards that FDA has introduced for methylamine NDAs, which are really rigorous and difficult to meet, one cannot exclude that there would be generics into the marketplace. But the hurdle is high, and we remain confident to see continued growth. Yet, of course, at some point, the opportunity we've captured with this disruption in the market may subside a bit. But we continue to see great prospects and short term, no major generic threats.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

And then going forward, how are you thinking about the GI franchise and the opportunities to build there?

Flemming Ornskov

So the GI franchise is financially, particularly from a cash and currently also from a growth perspective, very important for us. As you know, we have been focused on developing a more robust pipeline that we have today. That continues to be something we're looking for. We are scouting and scanning the marketplace for these opportunities. But what we can control right now have been the commercial execution. And I think the numbers speak for themselves. We've done very well. But if we have opportunities to get more new products into this pipeline that would meet significant unmet need in this area, we see that as a continued growth driver for us.

Operator

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

Peter Verdult - Morgan Stanley, Research Division

Pete Verdult, Morgan Stanley. Just one quick question for Graham and then I'll have 2 for Flemming. Just a point of clarification, Graham, as you currently see the revenue and expense trends playing out, do your comments on delivering operating leverage extend to 2014?

Graham C. Hetherington

Yes. If you look at the end of Flemming's quotes, we reinforced not only the double-digit earnings growth in 2013, but our confidence in being able to deliver operating leverage beyond that. We're doing a lot of work in flying the business. We're excited to the scope of the opportunities to -- way too early to call out the specifics of that. But certainly, we are intentionally signaling our confidence in being able to deliver operating leverage beyond 2013 into 2014.

Peter Verdult - Morgan Stanley, Research Division

Okay. And then, Fleming, just one pipeline and one product question. On lifitegrast, just thinking about the regulatory risk that are out there, can you talk about the changes that you will make regarding the recruitment of patients for OPUS-2 versus OPUS-1, which you think will increase the other's success? And then if we did see OPUS-2 play out similarly to OPUS-1, i.e., you meet the endpoint and signs but not symptoms, what's your understanding from the FDA? Would this still be a fileable product? And I'll save my last one after this one.

Flemming Ornskov

So after -- well, it was initially SARcode Bioscience who got the results from OPUS-1 and, of course, now with OPUS-2, we're also involved. If you look at the size of the trials, that has been increased. So OPUS-1 was 588 patients, and this OPUS-2 is 700 patients. As you know, OPUS-1 was positive on signs, but barely missed symptoms. But in one of the secondary symptoms, it was statistically significant. So SARcode and us have changed the symptom endpoints to a visual analog scale, which we think is easier for patients and physicians to fill out than the more complex one used in OPUS-1. So I think with increased sample size, with a simpler symptom score, we should have a better chance of meeting both signs and symptoms. But as you know, there are no guarantees. I think that the FDA would look at the totality of the package. But I think it's too early to speculate on -- I really want to see the outcome of OPUS-2. And I remain cautiously optimistic that with the adjustment that has been made to the trial's design that we stand a good chance for success. But it is still a Phase III program.

Peter Verdult - Morgan Stanley, Research Division

Okay. And then just the last one on DERMAGRAFT. Signs of recovery, but I just wanted to get a sense from you how you're thinking about this product and therapeutic area within the sort of encompassing "One Shire" strategy?

Flemming Ornskov

So I think the main priority we have right now is to return DERMAGRAFT to sales growth. I'm very complementary in the hard work that the newly established sales force has done. I'm very pleased with that. I know how difficult it is to turn the tide when you have negative sales trends. What I see is we have a 20% week-over-week growth in sales. It's encouraging. I think we have to be more moderately optimistic, both about peak sales and about the total opportunity for Regenerative Medicine. But I want to encourage my colleagues working in that field to do the very best to get significant growth into that brand. I don't have any more strategic comments at this stage.

Operator

Our next question comes from the line of David Steinberg from Deutsche Bank.

David M. Steinberg - Deutsche Bank AG, Research Division

I have 2 questions. I just wanted to follow up on the prior REPLAGAL question. You've indicated that Q3 will be flat with Q2 and Q1. However, you're expecting return to growth in the fourth quarter, so a couple of items. Last quarterly call, you indicated market share, I believe, went from 80% to 70% of the Fabry market. You indicated you're having net patient adds, but what gives you the confidence that with still high share versus Sanofi, that you'll actually show growth in the fourth quarter? Secondly, with regard to lifitegrast, the conventional wisdom has been that for a long time, that there'll be no generics in the dry eye market, given the difficulty in achieving many different endpoints. However, a month or 2 ago, there was some draft guidance from the FDA regarding potential generics to RESTASIS. And I'm just curious, assuming OPUS-2 does well, SONATA goes well, and you get your product approved, how -- when you enter the market, there's a reasonable chance of generics. And so how would you think about positioning and pricing if all that plays out?

Graham C. Hetherington

Okay. Shall I start with REPLAGAL? I think -- crucially, I think it's important to identify that I think it's 80% of REPLAGAL patients have only ever been treated by REPLAGAL. So there is a limit to the extent to which any switching competition can impact the underlying performance of the brand. Of those patients that switched to REPLAGAL from Fabrazyme, we believe that we have retained approaching 70% of those patients on REPLAGAL during this competitive period. Thirdly, we are now, we believe, better-sighted than we were over the last 6 months. As to how that switching dynamic took place, we believe that there was an initial flush of switching and that, that rate has slowed. So combine that, those dynamics, David, with the net gains that we see around the world, and I think it is important to point that pricing is different around the world, so net patient gain is one thing, that takes time to convert into net revenue gain. And that's, combine all those factors together, that's what influences our core long sequentially flat into Q3 and then sequential growth into Q4.

Flemming Ornskov

So David, maybe I may add, in addition to the financial outlook that Graham just gave, a few commercial insights. So we have added additional representatives in Europe to support our share gain and our share maintenance. What we have seen is that 70-plus percent, which was the number that Graham mentioned, of patients have never been -- of our patients on REPLAGAL have never been on anything else. So their inclination to shift is probably rather low. What we've seen is, because remember, this is self-recorded and this is what we can see in terms of shipping, what we've seen is a stabilization of the switches back. So if you take 100%, that's all the patients we got over from Fabrazyme, the current estimation is that it's 70%, maybe a little less of the patients that we still have retained. So the vast majority of patients have been retained. And we've seen a slowing down of centers -- of switching. What we also see is not universal switching. It's in a few centers that there's been more switching in others. As to lifitegrast, excellent question, showing great insights on your part, not surprisingly. But what it is here is, of course, that there are technical challenges for any generic provider to go out and make cyclosporine. It's a technical difficult compound to make bioavailable. But let's even say that someone succeeded, and I'm sure several will be working on that, the 2 challenges with cyclosporine in the eye is basically it's not well tolerated in any formulation in the eye. And secondly, it takes quite a long time to set in an efficacy, some are saying up to 6 months before you have full efficacy. So I think with much faster onset for lifitegrast, which much better tolerability, but most importantly, I think that with lifitegrast, you get a product that has biochemically mechanism action and in clinical trials, clearly proven efficacy in various trials in both signs and symptoms. Consistently, you get a consistently effective product that is well tolerated.

David M. Steinberg - Deutsche Bank AG, Research Division

Okay. And just one housekeeping question and one more question. So on LIALDA, you showed very strong growth, curious what sort of inventory in the channel you have currently. And then secondly, Flemming, you've been at the job for a little bit, curious what your thoughts are now in licensing/M&A?

Graham C. Hetherington

Okay. So Dave, on LIALDA, what I said earlier, I think, was that we had seen an increase in wholesale of our inventories of about $8 million this year than in the channel. And that doesn't surprise me at all: one, seeing the script growth; and two, the anticipated script growth. The year-on-year impact of stocking is higher because at the net level, we sort of de-stocked around, let's say, $12 million. So the year-on-year delta there is $20 million. So stocking movements year-on-year contributed $20 million of the year-on-year revenue increase at the net sales level.

Flemming Ornskov

And as for your question on business development and M&A, I think the best answer is the proof is in the pudding, as you say. We've done 3 deals this year. I was actively involved in 2 of those: Premacure, which brought us a great product for retinopathy of the premature babies; and SARcode Biosciences, which brought us a great dry eye product. So I will say my attitude is positive, but I'm really looking at this for innovation. And as we, both internally and externally, have innovation opportunity, I think my answer is, at least so far this year, I've proven that I'm unbiased to whether innovation comes from in or outhouse. But I have shown that in 2 cases, I certainly could also go outhouse and find that innovation.

Operator

Our next question comes from the line of Kerry Holford from Credit Suisse.

Kerry Holford - Crédit Suisse AG, Research Division

Yes. Kerry Holford of Credit Suisse. My first question is on R&D spend. I wonder if you can comment a bit further here. Given the scheduled completion on a number of your large Phase III, Phase IV studies next year, can we assume you'll be in a position to pull back on spend, all other things being equal, of course? So really, I guess, what I'm getting at is could 2013 represent the peak year of absolute R&D spend for Shire? And then secondly, talking more about your expectation for margin leverage, do you have some expectation within that gross margin expansion over the next few years? Regarding [indiscernible] improvement there for this year, but I wonder if you can talk about that in the later years? And then, lastly, Flemming, you mentioned building an R&D center of excellence in Rare Diseases. Could you expand on what that may involve and whether there's any particular costs associated with that?

Flemming Ornskov

Maybe I'd just start off on the technical side of R&D, also to clarify. Together with the pipeline committee, we've identified, looking at the inventory of science and technology and clinical trial expertise within the company, that in Lexington, we have an outstanding expertise, both in terms of people and projects available in the Rare Disease area. So my comments is just that as we re-prioritize within the company, not adding, but re-prioritize within the company, particularly as pertaining to basic research, we want to shift more resources to rare diseases because we see significant unmet need and great opportunities. As to the question of major clinical trials ending next year, that is true. Of course, you still carry some cost after you stop these clinical trials. The challenge is, of course, in the current setup, with the current trials available, some of the clinical costs will go down significantly. But it's also a priority for us to continue to look for late-stage opportunities. So with the current situation, it could look like we certainly, on the clinical trial side, we'll have significant less costs. But I think as we get into 2014, we want to look at what's the portfolio available to us. And we also have a few compounds in Phase II that have great promise, the Premacure compound. And we also have SPD 602 for eye inoculation that could deliver excellent Phase II data and would require the further Phase III investment, which, in the end, probably would be worthwhile, given that these represent significant unmet needs and significant commercial opportunities. But I will let Graham add to my answer.

Graham C. Hetherington

Let me add to that. I think that you're absolutely right, everything being equal, there will be, based on current programs, a lower demand on our R&D dollars, which gives us the ability to fund the kind of areas that Flemming was talking about and, certainly, reduces the need for further increases in our R&D. Gross margin, I don't see any dramatic change in trends there. But I do see that the significant simplification of the organization is going to support us being able to be more efficient with our cost base going into 2014. And that's going to support operating leverage. And ultimately, what is the easiest way to deliver operating leverage? That's through growing product sales. And we anticipate we will have a core product portfolio, which is going to be continuing to grow into 2014. And taking all of those factors together, that's what's given us the confidence to call out continued margin enhancements and operating leverage through beyond 2013.

Operator

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

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just a couple of questions. Timing may be of the Phase IIb data results from your ROP program, Flemming, if you could provide it. And then a couple of follow-up questions.

Flemming Ornskov

So on the ROP program, when we took over the protocol, there was only centers in the -- in Sweden, there were 2 centers, as I recall it, one was in Uppsala and one was in Malmö. And the dosing, which this product is, as you know, it's insulin-like growth factor. It was dosed and then it was measured and then adjusted. And what we felt for commercial execution is, given that we think this product has significant promise and could clearly become part of standard care in any neonatal clinic, we thought that we should absolutely simplify the protocol. And what we expect is that in September this year, we will have made changes that will make the protocol simpler, and then we want to enroll significant more centers. I think we had hoped that we would see data kind of mid-next year. But it may be shifted by a few quarters out until the end of next year. But we also, of course, know that this is a product that could be so game-changing that it's probably very important for us to go to the FDA in the Phase II meeting, with a very significant amount of patients in the trial to have a further discussion.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Okay, great. And then on lifitegrast, you mentioned a bit higher number of patients. Can you maybe talk about -- are these patients differently enriched, i.e., are they maybe worse than what was in your original Phase III? And then also, you talked about a changing endpoint. So can you just talk about maybe a little bit of a history there and interactions with the FDA to agree upon a change at the endpoint? And then one follow-up question on SPD 602.

Flemming Ornskov

Yes. So excellent question, Ken. So of course, not surprisingly, we enhanced or enriched the population in OPUS-2. In the first study, OPUS-1, there were no minimal severity for eye dryness. So this was an allcomers' trial and there was no minimal inferior corneal score that was necessary. And now, we have an eye dryness score of 40 plus/minus, and that's clearly moderate to severe. So we should get a more enhanced, enriched population, which probably would give us a better chance of success. The number of patients were basically increased based on the need to have a higher probability of success with a core primary endpoint. And finally, I've said we changed the symptoms score from a somewhat diffused long list of symptoms to a visual analogue score. That would be much simpler to implement and probably give a more accurate -- this is a validated endpoint score. So these were the things that were done to increase the probability of success.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Okay. And then on SPD 602, you talked about more data or more Phase II programs. Can you talk about whether you're considering running a head-to-head against Exjade in Phase II or would you wait for Phase III? And if you were to run a head-to-head, can you just give us a timing of that Phase II data readout?

Flemming Ornskov

Yes. So there's basically 3 studies -- well, there's 4 studies underway. One has already been read out and has been presented, which is 201, which basically show that it was well accepted and tolerated. But that twice-daily dosing was probably more relevant to secure a relevant clearance of iron. We have included in 2 or 3 now a BID dosing, which will delay that until mid-2014. I also know and can disclose that we actively are considering adding comparative patients already in Phase II to one of the studies or at least maybe in a separate study to get some idea about that, because we want to be ready to do a Phase III study, with or without an active comparator. So your considerations are absolutely correct.

Operator

Our next question comes from Liav Abraham from Citigroup.

Liav Abraham - Citigroup Inc, Research Division

This is Liav Abraham from Citi. Just one question on lifitegrast. Flemming, can you confirm whether the trials that are ongoing will support a European filing as well? And any commentary that you can make on conversations that you've had with the EU regulators regarding the regulatory pathway for approval there, given that no dry drug has been approved in the region and it is a material opportunity.

Flemming Ornskov

Yes. Thanks very much, Liav. Excellent question. So as you know, the dry eye market in Europe is somewhat different than in the U.S. RESTASIS is not really on the market and there are -- high uronic acid is one of the key players. I think Teva is the one that has that product. So I could expect that in Europe, we would be asked to do an active comparator trial. I think once we see the outcome of the OPUS-2, we will engage in those decisions. We absolutely want to develop it for that as well. But I would imagine that we would have to have a separate trial, probably with an active comparator.

Liav Abraham - Citigroup Inc, Research Division

And just a quick follow-up question. As we head into potential -- as we head into Phase III data for lifitegrast and the BED program and these potentially being launched over the next couple of years, any thoughts on the sales force that you would -- incremental sales force that you would need to recruit, particularly in ophthalmology? Or is it just too early to talk about that?

Flemming Ornskov

No, I think I know ophthalmology pretty well. It's difficult to say. Well, depending on, of course, the data and how broad we would go. Typically, ophthalmic sales force is, I would say, 150 to 250, in that kind of size. That's what the sizes are in the U.S.

Operator

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. First, Flemming, I would love to hear your thoughts on kind of your view for the ADHD market outlook longer term, both in the U.S, especially given kind of how much penetration we will achieve for the AD [ph] population, how much more do you think there is to go? And what do you see as the broader market growth outlook for the next kind of 4 through 5 years? And just in the same breath, kind of how do you size up the European opportunity [ph]? And secondly, moving onto VYVANSE and binge eating, I know you kind of given some incremental data today, and I just want to make sure I understand. For the first quarter '14, potential readout for VYVANSE and binge eating could imply that it comes ahead of the depression study. Is that a fair assessment?

Flemming Ornskov

So 2 excellent questions. So maybe let me try first to address the ADHD market and the outlook in the U.S. Well, one observation I had when I came in was that the market growth had slowed down. I think we have seen about -- year-to-date, it's now, I think, 6.8%; in the quarter, it was 7.5%. So it's coming up a little bit again. What I can see is several players retracting from the market, and we took away 150 reps out of 450. So we also took a significant promotional share away. I see the adult market growing about 11% and the pediatric market growing about 4%. It is our hope with adding additional representatives in the U.S. and with a significant focus back in the pediatric market that maybe we can increase the growth with 1 percentage or so. I think clearly, long term, that we are seeing more generic pressure, and we have to keep up a very high promotional effort, particularly in the pediatric market, to continue to see share growth and market growth. I do, however, see that if we were able to get a new indication, particularly in the adult market, which has been the faster-growing market, mostly growing double-digit, I think there is a significant opportunity. So I hope that short term, with further investment in back-to-school programs and more effort on the pediatric market, that we can maybe get it up 1% or so. But longer term, we'll have to focus on developing the adult market and particularly also develop the new indication. And as you saw on one of our slides, I think it was Slide 23, with the Venn diagram, there is significant overlap between some of the new indications being those binge eating and major depressive disorder add-on and ADHD. So hopefully, that will also fuel the growth. ELVANSE, slow start in Europe. We're in 4 countries. We'll introduce 4 more next year. This is really a market development opportunity. I would say the feedback is okay, but we've had lots of challenges with, not pricing, but more with reimbursement and implementation of the CHMP approval. But so far, it's going fine. I would think it will be slow. It will take us some time. Probably, first next year, you'll start to see some more significant numbers. But I also think what we didn't talk too much about in detail today, if we can get in tune onto that market to have both a stimulant and a non-stimulant will help control that market. So thanks. Oh, last question, sorry, was whether VYVANSE would come for BED before major depressive disorder. Well, if the enrollment continues as strong as it's been for BED, that is an opportunity. But both of them, we expect in the first half of next year.

Operator

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

Nicolas Guyon-Gellin - Exane BNP Paribas, Research Division

Nicolas Guyon-Gellin, Exane BNP Paribas. Actually, I have 3 questions. The first one is at P&L, one; and 2 quick other ones that I'll ask one by one. So first for Flemming about cost containment, it seems that your first comments a few months ago referred to a certification of the entire organization, so just room for efficiencies. After just 1 quarter at the helm, operating expenditures are expected to be lower than previously guided. So how shall we think of it going forward? And what could be the magnitude of these savings longer term?

Graham C. Hetherington

Let me pick that up. I called out very explicitly that we had sight and confidence in our -- of us benefiting from simplification of the organization, which will mean that we are more efficient from a cost perspective. We will expand on that during the next 6 months as we've got more detailed plans and we can credibly talk about the magnitude of that into 2014. But at this stage, we're not going to be saying anything more than the fact that we are confident in our ability to expand margins through operating leverage beyond 2013.

Nicolas Guyon-Gellin - Exane BNP Paribas, Research Division

Okay. The second is on DERMAGRAFT. Do you have a plan B in case you cannot turn it around? And to what extent would you consider divesting this product?

Flemming Ornskov

So I'm focused on plan A, which is returning the brand to growth. And I think you've seen 20% week-over-week growth. I think, as I said, the team is doing a really good job. I'm very encouraged by that. The longer-term outlook and the prospects and all that, that's way too early to talk about. I'm focused week-by-week, account-by-account, and I also am very pleased that we've gone up to almost 1,000 accounts now. We grow 20% week-over-week. And I think that the sales force, which is now 95% full and trained, is working hard on growing this. And I think the last thing they need is discouragement from me. They now probably need more encouragement. So I look forward, and that's giving them clear targets on growth, of course, complying growth. And that's where my focus is. So I'm focused on plan A.

Nicolas Guyon-Gellin - Exane BNP Paribas, Research Division

Okay. And the very last one is, with your strategy now well outlined, how about the opportunity to hold a capital market day in the next quarter?

Flemming Ornskov

I think in the next quarter, maybe a bit early. I've had that request before. I, and the rest of the team, absolutely listen to analysts and shareholders, and it's in our plans. I don't think we have a specific date, but it is something that we will deliver on.

Operator

Our next question comes from the line of Peter Welford from Jefferies.

Peter Welford - Jefferies LLC, Research Division

Just 2 very quick ones. Firstly, just on the price increases we saw just, I guess, at the start of 3Q for both VYVYANSE and INTUNIV. Could you just sort of talk to perhaps how much of that would stick, given the current U.S. environment? And secondly then, just reverting back to VYVYANSE and the ADHD market, can you just briefly talk about what you've seen with regards to pressures from some of those companies leaving, in the sense, obviously they've been leaving because there has been increased generic usage, and whether or not you're seeing any pressure from the care -- managed care organizations to shift VYVANSE away to perhaps lower tiers or less favorable positioning?

Flemming Ornskov

So maybe I'd take the one on shifting in the marketplace. This is a partly genericized market, so we have to fight harder and show a better value of VYVANSE, which we continue to do. We maintain our formulary position very well. But I think one can expect that's normal in the U.S. marketplace that they are, and we observe that increased pressure to go generic, and we're aware of that. And we think that with the good value proposition we have for our long-acting VYVANSE, we have shown so far with our contracting that we do very well. But of course, it is getting more competitive. And I will let Graham answer on the prices.

Graham C. Hetherington

So we posted top line gross price increases for both INTUNIV at 7% -- sorry, VYVANSE at 7% and INTUNIV at 9.5%, and I think it was in the 1st week of July. Both of those products have gross and that's around the 40% level. It's an inexact science, but directionally, I reckon about 50% of that headline price increase will stick.

Flemming Ornskov

So with that, I think we have come to the end of this call. I want -- thanks very much for the excellent questions and apologies if we don't get to answer all of them. But feel free to contact us if you have further questions, and our team will be happy to answer them.

Just in conclusion, I think we've had a very good quarter. We have simplified the organization, but we haven't taken the eye off the ball. We have healthy sales growth in most of our portfolio. We have, in all areas, including the pipeline, very good progress. And most importantly, as we also said in the press release, we anticipate to deliver full year double-digit non-GAAP earnings growth in 2013. And we are very excited about the prospects for Shire, short and long term. Thanks a lot.

Operator

This now concludes our conference call. Thank you for attending. You may now disconnect your lines. Thank you.

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