Shire Management Discusses Q1 2014 Results - Earnings Call Transcript

| About: Shire PLC (SHPG)


Q1 2014 Earnings Call

May 01, 2014 9:00 am ET


Sarah Elton-Farr

Flemming Ornskov - Chief Executive Officer and Director

James Bowling - Interim Chief Financial Officer, Senior Vice President and Group Financial Controller

Perry Sternberg


Graham Parry - BofA Merrill Lynch, Research Division

Mark Clark - Deutsche Bank AG, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Amy L. Walker - Morgan Stanley, Research Division

David Michael Steinberg - Jefferies LLC, Research Division

David Amsellem - Piper Jaffray Companies, Research Division


Hello, and welcome to Shire's 2014 First Quarter Results Call. [Operator Instructions] Just to remind you, this call is being recorded. Today, I am pleased to pass you over to Sarah Elton-Farr, Senior Director of Investor Relations. Sarah, please begin.

Sarah Elton-Farr

Thank you, Hugh. Good morning, and good afternoon, everyone. Thank you for joining us today for Shire's First Quarter 2014 Financial Results. You should have all received our press release and should be viewing our presentation via our website on If you are unable to access the press release from our website, please contact Souheil Salah on our Investor Relations team at + 44 1256 894 160, and he will be happy to assist you. Our speakers today are Flemming Ornskov, James Bowling, and Perry Sternberg.

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, could materially affect our results.

Flemming and James will talk about Shire's performance, strategy progression, financial review and 2014 outlook. Perry will continue with the Neuroscience business unit update. And finally, Fleming will make simple some concluding remarks and open up the call for your questions. [Operator Instructions] Eric Rojas and I will be happy to follow up with you after the call.

I'll now hand the call over to Flemming.

Flemming Ornskov

Thank you, Sarah. Good morning, and good afternoon. I'm very pleased to be talking to you today about our strong first quarter and to give you more insight into the progress we've been making in implementing our strategic shift towards building a growing business focused on highly specialized medicines targeted at diseases with distinct and significant needs.

I'm particularly delighted to have 2 new speakers on our call today, Perry Sternberg and James Bowling.

Perry joined Shire in September. He brings considerable career experience of sales and marketing from his commercial leadership roles at Bausch & Lomb, Novartis and Merck. Perry leads our Neuroscience business unit, and he will share with you the plans we have in growing this core business.

James Bowling, as you know, stepped into the role of Interim Chief Financial Officer on March 1 of this year.

Let's move to Slide #3. As you've seen from our press release, Shire continues to deliver strong earnings. This quarter, non-GAAP earnings per ADS is up 38%. The implementation of our strategy shift and focus on operational discipline, which we outlined earlier this year, are behind this success and behind our long-term outlook.

We've moved quickly with our integration of ViroPharma. It's progressing very well on all fronts. It's contributed sales growth and brought attractive pipeline possibilities. Integration of people and offices is underway. And the non-manufacturing challenges are being mitigated. Overall, the integration is on track to meet all targets and capture the synergies identified at the onset. We have shown that we are good at identifying strategic M&A and that we can execute and integrate effectively and, thereby, building value from the assets we acquire.

We strengthened our pipeline with new valuable potential products from ViroPharma. And we are also progressing well with potential treatments in development for rare diseases, while continuing to remain active on the business development and licensing front.

Double-digit product sales growth this quarter is a result of our focus on commercial excellence, driving our in-line business, and the contribution from the acquired ViroPharma products. We're exploring new opportunities to drive future growth and value through continued commercial excellence in all business units. You'll hear from Perry how we expect to be able to significantly increase the revenue of our Neuroscience business.

Strict operational discipline continues to pay off. We've gained further leverage from our One Shire reorganization. And we maintain our strong cash generation capability, thereby, providing capacity for investing in future growth of our pipeline, and through business development.

Moving to Slide 4. On this slide, you can see more detail behind our in-line success and the impacts of our continued emphasis on driving performance. We have a number of growth drivers, including the contribution from CINRYZE. Five of our products, making up more than half of our first quarter sales, have delivered double-digit sales growth.

We are particularly pleased with the strong performance of CINRYZE. It has delivered sales of $86 million in the 2 months, since the merger closed, at the end of January. Importantly, the patient-related catalysts of growth have continued, which is very encouraging. The sales force continues to be very capable and highly motivated.

FIRAZYR is also continuing its strong growth trend, with sales up 80%. Our commercial team and all of the Shire people involved in the ViroPharma integration have done an excellent job in ensuring that our hereditary angioedema patients' needs are met, and these results speak for themselves.

ELAPRASE sales are up 13%, following continued growth in the number of treated patients.

LIALDA, strong performance, continues as a result of further market share gains, in particular, in the U.S.

Our lead product for ADHD has also delivered good results in both the U.S. and international regions. I'm pleased with the continued performance of VYVANSE.

As you know, Neuroscience is the core franchise for Shire and the improved performance as a result of the initiatives we took 6 months ago. We have many years of experience in ADHD. We understand this condition. We know the patients' need, and we are well qualified to serve the physicians in this space.

In a few minutes, Perry will tell you more about our exciting plans to continue the growth in this business, including the exciting news we announced today about our new product for the growing adult ADHD market, SHP 465. But first, let me hand over to James to walk you through the numbers for the quarter. James?

James Bowling

Thank you, Flemming. Good morning, and good afternoon, everyone. As Flemming has highlighted, we've delivered another strong set of quarterly results. Today, I am going to focus on the following: first, the product sales growth delivered from across our in-line portfolio; second, the lower operating costs, which have driven the significant leverage we're seeing this quarter; third, the strong cash flow of our business; and finally, our increased expectations for non-GAAP earnings per ADS growth in 2014.

Turning to Slide 6 and our first quarter performance. Our product sales were up 19% to $1.3 billion. We are very pleased with the strong start made by the ViroPharma products, which in the 2 months since acquisition, have contributed 8 percentage points to our growth this quarter. And our underlying business also started the year well, delivering 11% growth compared to last year.

You'll see that our EBITDA was up 40% to $628 million this quarter, as both our strong product sales performance and also lower operating costs increased our operating margin to 45%. I will provide some more detail on operating costs and our expectations for them going forward in a moment.

Our earnings per ADS are up 38% to $2.36. And we've delivered cash generation of $331 million in the quarter, up 29% from last year.

Turning now to Slide 7 and our product sales. We've seen a strong performance from across our portfolio. VYVANSE was up 18% or $53 million, as we saw the benefit of pricing actions taken since last year, and also good growth in Canada and the EU launch markets.

INTUNIV prescriptions grew in line with the ADHD market. Net sales increased 6%, as the effects of the pricing actions we took last year was slightly offset by higher sales deductions.

CINRYZE delivered product sales of $86 million. As Flemming said, we're pleased to see a continuation of CINRYZE's growth in the 2 months since acquisition. And on a pro forma basis, CINRYZE sales are up 16% compared to the first quarter last year.

FIRAZYR was up $33 million. That's an 80% increase, driven by the U.S. market, where we continue to see good growth in patient numbers and the number of treated acute attacks, as well as the benefit of pricing actions taken since last year.

ELAPRASE was up 13% to $129 million, with strong performances in Europe and the developing markets.

REPLAGAL sales were flat on last year at $114 million, as slight volume growth was offset by lower pricing. We continued to see good growth in emerging markets and consistent demand in the more established markets, including Europe.

VPRIV sales were up 6%, as the number of patients, globally, on therapy increased.

And finally, LIALDA, which was up 28% to $129 million. LIALDA's U.S. market share has grown by 8 percentage points over the last 12 months, and we exited this quarter with a market share of over 30% for the first time. And prescriptions were up a very strong 33%, that's higher than net sales growth, which was held back by some $10 million of retail stocking in the quarter.

Turning now to Slide 8 and our operating ratios.

As you can see, our R&D spending was markedly lower this quarter, down 13% or $27 million. Three main factors contributed to this. First, in Q1 last year, we were still incurring significant R&D costs across a number of large Phase III trials, including LDX, for major depressive disorder, and NSS. These trials have now concluded, and as you know, we are not pursuing these programs. This accounts for approximately $25 million of the lower R&D spend year-on-year.

Second, we saw the benefit of our lower R&D overheads, following the One Shire reorganization and our focus on operational discipline. And finally, following the reprioritization of our portfolio last year, we've targeted our R&D spending on our most effective programs. This increased efficiency has given us the capacity to continue to add external innovation to our pipeline and absorb the development costs of the promising assets that we acquired with ViroPharma.

Our SG&A spending was up 4% year-over-year, with the increase wholly attributable to the inclusion of 2 months of ViroPharma's costs. Excluding ViroPharma, our underlying SG&A spend was slightly down year-on-year, as the benefits of our focus on operational discipline continues to bear fruit. And overall, as a percentage of product sales, SG&A fell to 27%.

We do expect to see operating costs over the balance of the year to be higher than the first quarter. And I'll outline the drivers of this in a moment.

Let's now take a look at our cash flow on Slide 9.

The $331 million of cash generation this quarter is up 29% on last year, but is also, after about $100 million of one-time costs relating to the acquisition and integration of ViroPharma, our One Shire reorganization and the divestment of DERMAGRAFT. This strong underlying performance has meant we ended the quarter with net debt of just $1.4 billion. And our solid balance sheet and our strong cash flows give us significant capacity to invest in future growth opportunities.

Turning now to Slide 10 and our increased outlook for 2014.

Following our strong start to the year, we are increasing our guidance for non-GAAP earnings per ADS growth to be in the mid- to high 20% range. We continue to expect product sales growth to be in the mid- to high teens in 2014. This reflects 11 months of ViroPharma's product sales and continued growth from our other products, albeit at a slightly lower rate than we saw this quarter, as we lap against strengthening comparatives over the balance of the year. We still expect royalties and other revenues to be 10% to 15% lower than 2013.

Our non-GAAP gross margin is expected to be approximately 1 percentage point lower than in 2013, due to the slight dilution from the ViroPharma products. We will continue to benefit from our reorganization and focus on operational discipline. But we also expect to see increased operating costs over the remaining quarters of 2014, as we invest in our innovative and exciting pipeline of early-stage assets, including DEB, ROP and our intrathecal programs, and bring fiber tech and other new assets for further business development activity into our pipeline. And this expectation is included in our guidance.

Our in-line team will be making investments to prepare for the launch of SHP 465 in the U.S. and XAGRID in Japan, to build disease awareness for binge eating disorder, and to support the continued international expansion of VYVANSE. And our operating costs over future quarters will, of course, also include the full effect of the ViroPharma acquisition.

With these in mind, together with the lower-than-expected costs in the first quarter, we now anticipate combined R&D and SG&A costs for the full year to be between 4% and 6% higher than last year. And this should result in a slightly lower full year EBITDA margin than the 45% seen in the first quarter.

We continue to expect net interest expense to be at a similar level to 2013. And our core effective tax rate on non-GAAP income is expected to remain in the range of 18% to 20%. Taken together, we've increased our guidance for non-GAAP per ADS growth in 2014 to be in the mid- to high 20% range.

And with that, I'll hand you over to Perry.

Perry Sternberg

Thank you, James, and I'm delighted to be here today. When I joined Shire last year, I was aware of the company's excellent reputation and experience in neuroscience, specifically ADHD. In the months since then, I've been working with the great Shire talent to formulate the strategy that will fulfill our ambition for growth in this exciting space, where so many patient needs are still unmet. We believe we can grow Shire's Neuroscience business unit significantly in the coming years. This is in despite the pending loss of exclusivity of INTUNIV in the United States at the end of the year.

On Slide 12, you can see the growth catalysts for our Neuroscience business. First, we have a new potential product in development for a growing niche with unmet need in the adult segment of the U.S. market, more about this in a moment. Second, we are making great progress with our pending indication of VYVANSE for binge eating disorder. And third, we are confident in our expansion and growth potential in the markets outside United States. Together, if we are successful, these 3 actions provide the opportunity to double the size of our existing business by the end of the decade.

On Slide 13, let's take a look at the U.S. market growth. ADHD market growth has remained strong, and we expect this growth to continue at the low single digits through 2020, driven by population growth, increased awareness, especially among adults who previously suffered as kids, as well as potential new product launches. In 2013, the market value was over $8 billion based on 60 million annual prescriptions. Of these, about half were for adults.

With the modest growth factors I just described, we believe the U.S. market will reach 70 million prescriptions by 2020 and that the adult patients will increase to about 56% of the market. With our dedicated sales force, leading consumer education efforts, and market-leading products, we believe we are excellently positioned to take advantage of these market dynamics and to increase our U.S. share of the ADHD market. As you can see, the adult segment is the largest and fastest-growing segment. Our experience in the ADHD market and understanding of patient needs has led us to identify a new opportunity for Shire to gain additional share of this segment.

Let's move to Slide 14, and I'll tell you more. In dealing with ADHD symptoms, adult needs are often times different from those of children. For many patients, their working day is longer and they also want to control symptoms into the evening to cover all aspects of their lives. As you can see, VYVANSE captured approximately 15% share of the adult market during 2013. VYVANSE's duration in efficacy have 14 hours post-dose time point. So for many patients, it's a great choice.

Currently, the 2 products with the highest share in the adult market are ADDERALL IR and ADDERALL XR, both mixed amphetamine salts. Combined, the ADDERALL IR and XR molecules represent approximately 60% of the market. Our analysis of the market suggest that about 10% of the adult patients are using a combination of extended-release with an immediate-release treatment and they're doing so in order to serve their specific needs for additional duration. So although VYVANSE continues to perform very well in the adult market, there is a segment of the adult market that still has unmet need for longer symptom control. We believe that SHP465 could address this need.

Let's move to Slide 15 to tell you more about it. SHP465 is a mixed amphetamine salt, which demonstrates efficacy in adults at 16 hours, post dosing, in clinical trials. Seeing this unmet adult market need, we recently revived SHP465 from our portfolio, as we believe a longer-lasting therapy will provide a great benefit for the adult market. We discussed SHP465 last week with the FDA and, following positive feedback, anticipate a 6 months review, enabling us to potentially launch this product in the first half of 2015.

Here's how it works. It is a novel and complex BBB release system, as shown on the diagram on this slide. If approved, SHP465 would be the only product to demonstrate efficacy at the 16-hour time point, post dose, while also having a safety profile consistent with other ADHD stimulant medications. SHP465 could be an attractive alternative for those adults who need longer efficacy later in the evening. We expect SHP465 to have 3 years of Hatch-Waxman exclusivity, and we expect to have at least 2 patents listed in the Orange Book expiring as late as May 2023. We believe, with SHP465 in our portfolio, we can increase Shire's share of the U.S. ADHD market by an incremental 3% to 5%.

Now, moving to binge eating disorder on Slide 16. I am aware that many of you have heard us talk about this area of significant patient unmet need before. Based on our extensive work to-date to understand all aspects of this condition, we still believe that it is misunderstood and the potential benefit to patients and contribution of growth in our business is significant. This slide sets out the characteristics of this condition, which is confirmed in the DSM-5 as a psychiatric disorder.

Important is the distress that it causes in patients. Binge eating disorder is not just about eating a lot; it is that, plus being out of control and feeling bad about it. This is a significant market, estimated at 2.8 million U.S. adults. We believe that this patient population is under-diagnosed and underserved. Currently, there are no approved treatments.

On the next slide, Slide 17, you can see our next steps. We are very excited about the data, which you all have seen. We're setting it in full detail to the medical community at the APA, next week, and we are on track for a submission, potentially in Q3. We anticipate, if approved, a launch in 2015.

Now moving to Slide 18. I'll talk about the other source of our growth for the Neuroscience business, and that's the market outside the United States. Although the markets are smaller than the U.S., with new neuroscience product launches and focused resources in the growing countries, we expect to see good growth in revenue contribution from the international business over the coming years.

We have 4 products in our international portfolio, EQUASYM, ADDERALL XR, ELVANSE and INTUNIV. We are in launch mode for ELVANSE, and you can see on this slide the country rollout that we're executing. If INTUNIV is approved in Europe, we anticipate a similar footprint for this nonstimulant. If we successfully execute these commercial plans, by 2020 we expect we could have a much larger ADHD international business in more than 20 countries, which promises to be a significant contributor to our overall Neuroscience business.

Now to sum this all up, on Slide 19. We are excited by the 3 strategic opportunities to grow the Neuroscience business. In the U.S. ADHD market, we are confident in expanding our market share of the adult segment with SHP465. In binge eating disorder, we have very strong data supporting the potential of VYVANSE to treat this newly-recognized and underserved adult patient population. Outside the U.S., we believe we can grow our business with our expanding portfolio of treatment choices and country rollouts. If all these plans are successfully executed, we believe we have the opportunity to double the revenues from our Neuroscience business.

Thank you very much for your attention, and I'll turn it back to Flemming.

Flemming Ornskov

Thank you, Perry. And to summarize how we are addressing the opportunities for our in-line business in Neuroscience, I'd now like to switch to talk to you about the value of our pipeline.

On Slide 21, you can see the diversity, the balance and spread of our rich pipeline assets. There are a few that I'd like to call out specifically, lifitegrast. As you've read in the press release, we received the results of the SONATA safety study, which was entirely consistent with that observed in the Phase II and in OPUS-1 and OPUS-2 studies. We are planning for a meeting with the FDA to determine our ability to file based on the totality of Phase II and III data and if additional studies should be required. It is, as you know, the first potential Dry Eye treatment to have supportive Phase III data demonstrating control of symptoms.

Since we last talked to you, the INTUNIV submission has been filed in Europe and we're excited about the possibilities for that as you just heard from Perry. Unfortunately, we placed SHP602, the iron chelating agent on clinical hold as we evaluate nonclinical tox findings. However, we're very pleased that the ViroPharma acquisition has brought us some interesting potential new programs and we're particularly excited about the potential opportunities for new users for CINRYZE.

Another program we think shows great promise is Maribavir. Let's move to the next slide to tell you a bit about this.

On Slide 22, you can see a summary of the patient population, a description of the products, our progress and the potential we see for Maribavir. In essence, this is an unmet patient need and a growing patient population. Orphan designation was granted in both the U.S. and in the EU. The data we've seen so far is encouraging and the safety profile is good. We're assessing its potential for Shire, and once the Phase II data is received, we'll have a clearer view of the potential value and the overall strategic fit.

Moving to Slide 23 and our latest pipeline addition announced today. The acquisition of Fibrotech strengthens our growing and innovative portfolio targeting renal and fibrotic diseases, and it leverages our existing renal capabilities from both FOSRENOL and REPLAGAL. FT011, the lead molecule, targets an innovative, novel mechanism of action, which completed a Phase Ia study in healthy volunteers and is currently in a Phase Ib study in patients with renal impairment.

The first Phase II study is planned to enroll patients with Focal Segmental Glomerulosclerosis, also called FSGS, a rare fibrotic kidney disease with high unmet medical need that affects around 75,000 patients in the U.S. and top 5 EU countries. We will also explore the application of this technology in other potential fibrotic conditions.

Given recent advancement in the scientific understanding of fibrosis, as well as the development of biomarkers to aid in the clinical development, it's an exciting time to expand our interest in anti-fibrotic agents with the clinical stage candidate, as well as a library of additional novel molecules. All in all, I'm really excited by the content of our pipeline and with the progress we're making.

Moving finally to Slide 24. Shire once again delivers a strong set of results and has its sights on continued growth in the future. Our shift of strategic focus mean that we are concentrating only on the areas where we see high growth potential for the future, highly specialized medicines targeted the diseases with distinct and significant needs.

We've demonstrated our ability to deliver commercial excellence and explore targeted additional opportunities to grow our core franchises. You've heard from Perry how we believe we can double, double the revenues of our Neuroscience business. Maintaining operational discipline is now a constant at Shire. We have a lean, but scalable structure that is generating operating leverage and providing room for future strategic investment opportunities. We have a pipeline with considerable potential and we are constantly seeking to add to it and to increase its values.

I believe, personally, that our broad range of programs represent a significant source of value upside for Shire in the future. All these elements of our strategy are delivering and I'm very excited about the future growth potential for Shire.

Thank you so much. And now, James, Perry and I, will be more than happy to take your questions.

Question-and-Answer Session


[Operator Instructions] And the first question is from Graham Parry of Bank of America Merrill Lynch.

Graham Parry - BofA Merrill Lynch, Research Division

Say firstly on the costs, and I was just wondering if you think this is just faster delivery of the savings that you've already identified, or do you think you could exceed the initial around $300 million that you envisaged? Secondly , there's obviously a little bit of speculation in M&A around in the markets at the moment. Just could you reconfirm your thoughts on Shire remaining an independent company and your own M&A target priorities. And I noticed the AGM voted the increase in your borrowing power through to $12 billion from $4 billion, so as we see this signaling a near-term intent to utilize that level of debt? And then I'll ask a third one to prove that I can't count. In Maribavir trials, could you discuss whether you think those could be potentially fileable data or not?

Flemming Ornskov

So I noticed 4 questions. I think you may receive a red card in the mail from Sarah at some point, but I'll try to answer all of them. So I noted one on cost, one on M&A, one on the $12 billion borrowing power at the AGM, and one on Maribavir. So maybe on M&A, as I'm sure you're aware, I will not, cannot comment on any specifics relating to M&A. What I can comment on is, as you've also seen today, Shire is a growth company that delivers its results through being efficient and innovative and today, we've shown that also in the M&A front, we're active. It's a small acquisition, but it adds to our innovation. And with Fibrotech, we've added another interesting compound and a number of compounds, potentially, to our really innovative and thriving renal platform, where we also have some really interesting candidates internally. And you're all aware of, we, a few years ago, acquired IGAN, so we're building our expertise in that area. On the $12 billion at the AGM, I would call that a routine manner. We had not updated that for quite some time. It coincides with a lot of cyclic activity in M&A, but I think it's just a coincidence. On Maribavir, we have said that in the first half of next year, we should have additional data. We are very excited about potentially having a very effective and safe compound in an area of significant unmet need, namely to treat CMV in transplant patients. On the cost, which clearly was the most difficult of your questions, I'm more than pleased to pass that over to James.

James Bowling

Thanks, Flemming. Yes, I think I've given good guidance on cost. I think, we're making excellent progress both in terms of improving the efficiency of the business, but also investing in our innovative pipeline. And I think I've given good guidance in terms of how we're going to turn out for the rest of the year on costs.


The next question is from Mark Clark at Deutsche Bank.

Mark Clark - Deutsche Bank AG, Research Division

There's been some considerable uncertainty in the stock price, at least until the recent M&A sort of few are already in the sector, about the patent situations surrounding LIALDA in particular. And I thought it would be a good opportunity for you to set out exactly what the situation is, as regards to the Actavis appeal decision, which reversed the district court decision, sent it back to the initial court house. If you could just talk us through what that actually means for the ongoing litigation? And secondly, could you confirm that there's still no court date for the VYVANSE patent challenges?

Flemming Ornskov

Thanks very much for your question. I think, when there are a lot of details, it's sometimes very important to take the big picture. When there's a lot of people talking and the facts may get lost, I think it's important to take the facts into consideration and try to answer them, and I'll answer it as I can in a complex manner. I think the first thing you want to know is do I sleep well at night over this topic? The answer is yes. So let's just take what the facts are. So Zydus, which has the first 5 studies and they have retained that, the case has been reopened. No one knows whether they have an approvable enter, but administratively, the case has been reopened. There's a new trial date, July 6, 2015. Then there's Actavis, there the Courts of Appeals sent it back to the lower court in California. That was regarding the construction of 2 claims. So talking to my team, that means that it has to go through another round, it Southern Florida Court. And then both parties can appeal. So I imagine, we're talking about 1 year's plus time here. And then again, even if you, as a challenger, were to win, it would have to have an approvable ANDA. And again, I think that's a question -- a high question, so to speak. And there's Osmotica, there's no trial date and, Mylan, they have a date set in October of this year. So I think there's a lot of activity, but we are very confident in our ability in the strength of our patent. And on VYVANSE, there is no court date.


Our next question is from the line of Ken Cacciatore of Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Flemming, I'm going to take another chance on the M&A that maybe you'll comment. We're seeing high quality companies with good duration of assets and balance sheet flexibility. They're seemingly rare assets and they're being hunted right now. So I just wanted to get your thoughts, I think previously, there was some discussion or thought that we would wait a little bit and digest ViroPharma. But I wanted to understand your urgency to put that balance sheet to use now and continue to drive forward and then maybe, talk about either development assets or commercial unmarketed assets, maybe what your appetite is. So timing and thoughts on how aggressive you need to be and type of assets?

Flemming Ornskov

So thanks very much, Ken. As you know, and everybody that follows Shire, M&A and business development is an integral part of Shire. And if you look, even after I have arrived, we have been playing small and big. Today, we played small. You can say in the M&A front with Fibrotech, a few months ago, we concluded the largest deal ever at that time for Shire, which was the ViroPharma, which was $4.2 billion. Size does not really matter in this context for us when we look at M&A. We look at value and how it fits into our portfolio in the areas of specialty medicine that we're interested in. So to say about Shire that they are more or less interested in M&A at any given time is a misnomer, because we're always interested. If you say that about BD, we're always interested. Size is not a relevant factor for us, it's value and fits. And our appetite has neither gone up or down and it's part of our strategy to acquire assets.


The next question is from the line of Keyur Parekh of Goldman Sachs.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Firstly, Flemming, could you just give us a sense for kind of SPH465 (sic) [SHP465] and how do you see that positioning in the adult market. Clearly, kind of there's a lot of opportunity for VYVANSE and given the VYVANSE's long action, I'm just kind of trying to understand what the value proposition of 465 might indeed, end up being. Secondly, and again, kind of in the same breath as it relates to the exclusivity protection, do you think you could potentially end up undermining the long-term outlook for VYVANSE? Secondly, and I realize that you've spoken a lot about kind of the value proposition at Shire, and yet when I look at kind of the growth outlook versus the multiple that Shire trades at, it seems like the market is unwilling to pay you for that growth outlook. Can you help us think about the steps that you may be able to take to recognize this value within Shire as an organic independent entity?

Flemming Ornskov

Thanks, very much, thanks for the question. So I will ask Perry, in a second, to add on the 465 compounds. So as Perry outlined, if you look at the ADHD market in the U.S. where we have outstanding data, it is quite clear that the growth currently is mainly coming from the adult ADHD market. We have not proportionally to our portfolio have been participating significantly in that market. The other things that our market research clearly shows is that there is a lot of combination use and there is a high patient demand for a long and longer-acting product than what is individually available today. So to have a safe product that delivers for 16 hours of coverage -- up to 16 hours of coverage with the same safety profile as other products in the stimulant class, that is, and of course, we wouldn't say that we haven't tested with market research, that really is a very attractive value proposition. So the product allows us to participate in the fastest-growing segment of the largest ADHD market in the world with a product that has a profile that is incredibly attractive to the majority of patients in that segment. So maybe, I'll just ask Perry to add, and then I will ask, talk about the IP implications and then the market view. So Perry, do you want to say a word or 2 about how you see this fit into the market?

Perry Sternberg

Yes, sure, Flemming, and thanks for the question. So as Flemming mentioned, we believe that there is an unmet need in that adult patient population. And it's not about 465 or VYVANSE or the other products that are out there, it's about meeting that unmet need of that adult patient population, and there is clearly an unmet need. And we believe, by brining SHP465 to the market, our portfolio of products, VYVANSE plus SHP465, will be stronger and be able to meet more of the patient needs that are out there in the market.

Flemming Ornskov

So of course, we would not bring such a product potentially to market if we haven't done some relevant market research, if it was very clear about, this is a clear value composition -- proposition and also, that the net effect for Shire would be an increase in market share and a significant additional contribution to the overall growth, hence, also our ambitious goal of doubling the overall contributions to the business and the sales from Neuroscience by 2020. So let's talk about the exclusivity issue. It's a nonissue because we are absolutely convinced with an incredibly strong portfolio of patents for VYVANSE and cross-references, 18-plus cross-references, that we have a very, very strong kind of patent situation for VYVANSE and that goes to June '23. So also here, very confident, and we're very confident in the patent situation for 465. The last question, again, probably the most difficult question, so I have another temptation to pass that on to James, or maybe I may allow myself an editorial comment. When I came to Shire, the team and I, and it's not me, it's the team and I, we sat down and said, what's the first order of business? The first order of business is to make sure that the franchises we have, have a clear growth outlook. When I came in, people were asking questions about GI, they were asking questions about Neuroscience and they were asking questions about the Rare Disease business. Last I checked, the growth outlook for the Rare Disease business has dramatically improved. We are today giving you a way forward to significantly improve the outlook for the Neuroscience business and, I think LIALDA, and other plans we have, I'm sure will give a very strong growth profile for the GI franchise. I hope the market at some point, but I'm just the CEO, will catch up to the growth prospects of the business as they really are.


Our next question is from the line of Amy Walker, Morgan Stanley.

Amy L. Walker - Morgan Stanley, Research Division

My first one, perhaps to James. James, I calculated the 2% lowering of the midpoint of your OpEx guidance equates to around 2.5% growth in net income. So baking that in, we get us to the bottom end of your new EPS guidance range. Are there other elements of flex baked into the new guidance that we should be aware of as well or have I misinterpreted something? And then my second question, maybe for Perry or Flemming. Why was SHP465 -- I think this is addressed, but you had trials in 2006, 2007. Why was it not approved by the FDA in its original form when you filed for it? And why are you restarting this opportunity right now? Has something changed, particularly in the dynamics with the adult market, has there been a shift? What makes now the right time to be pursuing this opportunity rather than 3 to 4, 5 years ago, if you could give some color?

Flemming Ornskov

I think we'll split it into 2, as you also requested, James will take the question, whether he's lowballing or not, and then I will take the more ambitious questions about the future.

James Bowling

Thanks for the question, Amy. We haven't changed any guidance other than the cost guidance. That has come down, you're absolutely right, by a couple of percentage points. And by my math, that's, broadly speaking, about $50 million worth of operating costs, and I'm not really changing any of the other guidance. So nothing unusual there, I think.

Flemming Ornskov

So on SHP465, when I came in, and particularly when Perry came in, we took a look at the market. And markets evolve and we clearly saw that the main need in the adult market, where we did not feel that we had a relative participation in share, that matched the overall ambitions we had. So we looked at that, we did extensive market research. And we clearly identified that what was needed for a large, if not the vast majority of the patients, was a long-acting product, because they were combining to get that long-acting effect. When you looked at what we had in the portfolio, it was clear that SHP465 was in our portfolio and had not progressed, it had never been turned down by the FDA, it actually got a letter that inclines -- that said to us what we needed to do. At that time, it was at a time of VYVANSE that people felt that they should put the efforts behind VYVANSE. So and the adult market, I'm sure, looked very different at that time. So the best place you can look, when you're looking for new things, if you don't want to go out and acquired, is in your own pipeline. And we pulled it down from the shelf and we're glad to have more of that on the self, I'm not sure we have, but this one is certainly a bit of a diamond in the rough.


Our next question is in the line of David Steinberg at Jefferies.

David Michael Steinberg - Jefferies LLC, Research Division

A couple of questions. First, I know you just mentioned the SONATA study. There are a couple data pieces, I just wanted to get your view on. So the visual acuity reduction was 11.4% versus 6% in placebo and then dysgeusia was 16.5% versus 2% for placebo. Were these things you expected, does your view change at all on the profile? Secondly, in the last couple of years, you're able to take your tax rate down a couple of 100 basis points. Do you -- is there any possibility of reducing that further over the next 3 to 5 years? And finally, we're seeing a lot of split offs in Pharma to increase shareholder value, and just from a 20,000 foot view, as I look at it -- look Shire, it seems like the pieces may be just greater than the sum. In other words, your Rare Diseases is not your biggest portion of your portfolio, a little less than 40%, but if you look at some of the multiples paid for similar companies, you could extrapolate that your Rare Disease business is worth over half or 60% of your current market cap. I'm just curious how you thought about shareholder value there, and any thoughts to splitting off that piece of the business to unlock value?

Flemming Ornskov

So David, thanks for your questions. I noted 3 questions, one, basically, over the efficacy, in particular, on the signs and the symptoms for the data that we have with Lifitegrast. Then I noted one on tax, and I noted one on the sums and the overall value. And maybe we take them one at a time. So on Lifitegrast, as you know, more and more of the data is coming in to the public domain. I think the feedback is resoundingly positive. This is the first product ever that has shown and absolutely overwhelmingly and very impressive, statistically significant reduction of symptoms in a real-life population and not in a chamber. I think it seems to be the case is that if you want to show a reduction in signs, that has more frequently been done if you used the so-called chamber studies. And if you go to mild to moderate patients, it seems like the efficacy of symptoms in real life is certainly achieved in moderate to severe patients, which mirrors exactly very well the difference between OPUS-2 -- OPUS-1 and OPUS-2. We think that what the patients are going to the physician for is a reduction of the symptoms, and we're very pleased that this study, as the first, has shown that. I think that there can be many reasons why the data on science were not statistically significant in the OPUS-2, but has been consistently so in the Phase II and the OPUS-1. So I remain very confident that we'll have a robust discussion with the FDA, whether the FDA will require additional data -- data in addition to the Phase II and the Phase III program in SONATA. It's hard to predict if that was the case, we will do that, of course. I will then take the last question and then I'll pass over to James to comment. We think that our Shire is well positioned and well diversified with the franchises we have today. As I mentioned earlier, we have shown that we bring strong growth into all of these franchises. I think if you look at what is happening in the GI franchise, what we're doing now with the Neuro franchise and what we've done also through acquisition with the Rare Disease franchise, we're very confident that the parts and the sum are really performing very well. We, of course, as a responsible team, always to evaluate whether we are the best owner of all or some of these assets, but that takes place all the time. James, I don't know if you want to comment on that or on tax?

James Bowling

No, I'll comment on the tax question, David. Very boring, I'm afraid. I think I've guided 18% to 20% for 2014 and I think that's a good core tax rate for you to use for your modeling going forward.

Sarah Elton-Farr

If we could just take one more question.


The next question is from the line of David Amsellem of Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

I just wanted to come back on the overall question of M&A. And I know you can't comment on all of the chatter and activity on a large scale that's been happening. But given what Valiant is proposing to do to allergens, R&D, infrastructure, should it succeed, given that backdrop and what we're seeing in the space broadly, does that put even more pressure on you to further reduce costs on R&D to be more aggressive on costs? Yes, bearing in mind that you are investing in a pipeline, but how do you think about that? And do you envision your strategy becoming even more aggressive on the cost-cutting side?

Flemming Ornskov

It's very difficult to comment on specific comments about companies. My experience is that you cannot judge things just in very short cycles. I think the best value proposition for Shire is that we have an excellent focus on the 2 parts of the business that management always have to keep a strong focus on. One is to be as efficient as possible and be as, and secondly, to be as innovative as possible. I can only take responsibility with our management team for the period that has happened since 1st of May last year, when I took over. We have dramatically improved the efficiency, we have reduced the cost base of the company, we have consistently provided upgrades and we have done what rarely is done in these cases, also in some of the examples you cite, that we've also dramatically increased the top line. So I think we're doing what we're supposed to do, to drive the company extremely efficiently and at the same time, not do that while losing top line. So that speaks for itself. I think the long-term -- and typically, when you're an investor in this field, you also have to look at the long-term. The long-term outlook for Shire is excellent, and I think we, through deals and internal pipeline, continue to deliver things that will drive future growth. So I think we have a very good balance between efficiency and innovation, could we be more efficient? If we didn't say so, then we would be unambitious. Could we be more innovative? If we didn't say so, we wouldn't be as ambitious as I would like us to be. I think we have a good balance, a good population of employees, a good balance between short-term, midterm and long-term. And I'm absolutely confident that you can look forward to excellent growth, excellent profitability, excellent efficiency and excellent pipeline and innovation at Shire.

So with that, I'd like to thank you for your questions and in summary, maybe give you a few highlights from today. First, going back, maybe, to the last questions. Are we driving the business the right way? Well, we have excellent top line growth, 19%. We have shown that 5 of our products, which constitute over half of our Q1 sales, delivered double-digit strong sales growth. We have shown that not only can we drive the top line, but we can also drive the profitability. We have provided an upgrade on our outlook with the non-GAAP EPS growth and saying that's going to be now in the mid- to the high 20% range. So both on top and bottom line, I think you'll find that we are delivering, but we are also not forgetting the innovation side. And as you said today, we've provided 2 great updates. One, that dramatically could change the outlook for our ADHD business by providing a very attractive product to the adult ADHD market. And to our Rare Disease product, we made an acquisition with Fibrotech, thinking also about the mid- to the long-term, a potential Phase II compound for a rare kidney disease and other diseases. So if you want to judge us on efficiency and innovation, we're happy to be judged today. Thanks, a lot.


Now this now concludes today's webcast. Thank you very much for attending. You may now disconnect the lines.

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