Shire Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Shire PLC (SHPG)


Q3 2013 Earnings Call

October 24, 2013 9:00 am ET


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


Liav Abraham - Citigroup Inc, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Graham Parry - BofA Merrill Lynch, Research Division

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


Okay. Good morning, ladies and gentlemen, and welcome to the Shire 2013 Third Quarter Results. [Operator Instructions]

I'm now pleased to introduce Eric Rojas, Senior Director, IR. Please begin your meeting, sir.

Eric Rojas

Thanks, Dimitri. Good morning, and good afternoon, everyone. Thank you for joining us today for Shire's third 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 on our IR 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, Flemming will talk about Shire's performance, strategy progression and give an overview of our retinopathy program. Graham will continue with the financial review and Shire's 2013 outlook. 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 good morning, and good afternoon. It's great to be here today. We have a strong set of results this quarter that demonstrate how our strategy is delivering. I'm very pleased with our progress.

You can see from Slide 3 the topics I'd like to cover with you today. I'll give a short update on our One Shire reorganization, which is well underway. I'll give you more detail on the cost benefits and resulting improved operating leverage that we are realizing as a result of One Shire. I'll talk about the effect of our focus on driving optimum performance of our In-Line products, and I'll remind you about our pipeline.

In particular this quarter, I'll provide you a deeper perspective on retinopathy of prematurity of blindness in premature babies, for which we are developing a treatment currently in Phase II. This is a great example of an acquired asset that fits very well with our strategy.

In doing all this, I hope you'll be able to see the exciting prospects that we have at Shire for growth, both in the short and in the long term.

But first, let's move to Slide 4 and our results for the quarter. These results are strong and demonstrate our good progress this year since we announced our new strategy in the first quarter of this year. Our focus on excellent commercial execution is clearly delivering. 13% product sales growth this quarter is a strong result, and we anticipate similar double-digit growth in the last quarter of this year.

For the full year, we continue to expect mid- to high-single-digit product sales growth. You'll have seen from our press release today that we have increased our earnings guidance for the second time this year. We have increased it from double digits to mid- to high-teens non-GAAP earnings growth for the full year. These results are evidence of the success of the new focus that we have brought to the organization since May.

I'm extremely proud of what my Shire colleagues have already achieved. Our strategy to develop and market innovative specialty medicines to meet significant unmet patient needs is what we are intensely focused on. And we are doing that through continuing what we are good at, moving into new areas where we know we can develop and grow and stopping or pulling back from areas where the potential for growth no longer meets our criteria.

The simplification of the organization, our One Shire reorganization, is important to us as it's helping us to ensure we are focused on the right things and enables our teams to make quick decisions and move fast and of course, to direct resources to areas where we think we have the best potential for sustainable growth. We're increasingly focusing our investment behind disease areas where there is a real unmet need and little or no competition.

Let's move to Slide 5. And you can here see the elements of the One Shire reorganization. When I started at Shire earlier this year, as you know, the company had 3 autonomous businesses, each with their own R&D, supply chain, technical operations and commercial infrastructures. We have now put these 3 businesses together. The result has been greater collaboration and focus for our commercial operations led by our In-Line team. And with a single R&D organization now in place, we have a more effective process to evaluate all our pipeline opportunity, as well as our business development prospects holistically. This is led by our Pipeline team. Our operations are much more efficient and in reducing overlap that existed previously, we are starting to see the benefit both on our cost line and on our margins. Importantly, our One Shire reorganization is not impacting the customer-facing parts of our business.

Moving to Slide 6. I'll now talk about how, as a consequence of our One Shire reorganization, we are making Shire a leaner and more productive organization with a reset cost base. But first, please remember, we are a growth business, and that is what we are pursuing relentlessly. Over the past few years, Shire has consistently delivered double-digit product sales growth. The next 2 years, however, as you already know, we are expected to show more modest product sales growth, and that will likely continue for our current commercialized products through 2015, when we anticipate the full impact of competition against INTUNIV. After 2015, we expect our pipeline to begin to drive growth over the longer term.

In implementing our One Shire reorganization, we have identified multiple opportunities to reduce overlap and implement more efficient ways of working without compromising our ability to pursue growth. This has enabled us to generate operating leverage and reduce cost. We are seeing some of these benefits in our year-to-date margins, and we expect these trends to continue freeing up capacity to both invest in our future growth and deliver to our stated goals in the shorter term.

We anticipate that the organizational changes of One Shire will be fully clarified by the end of this year. The increase in our full year earnings guidance is a clear illustration of our action in removing unproductive cost at Shire and driving further operating leverage.

In February this year, we guided combined R&D and SG&A for 2013 to high-single-digit growth. We are now guiding these combined costs in 2013 to be 1% to 3% lower than 2012. This equates to approximately $0.25 billion in cost savings.

We will continue to reduce duplication, and we will remain fearlessly focused on keeping costs in check and increasing operating leverage, as we complete this implementation of One Shire and complete the current Phase III trials.

Our ongoing targeted investment in R&D is increasingly focused on rare diseases and the development of promising compounds to deliver future growth. Importantly, our commitment to investment in our R&D is evident from our Phase III program and the acceleration of some of these programs. We expect the combined R&D and SG&A to be around $250 million lower than current consensus in 2014 and $300 million lower than current consensus in 2015 as our One Shire reorganization is completed.

We will also seek to enhance our growth and replenish our pipeline through M&A, and we have considerable balance sheet flexibility to do so. Shire has traditionally grown through M&A, and I intend to continue that tradition with execution of targeted M&A to bring innovative assets to our portfolio and pipeline, that will fit our specialty focus, will meet patient needs and will deliver a sustainable growth to our businesses.

Moving to Slide 7 and the performance of our In-Line products. Graham will walk through the numbers for each product in detail. But I like to draw out a few highlights that demonstrate our improved focus on executing commercial excellence.

You've seen the overall product sales growth of 13%, a good result. 8 out of our products have delivered double-digit growth, and they include VYVANSE, LIALDA, ELAPRASE, VPRIV, INTUNIV and FIRAZYR. That's a really great illustration of our commercial success.

LIALDA continues to perform very well with 36% growth in sales, driven by a great commercial strategy and favorable reimbursement in the U.S. I'm very pleased with the results we're delivering in our GI franchise.

Onto the next line, Slide 8. In our Rare Disease portfolio, we are very pleased with the excellent results from FIRAZYR, an ongoing success in the U.S. market. We have increased our medical education efforts, and the increase in disease awareness is having a positive impact on the overall market and the success of our product. We see further potential growth opportunities. New patient starts in the U.S. have been accelerating over the course of this year. More than 1,500 patients in the U.S. have received FIRAZYR to date. FIRAZYR has now the leading U.S. market share for the treatment of acute HAE attacks. In the U.S., this portable, self-administered presentation is being used to treat some average 12 to 18 attacks per patient per year.

Let's now move to Slide 9. As you know, from the middle of this year, we implemented new programs to accelerate VYVANSE's U.S. growth, and we increased the size of the U.S. sales force. We're capitalizing on the back-to-school season, and we've seen some meaningful prescription growth and share gains since this summer. This helped fuel the good sales growth in the third quarter. We provided our sales force with new resources and tools to engage in customer discussions. And in particular, we've been focusing on micro-targeting strategies with key physician groups. And we have specific programs such as coupons to help patients who may be more price sensitive.

I'm particularly pleased that based on the latest monthly IMS data, VYVANSE, as a share, has grown more in this year's back-to-school season so far than it did in 2012. And recent weekly growth rates are now in line with the overall market growth at levels closer to that we achieved and were seen earlier in the year.

As we end the back-to-school season and focus on finishing this year strongly, I'm optimistic that we will continue to see good VYVANSE performance. We have recently hired a new head of the Neuroscience business unit, Perry Sternberg, who has significant global sales and marketing experience.

Moving to Slide 10 and our pipeline. You can see here the range of potential assets that we're developing. We have 9 programs in Phase III, and we have data reporting over the next 9 months on several of these.

Let's go to Slide 11. I would now like to give you some more color on SHP607, our Phase II clinical program for the prevention of retinopathy of prematurity or ROP, which we acquired with a Premacure acquisition earlier this year. This is an asset which is strategically aligned with our interest in rare diseases and ophthalmology and also gives us exposure to the neonatology space, a space -- a growing market with many underserved patient needs. It also leverages our core capabilities in protein replacement therapies.

ROP is a rare condition which affects premature babies. It's one of the most common causes of vision loss in childhood and can lead to lifelong visual impairment from ocular scarring and potential blindness. Surgery is one of the widely recognized treatment options. ROP is routinely screened for in babies under 13 weeks of gestation and is particularly prevalent in babies born at less than 28 weeks of gestational age. We estimate that there are approximately 30,000 to 40,000 addressable patients in the U.S. and EU combined and also a significant market opportunity in Latin America and Asia, which we're currently assessing.

SHP607 is an insulin-life growth factor 1, IGF-1, protein replacement therapy, which is designed to be administered preventatively, starting in the first 24 to 48 hours of life via continuous IV infusion until the babies start making their own IGF-1.

Now on to Slide #12. We have made good progress in the clinical development of SHP607 since the acquisition of Premacure earlier this year. A Phase II multicenter trial is ongoing in Sweden. And we recently completed a dose optimization exercise, which gives us confidence that with a single dose, without adjustment, all the needs for frequent IGF-1 monitoring that we can use that in this program. This important modification allows scalability across multiple sites, and we believe that it will help drive effective commercialization.

The primary endpoint of this trial is the maximum severity of ROP, that is retinopathy of prematurity, observed in the babies. The secondary endpoints on the investigation will allow us to determine whether SHP607 is having additional benefits, including on other developmental issues associated with premature birth. We are expecting headline data from this trial in the first half of 2015.

Now moving to Slide #13. Here, you can see the news flow that we expect from our pipeline. It is truly busy times at Shire. In addition to the Lifitegrast data, we are looking forward to the results from our studies that will enable us to build our new indications for our LDX, that is VYVANSE molecule. VYVANSE, as you know, is already well-established in ADHD. The potential to grow this brand into other neuroscience categories will be clearer when we have the data from our Phase III trials into the effectiveness in major depressive disorder and in binge eating disorder. We expect the Phase III trial data on our LDX or VYVANSE program within the next 9 months.

Now let me hand over to Graham, who will walk you through the financials. And then after that, I'll be back to summarize and lead the Q&A. Graham?

Graham C. Hetherington

Thank you, Flemming, and good morning, good afternoon, everyone. As you've seen, we've delivered another strong set of quality results, which demonstrate the positive momentum of our business.

Today, I'm going to focus on 3 areas. First, the double-digit product sales growth we've delivered this quarter, which keeps us on track from mid to high single-digit growth for the full year. Second, the cost improvements which have driven the significant operating leverage we're delivering. And third, our increased guidance for the full year 2013 and our anticipation of continuing improved operating leverage in both 2014 and 2015.

On Slide 15, you can see the details behind our third quarter performance, leading with strong product sales growth, up 13% this quarter to $1.2 billion.

I'll talk through the dynamics, which have shaped our product sales performance, in more detail shortly. Total revenues grew 12%, and EBITDA was up 29% to over $450 million in the quarter. We've delivered a 5.5-percentage-point improvement in our EBITDA margin compared to last year. We're continuing to see the benefit from the reset of our cost base, which positions us to deliver sustainable, improved operating leverage going forward.

Earnings per ADS were $1.77, up 30%. Finally and importantly, you can see at the base of the Slide that these earnings have been converted into strong cash flows with quarterly cash generation of $482 million, up 36%.

Turning now to Slide 16 and our product sales performance. We've delivered a strong performance from our In-Line portfolio, with 6 of our growing products captured on this particular slide, delivering double-digit growth.

VYVANSE sales were just short of $300 million, up 21%. U.S. prescriptions were up 7%, and we've benefited from price increases taken since last year.

As Flemming mentioned earlier, we've seen encouraging trends through the back-to-school season. LIALDA continues to show strong growth, up 36% to $142 million. In the U.S., we've achieved a 23% increase in prescription growth, and we've exited the quarter with a market share of over 27%. This is up 5 percentage points from this time last year.

We also benefited from some stocking in the quarter of approximately $7 million in net sales turns in anticipation of higher future demand. ELAPRASE sales were up 17% to $129 million, following further growth in the number of patients on therapy. Quarterly sales of ELAPRASE are affected by the timing of large orders, which accounts for the lower sales in the third quarter compared to the second quarter this year.

VPRIV sales are up 17%, reflecting continued growth in the number of patients on therapy, while INTUNIV continues to perform well, up 17% to $81 million in the quarter. And finally, FIRAZYR, which is up an impressive 107% or $33 million.

As Flemming mentioned earlier, the number of patients on FIRAZYR continues to increase, and this has driven the product's very rapid growth. I'd like to talk to dynamics affecting 3 products, which have not contributed to the growth this quarter.

First, REPLAGAL. Sales this quarter were down 11% year-on-year and 5% lower than last quarter. This performance is about $5 million below the guidance I gave in July. We've seen the rate of patients switching back to the competitor product continue to slow, and we're continuing to see significant gains from patients new to therapy. And with this, we now expect sales in the second half to be broadly in line with the sales in the first half.

DERMAGRAFT was down $10 million year-on-year. We've seen further quarter-on-quarter growth, though, with DERMAGRAFT up 7% compared to the second quarter this year.

And finally, ADDERALL XR. Sales were down $22 million compared to last year, held back by higher sales deductions. Sales deductions were approximately 70% of branded growth sales, and we expect sales deductions to remain at this new level going forward.

Turning now to Slide 17, which looks at our operating ratios in the year to date. You can see that we've delivered significant operating leverage so far this year. This has resulted in a 4-percentage-point improvement in our EBITDA margin year-to-date. We've continued to benefit from the simplification of our business and our resource allocation decisions. And from this, in absolute terms, combined R&D and SG&A for the first 3 quarters is now 1% lower than last year. The rate of growth in R&D has slowed this quarter, and year-to-date spending is now 10% higher than last year. This growth reflects our investments, which are coming to conclusion in Phase III trials for binge eating disorder, major depressive disorder with VYVANSE and Lifitegrast.

Turning to SG&A, year-to-date, which is now 7% lower than last year. We continue to focus on simplifying our business to deliver efficient growth, while continuing to appropriately invest in our commercial capabilities across the organization. The resulting cost improvements have helped drive our increased earnings guidance for 2013, and we expect to sustain these benefits and deliver continued improved operating leverage in both 2014 and 2015 as a result.

Let's now take a look at our cash flow on Slide 18. Our business continues to be highly cash generative. We've delivered cash generation of $482 million in the quarter, up at an impressive 36% with free cash flow of $388 million. We ended the quarter with gross cash of $1.7 billion and net cash of about $0.6 billion.

We continue to have a strong and flexible funding position, which gives us the capacity to invest behind further potential growth-enhancing opportunities.

Turning now to Slide 19, and let me give you a little bit more detail on our outlook for 2013, initially, and then talk a little bit more about 2014 and 2015.

As Flemming identified, we are increasing our guidance to mid- to high-teens non-GAAP earnings growth in 2013. Driving this, we anticipate fourth quarter product sales growth to be at a similar level to this quarter, and we continue to expect mid to high single-digit full year product sales growth. Royalties and other revenues are expected to be 35% to 40% lower than 2012. The fourth quarter royalties will be much lower, though, than the fourth quarter last year, which included a $38 million one-off royalty receipt.

Gross margins. We continue to expect these, as a percentage of product sales, to be at a similar level to 2012. We've reduced our guidance for full year R&D to between 5% to 7% higher than last year, as we re-prioritize investment behind our promising pipeline and late stage clinical trials.

We now expect SG&A for the full year to be 5% to 7% lower than 2012. We're continuing to provide targeted support to our commercial execution, and we're expecting non-GAAP SG&A in the fourth quarter as a result to be slightly higher than we saw in the third quarter.

As a result, we now expect combined R&D and SG&A to be 1% to 3% lower than last year, delivering significant operating leverage for the full year. And as Flemming said earlier, this translates to combined R&D and SG&A being about $250 million lower from when we gave our initial guidance for 2013 in February this year.

Our core factors tax rate is forecast to remain in the range of 18% to 20%, and taken together, these dynamics result in our increased guidance of mid- to high-teens non-GAAP earnings growth for the full year 2013.

Let's now look beyond 2013, and I'd like to make a few key points. The first relates to the number of shares in issue in 2014 and 2015. Based on the assumption that the convertible bond converts in May of 2014, our enough [ph] space drives our expectation that our diluted number of ordinary shares will be about $595 million in 2014 and around $600 million in 2015.

The second is our big point. We're expecting further operating leverage in both 2014 and 2015. One of the drivers, we're going to start as fully gained from the simplification of Shire, which will sustain the benefit of our reduced 2013 SG&A levels. We will see some further one-off costs on top of the $30 million-or-so that we've incurred already this year, which will quantify at the time of our Q4 call. What I can say now is that they will be substantially less than the cost guidance reductions we're flagging today. It's important to recall that in 2014, we will see the effects of the completion of our major late-stage programs and our evolving focused portfolio on our R&D line.

As a result, let me repeat what Flemming outlined a little earlier. We now expect that our combined R&D and SG&A will be around $250 million lower than current consensus for 2014 and around $300 million lower than the current consensus estimates for 2015.

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

Flemming Ornskov

Graham, thank you very much. And now, please turn to Slide 21 and some concluding remarks for my part.

Our strategy is delivering good results. I'm very pleased with our third quarter and how it demonstrates the progress we are making. We're executing our strategy. Our reorganization is well underway. The reorganization is enabling us to reset our cost base to be more in line with industry norms. We will emerge as a leaner and more productive organization with resources freed up for investing in future sources of growth. We're driving optimum performance from our product portfolio, which has delivered double-digit product sales growth in this quarter. And we have a valuable pipeline that we prioritized with exciting Phase III products to bring medium-term growth.

Shire is in good shape, and I believe we've demonstrated how our strategy is starting to deliver. For the second time this year, we've increased our full year earnings guidance.

I'd like to thank all our employees at Shire for their hard work on behalf of both patients and shareholders. I'm excited about the future prospects for this excellent company, and I look forward to talking to you again in the New Year.

Now Graham and I will be very pleased to take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Liav Abraham from Citi.

Liav Abraham - Citigroup Inc, Research Division

I have 2 questions, please. Firstly, on DERMAGRAFT. I know it says that the product lost $90 million in the first half of the year, excluding the vitals that you took. What was the loss in the third quarter? I also noted that you're discontinuing construction of the manufacturing facility in San Diego. But what is the rationale for continuing to market this asset at all, given that it's dilutive to your overall business, and there seems to be no evidence of a material uptick in sales in the near future? And the second question on BD. Flemming, I noticed that you've done some really nice pipeline deals this year. What are your priorities in terms of business development going forward? And perhaps, you talk us through your thoughts on an accretive versus a pipeline deal.

Flemming Ornskov

So let me start with DERMAGRAFT. Liav, here, you're absolutely right. We are incurring losses. I don't -- sorry, I don't actually have the -- here in front of me, but I would reckon that we probably lost another $25 million of that sort of order in Q3. We're deeply mindful of that. Our team are doing an outstanding job of focusing on sequentially growing the products. It is tough, and we are very mindful of the losses that we are incurring. And we're taking significant actions to reduce those. And one feature of that has been the decision to discontinue the build of the facility that you saw in the earnings release. We're continuing to explore all options to reduce the losses that we're currently incurring. But the absolute focus of the team is to build the brand and return the brand to continued sequential growth.

Graham C. Hetherington

And Liav, on the question regarding supplementing the internal pipeline, which is very attractive with further external opportunities, we scanned the marketplace continuously for opportunities. We have clearly said out that some of our priorities are offerings for rare diseases. We look less at the stage of the product, whether it's early, mid, late-stage pipeline are in the market. We look more at the fit with our overall portfolio. And if we feel this product has truly differentiated and can basically meet significant unmet patient needs, so we don't have any clear internal guidance whether we prefer pipeline or on-the-market assets. I think with the 3 deals we've done this year, Lotus Tissue Repair, Premacure and Lifitegrast, we have supplemented the pipeline. But we have an equal focus on strengthening our own pipeline. We have not spoken externally much about our early-stage pipeline. But I would say, particularly in rare diseases, we have a very exciting early-stage pipeline.


[Operator Instructions] I will now open the line of Keyur Parekh from Goldman Sachs.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

I have 3, if I may. First, Flemming, to what extent is it possible to file the ROP product on your Phase II data, given how big the Phase II actually is. Secondly, Graham, if you can just elaborate a little bit on what are your expectations are regarding DERMAGRAFT and RESOLOR, as you kind of layout the cost initiative for 2014, 2015? Are you assuming that those can continue being an actively marketed product for Shire? And then lastly, if you can just confirm kind of that you're still expecting top line growth for '14 and '15?

Flemming Ornskov

So maybe I take the first question regarding SHP607 or the retinopathy of prematurity product. So to my knowledge, some of the largest trials in neonatology was done clinically when surfactant was introduced into the markets. And those trials were 50 size of patients. So this -- where we go and file that number is quite significant. So the Phase II program, after we have done the modifications that should enable vast interest to more easily enroll patients and more ability because you don't have to have frequent monitoring in IGF-1, and it's -- you don't have a very complex dose adjustment. With that, we hope to have many more centers. We are planning to roll that out, as we speak. We just modified the protocol. We're going to a number of the top European, and we'll also talk to the FDA about this. So we hope to roll out this trial. I think it remains too early to say whether Phase II will be enough. Certainly, the size of the trial could point in that direction, and if the early data kind of can guide us, this is a product that has a potential to be filed for breakthrough status.

Graham C. Hetherington

And the short answer to both of your questions, Keyur, directed to me is one, our assumptions absolutely to assume that DERMAGRAFT and RESOLOR remain commercialized in 2014. And yes, we do expect to see product sales growth and revenue growth in '14 and '15, or be it. As Flemming flagged earlier, it will be suppressed based on today's portfolio because of the -- in 2015, as a result of the to genericization of INTUNIV. But yes, headline our product sales growth in both of those years.


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

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just have a couple of questions. First on Lifitegrast, I was wondering the cost guidance into 2015 remains the same with the expectations or hopeful expectations that you can launch Lifitegrast and maybe be building out an ophthalmology division. And then secondly, just wondering if you could talk about where you would all feel comfortable taking the leverage on the balance sheet. So we get some understanding of potential size of transactions that you could contemplate?

Graham C. Hetherington

Let me cover both of those. Lifitegrast, yes, our cost guidance does have the capacity to start that, and that is what is very encouraging about the work we're doing with One Shire. We are not only simplifying the organization. We're making us fit to grow more efficiently. But most importantly, we're developing the capacity to build to invest in areas of new growth. In terms of leverage, as you can see, we have no leverage at the moment. We have substantial free cash flows. I think that speaking to most investors, leverage up to 2.5x to 3x EBITDA is something for a period which would be acceptable. I've said too many on the call that size is not a primary consideration in determining our M&A selections. It is far more about the strategic fits and the growth profile of the assets we're investing in. And I think you can do the math. It gives us multibillion capacity with that kind of appetite to leverage.

Flemming Ornskov

Maybe to comment on Lifitegrast. So the cost adaptation that's going on in the company does not impact our preparation for Lifitegrast should data be positive. We have both the commercial expertise and increasingly, also people with the sales expertise in that area in the company. So we'll be ready to set up both the pre-launch and the launch initiatives as soon as we get the results. And it is clearly our plan if Lifitegrast data should be possible, be positive and the product can be filed, then we would also look for other assets in that area.


Our next question comes from the line from Graham -- sorry, from David Amsellem from Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

Just a couple. Quick question on VYVANSE in MDD. Should it succeed, how much would you need to expand the sales force by? Or would you consider some sort of co-promote structure there? And then secondly, what are your latest thoughts on the future role of the GI business and the reorganized company? I mean, is this space that you want to be in, that you wanted to do R&D investment in? And would you potentially look to divest LIALDA and PENTASA?

Flemming Ornskov

So the 2 ongoing Phase III trials for MDD, should they come out positive, so that they would be added benefits of adding VYVANSE to, for instance, in SSRI in a soft group of depressed patients that don't respond fully to, for instance, an SSRI. We certainly will and have been looking into whether this is best, something we would promote, or we need additional help. It's very important overall. We see VYVANSE as a single molecule, so we see that the growth in ADHD right now is in the adult market. That growth in the adult market is about twice that of in the pediatric market. What we also see is that we could penetrate more into adult psychiatrist and some GPs if we had one of both of those new indications, that would allow us to do so by expanding our field force. Naturally, if the magnitude of the results of MDD were such, that it would be dramatically changing therapeutic standards in major depressive disorder, then we would have to look at whether we would be sufficient in terms of doing that alone, or we should seek partners for expertise. The GI franchise has been delivering through commercial excellence and capturing on the wall to the chilled cox, of course, switched away from ASACOL.

I think we've seen, particularly with LIALDA, a fantastic results this year, great commercial execution, great formulary status. This is a franchise that we continue to feel that we are the right owners for. We are not undertaking initiatives in early-stage research and GI, where there, at later stage, are compounds or a market compound that was differentiated in a high-growth area. We would take a very seriously look at that, but so far, we're very pleased with the performance of the GI franchise. And we are absolutely sure that there could be options to supplement the current portfolio, which has either long patent life and/or is well protected through difficulties in copying that we feel that this is a strong franchise. But naturally, we are all about innovation, and we would like to add innovation also in this franchise.


Our next question comes from the line of Graham Parry from Bank of America Merrill Lynch.

Graham Parry - BofA Merrill Lynch, Research Division

If you can give us a little bit more color on what you think the revenue outlook is for 2014 and '15, given the stabilization of VYVANSE market share, but still some competitive pressures in HGT. And do you think that's impacted in any way by the reductions in SG&A that your guidance would imply? And secondly on the cost guidance, does that assume any new in-licensing of R&D projects or the expansion of sales force for binge eating or MDD survivance? And then thirdly, could you give us the latest on your thoughts on timing as the Lifitegrast Phase III APP2 [ph] and the binge eating and MDD Phase III readouts? Are these all still Q1 '14?

Flemming Ornskov

So maybe I could take the latter questions in that order. We have not changed our outlook for when we expect Lifitegrast and binge eating data. So we stick to what we previously said, which was correctly cited by you. I think in terms of our ability within the cost base that I will ask Graham to talk about in a second, one thing in the way we're going to build budgets going forward is within our pipeline committee, we have 2 objectives, either internally generate compounds or supplement through BD and M&A. So we will lead in the overall R&D budgets, every year capacity to assimilate additional cost should we in license products. So that will specifically each of the product categories that we have. So Graham, do you want to take the other parts of the question?

Graham C. Hetherington

Yes, so let me expand on that. We will have capacity in our budgets for absorbing in-line transactions. Clearly, up to a point, so we will have flexibility. But if we acquired something more significant, then that would change our guidance. But we do have conditionally, yes, enough capacity to commercialize the VYVANSE new uses. But all about will, as the building on what Fleming said earlier, depend entirely on the data results that comes out and the scale of the opportunity. In terms of revenue outlook, I think the only additional color that I can give is that we are directionally comfortable with where consensus product sales are going in 2014, '15. You can capture that on our website, and we're not going to be drawn any further on the guidance going out to 2 years, but directionally comfortable with the consensus projections that are out there at the moment.

Flemming Ornskov

I think it's also important to realize that you alluded to whether there were negative impact on commercial execution by the reorganization. Maybe we didn't make it totally clear. We have actually shielded the sales force. We have actually increased our investment in the field force. We've added 50 additional reps in the U.S. to the Neuroscience sales force. We have added 10 to the Rare Disease sales force in Europe, and we have added personnel in other parts of the world. We strengthened our international presence. We have simplified our structure internationally, and we're present in 29 countries and quite a number of countries through distributors. So the commercial infrastructure and the commercial execution have not been affected by this. There has been no minimal impact here and if so, it's actually been positive with increasing number of colleagues there. And the other thing, which is very important to understand, is that we reshuffled the focus so the area that have been affected and where the cost have been pulled out have been in more corporate function, and it's been in more back-office functions. But frontline, medical or sales-related options and functions within Shire have been increased. We're increasingly decreasing our back-office and increasing our front office facing customers.

Graham C. Hetherington

And let me just tactfully reinforce that's what I was talking earlier about SG&A likely to increase in Q4 versus Q3, and that reflects the investment decisions that Flemming has been talking about.

Graham Parry - BofA Merrill Lynch, Research Division

And if I can just squeeze a little further on the in-licensing of the R&D, meaning if you -- further example, between license and early-late stage II or early-stage III asset are the required in entire Phase III program. And will that be the sort of thing, which would be over and above what you're seeing? Or should we just think about that ending accretion? I know with no dilution to net own earnings.

Graham C. Hetherington

Directionally, yes, but Graham, we have to call everything out on a case-by-case basis. But I think the key point still remains that we're positioning ourselves to have capacity to be able to take home small to medium-sized in-licensing programs and our cross profile.

Flemming Ornskov

I think what happens when we're in-licensing is we have a process. We go through our portfolio on a regular basis. We re-prioritize, so if we in-license something that has higher value than that we have in the pipeline, it will lead to a re-prioritization, and we've seen that when we in-licensed Premacure, compound PREMIPLEX and when we in-licensed Lifitegrast. So we're absolutely a constantly just putting the money behind the best science and the best prospects.


[Operator Instructions] Our next question comes from the line of James Gordon from JPMorgan.

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

James Gordon from JPMorgan. One question was just a clarification, which is on timeline. So I think you just said that there wasn't any change to timelines for the 3 Phase III studies we're expecting. In the presentation of Q2, dry eye, binge eating and depression, we're going to report in Q1. But then when I looked at depression, still looks like it's enrolling in clinical trials.

Flemming Ornskov

That's a very smart -- and it was my misunderstanding. Major depressive disorder will not read out in Q1. It will go into the second or the third quarter next year. It's still enrolling. So you're absolutely right. Apologies for that. I thought there was only the 2 first we're talking about.

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

But the binge eating and the Lifitegrast are both Q1? Is that right?

Flemming Ornskov


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

The other one was just diversion on cost savings and internal medicine. You talked about reallocating spend in terms of promotion. But which products saw that you -- since you started you have actually taken promotions down and how much? I know there were products which should now going to be part of internal medicine, say for instance, the GI product. Is there any promotion still going there? Or is the promotion really just VYVANSE and the rare diseases? It's all whether the promotion, really, is in FIRAZYR?

Flemming Ornskov

I don't know. So the promotional efforts within the company is mainly behind the Neuroscience franchise, so we have significant resources behind VYVANSE in the U.S. and other countries and Elvanse, as it's called Europe. We have still significant investment behind INTUNIV on the side of the Neuroscience business in GI. We have investments behind both LIALDA and PENTASA. The majority is behind LIALDA. We have 96 reps in the U.S., so we have significant commercial infrastructure. We may have expressed ourselves wrong. I apologize for that. GI is a separate business unit. The internal medicine unit are products like ADDERALL XR and others that are, you can say, more mature. And behind those products, there's limited commercial effort, it's mostly contracting.

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

And just a final question, which was, do you have VYVANSE growth? In terms of volume, how we it would have broken down by adult and pediatric? And also any indication why ELVANSE sold this quarter?

Graham C. Hetherington

ELVANSE was still quite small and single-digit. Rest of the world, VYVANSE is starting to become a multiple number. So including Canada, Brazil and Europe, the VYVANSE compound is generating mid-teens millions in the quarter, so that is starting to evolve quite nicely.

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

And do you have a breakdown for VYVANSE by adults and pediatrics in the U.S.?

Graham C. Hetherington

Not to hand is a simple answer. If anybody wants to follow up with Eric and Sarah, that is something that we'll be able to provide.

Flemming Ornskov

Maybe just a comment, on the -- sorry, maybe just a comment, James, on when you interpret the ADHD market in the U.S. I think it's important to see that if you look at the overall market, when you look at what the VYVANSE numbers are, then there's a number of factors to keep in mind. The highest growing compounds in this market are the immediate release compounds. The other factor that is growing in that market seems to be combination therapy, so those are 2 markets that we don't compete in. If you actually take IR out of the market growth, we outgrow the market. The other factor that is happening in this marketplace is, of course, the double -- the growth is double as high in the market for adults, as it is in the growth for the pediatric market and that basically means that you will see some skewing a bit of the performance of VYVANSE because we're not competing in certain part of the market as effectively that are growing. We are addressing this, but that is something that you should see. So if you look at it, the adult market has grown that the 18-plus, that's grown about 10% this year and the pediatric market has grown about half that rate. And you could look at the VYVANSE share in the adult market, that's about 15% our share in peds is 18-plus percent. So as the adult market becomes a larger part of the overall ADHD market, they now represents about 50% of the market, then VYVANSE overall shares are a bit under pressure. And that something that we have to address with the overtime. In terms of getting more competitive also in the adult market, we are looking into that. Naturally, the 2 new indications will significantly help us there.


Okay. We appear to have no further questions from the telephone participants, so I'll hand the conference back to you, sir.

Flemming Ornskov

Well, thank you so much for participating in this call today. Just a few closing remarks.

I think the new strategy that we have introduced earlier in the year clearly is starting to pay off. I think we are seeing strong effects of the reorganization. I think we have a strong performance of our product portfolio, with 8 products delivering double-digit growth, overall growth of 13%. I think you've seen that our guidance of earnings have now, for the second year, the second time this year have been increased. And I think you've also see very strong operating income and very strong cash generation respectively, plus 30% and plus 36%. I think that can only qualify as a good, or if you're a little bit more optimistic, a strong quarter, for which I thank your attention.


This now concludes our webcast. Thank you, all, for attending. You may now disconnect your lines. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!