Shire Plc (SHPG) Flemming Ornskov on Q1 2016 Results - Earnings Call Transcript

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Shire Plc (NASDAQ:SHPG)

Q1 2016 Earnings Call

April 29, 2016 9:00 am ET

Executives

Sarah Elton-Farr - Senior Director-Investor Relations

Flemming Ornskov - Chief Executive Officer & Executive Director

Jeffrey Poulton - Chief Financial Officer & Executive Director

Philip J. Vickers - Executive VP, Head-Research & Development

Analysts

James Daniel Gordon - JPMorgan Securities Plc

David Michael Steinberg - Jefferies LLC

Louise Chen - Guggenheim Securities LLC

Jason M. Gerberry - Leerink Partners LLC

David A. Amsellem - Piper Jaffray & Co. (Broker)

Ken Cacciatore - Cowen & Co. LLC

Andrew Finkelstein - Susquehanna Financial Group LLLP

Kerry Holford - Exane BNP Paribas

Operator

Hello and welcome to today's Shire's 2016 First Quarter Results. For the first part of this conference, all participants are on listen-only mode so there's no need to mute your own individual lines. And afterwards, there'll be a question-and-answer session. Just to remind you, the call is being recorded.

I'm now pleased to present our host, Sarah Elton-Farr, Head of IR. Please begin.

Sarah Elton-Farr - Senior Director-Investor Relations

Thank you. Good morning and good afternoon, everyone. Thank you for joining us to discuss our first quarter results for 2016, which were issued earlier today. You should have received our press release and can view the presentation via the link on Shire's website. For those not able to view the webcast, slides that accompany today's call are located on the Presentation from Webcast page of Shire's corporate website, at shire.com.

Our speakers today are Chief Executive Officer, Dr. Flemming Ornskov, and Jeff Poulton, Shire's Chief Financial Officer. We will also be joined by Dr. Phil Vickers, Head of Research and Development, for the Q&A session.

Before we begin, please refer to slide two of our presentation, which provides information about certain statements to be made today that are forward-looking statements within the meaning of the securities laws, including those regarding our development programs, future financial results and statements regarding the potential impact of our announced combination with Baxalta. 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. The forward-looking statements in this presentation speak only as of today and we undertake no obligation to update or revise any of these statements. Additional information regarding these factors appears in our SEC filings.

Following our presentation today, we will also open up the call to your questions. We request that you ask only a maximum of two questions so that everyone has a chance to participate. We will also be available to follow up with you after the call.

I will now hand the presentation over to Flemming.

Flemming Ornskov - Chief Executive Officer & Executive Director

Thank you, Sarah. And hello, everyone. We're pleased to be with you today to discuss our first quarter 2016 results. During today's call, I'll give you an update on the excellent progress we're making towards executing on our strategy of becoming the leading global biotechnology company focused on rare diseases and highly specialized conditions. I'll talk you through some of the highlights of this quarter and give you an update on the important advances we are making in our innovative pipeline.

I'll also talk about the good progress we're making with our integration planning on the Baxalta transaction. We continue to be very excited about this major step in our strategy. Jeff will then take you through what was a strong first quarter performance and, finally, I'll make a few closing remarks before we move into question and answers.

Please now turn to slide number four. As you will recall, when I became CEO at Shire three years ago, we laid out a strategy for long-term growth and global biotechnology leadership with a clear focus on rare diseases and other specialty conditions. By continuing to grow and advance our pipeline, deliver commercial excellence on our existing franchises and leverage our business development skill set, we are now well on our way to achieving our goal.

The completion of the Baxalta transactions, which we expect to close in early June of this year, gives us a leading position in a number of rare and specialty therapeutic categories with multiple durable best-in-class products. The combined company will have a compelling financial profile and will have enhanced diversification and optionality. All these factors put Shire in an incredibly strong position to enable us to deliver growth and value for our shareholders for the future.

Kindly turn to slide number five. Let me briefly take you through what I see as the important achievements we've made this quarter. We are only part way into 2016, but we have already made significant progress on both our near and our long-term goals. From a financial perspective, we continue to deliver on both the top and bottom line. As well as these achievements, we have continued to drive the business, achieving strong double-digit revenue and non-GAAP earnings growth, strong cash flows and mid-40% operating margins all while continuing to invest in our future growth drivers.

We have also continued to advance our innovative pipeline. We are in full stride planning for the launch of Lifitegrast, if approved, which has a PDUFA date in July of this year. We have 14 Phase 3 or Phase 3-ready programs in our pipeline and have initiated a further four of those studies during the first quarter of this year. We continue to be very excited about the opportunities our innovative pipeline brings us. We've recently received positive data on SHP465, our new long-lasting stimulant therapy for use in the treatment of ADHD, and are on track to resubmit the file to the FDA by the end of this year.

Finally, we're continuing to build our business through value-creating acquisitions. Our rare disease leadership has been expanded through delivering on commercial excellence, as the products we acquired from NPS, that is GATTEX and NATPARA, both continue to perform very well.

The Dyax integration is progressing well, with SHP643, some of you may remember that was DX2930, fully transitioning to Shire R&D, clinical operations and governance. Finally, we've made strong progress on the integration planning for Baxalta, which I'll discuss later in this presentation in more detail.

Slide six. On a reported basis, product sales delivered 14% year-on-year growth, largely driven by volume. Excluding the impact of currencies, this translates to an even more impressive 16% growth. We continue to see strong volume growth from our major specialty products, VYVANSE and LIALDA, this quarter. And our Hereditary Angioedema franchise continues to perform very well as we grow patient numbers.

We saw a strong contribution to our growth this quarter from the two products we acquired from NPS last year, GATTEX for short bowel syndrome, and NATPARA for hyperparathyroidism. We've delivered this performance while continuing to invest in preparations for the launch of Lifitegrast and in the progression of our pipeline, including the advancement of SHP465 and SHP643. Despite the investment in these advances to both our commercial and pipeline activities, our efficient operating structure has enabled us to maintain our EBITDA margin steady at an impressive 46% and deliver 12% growth in non-GAAP earnings per ADR on both a reported and on a constant exchange rate basis.

Please now move to slide number seven. Multiple products contributed to our strong growth in the first quarter of this year, reflecting the investments made in recent years to bring these innovative products to market. Jeff will provide more detail on the performance of our portfolio, but it's worth highlighting the strength of the following products. VYVANSE continued to perform strongly, with growth driven by the adult market. Overall VYVANSE U.S. prescriptions grew at almost 10% over the quarter versus 7% for the ADHD market overall. LIALDA also continued to grow in volume trends as we continued to expand our market share within the oral mesalamine space.

Our Hereditary Angioedema franchise continues to be a major contributor to our growth profile as we build awareness of this rare condition and add more patients onto therapy. Both CINRYZE and FIRAZYR performed strongly this quarter.

Finally, our growth continued to benefit from the products we acquired from NPS, GATTEX and NATPARA. March was a very strong month for GATTEX in terms of start forms and patient adds and we believe our targeting work is paying big dividends. NATPARA also continues to exceed our expectation for number of new patients started on therapy.

Please now turn to slide eight. Now let me briefly take you through our approach to driving innovation and long-term growth to build category leadership. Business development has always been an important component of growth for Shire. And as well as investing in our existing pipeline, we use it as a tool to generate durable growth for all our franchises alongside our internal development programs. This approach helps to expand the areas in which we operate, build out our presence in existing therapeutic categories and sustain the growth of our more established franchises.

Firstly, we're expanding the therapeutic areas in which we operate and broadening our footprint into new categories that fit our rare disease and specialty model. Historically, Shire's areas of strength have been in the GI, NeuroScience and Rare Disease spaces. With the merger with Baxalta, we are now expanding and diversifying our areas of activity further, bringing us new strength and new opportunities for growth in the Hematology, in the Immunology and in the Oncology therapeutic areas. With maribavir for the treatment of CMV infection in transplant patients and with CINRYZE for use in the treatment of Antibody-Mediated Rejection, we are also expanding into the transplantation area.

In our newer franchises, such as Ophthalmics and Hereditary Angioedema, we're in build mode, adding in new products and indications to build category leadership for the future. And in our well-established franchises, we are working hard to sustain our leadership positions over time through the launch of new products in the GI/Endocrine and NeuroScience areas through executing Commercial Excellence and through solid defense of our IP.

Moving on to slide number nine. The investments we are making in our innovative pipeline is central to our future growth. I'm pleased to highlight key aspects of Shire's pipeline that continues to grow and advance. Our pipeline now includes 26 programs in clinical development and is the most robust pipeline in the entire history of Shire. The vast majority of these programs are focused on the treatment of rare diseases.

Let me now take a moment to update you on the progress of two of our later stage programs. Please turn to slide number 10. No mention of our pipeline would be complete without an update on Lifitegrast. The advancement of this program remains one of our key areas of focus this year. Lifitegrast is in Registration Phase in the U.S. and is the subject of the largest clinical trial program for an investigational compound for Dry Eye Disease, having been studied in over 2,500 patients in three rigorously designed Phase 3 trials, as well as a separate safety study.

The FDA has established a PDUFA date of the 22 of July of this year for Lifitegrast. At this point in time, the FDA has not informed us that it plans to request an Advisory Committee Meeting. We remain confident of a potential approval and launch in the third quarter this year and, as such, we have started to build out our commercial infrastructure. We continue to make good progress on building our sales organization and disease state awareness initiatives are also ongoing. We have had continued engagement with regulatory authorities in international markets and are becoming increasingly excited about the possibility of bringing Lifitegrast to additional markets once we have secured U.S. approval.

Let me remind you about the size of this opportunity we have here. There are 14 million people in the U.S. diagnosed with Dry Eye Disease and up to 29 million affected patients. Incidence is growing as the population ages and the prevalence of conditions such as diabetes also increases. Today, only one million patients receive any kind of prescription product however, and nothing is available for the indication of signs and symptoms of Dry Eye Disease. This leaves us with a tremendous opportunity for Lifitegrast and we are prepared to capitalize on that.

Please now turn to Slide 11. Another late-stage program that is progressing very well is SHP465 We received results from the Phase 3 pediatric study and efficacy study earlier this month and also successfully completed a pharmacokinetics study in this population. A further study in adults will read-out mid-year. This data will form part of the Class 2 re-submission and we anticipate approval in the second quarter of 2017, with launch to follow in the second half of 2017.

As a reminder, the adult market for ADHD is now the largest and the fastest-growing segment of the market. One of the major drivers of growth with the adult ADHD market has been the adoption of combination therapy. In dealing with ADHD symptoms, adult needs are often 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.

Currently, the two products with the highest share in the adult market are ADDERALL IR and ADDERALL XR. Both are mixed amphetamine salt. Combined, the ADDERALL IR and XR molecules represent approximately 60% of the market. Our analysis of the market suggests 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.

This is a segment of the adult market that still has significant unmet needs for longer symptom control and we believe firmly that SHP465 could address this need. SHP465 is a novel and complex triple-bead release system. If approved, it will provide a treatment option that demonstrates efficacy at the 16-hour time point post-dose while also having a safety profile consistent with other ADHD stimulant medications.

We expect SHP465 to have three years of Hatch-Waxman exclusivity and we expect to have at least three patents listed in the Orange Book expiring as late as May 2029. These results are an important step not only in providing a new treatment option for patients with ADHD, but also in sustaining our NeuroScience franchise out into the next decade.

Kindly turn to slide number 12. As well as investing in our innovative pipeline, M&A is also an important driver of our long-term growth outlook. Shire has a strong track record of capitalizing on our opportunities to create growth and value for our M&A activities, reflecting the benefits of the rapid and effective integration we've been able to achieve.

Although each of our deals has been done with a core opportunity in mind and we've been careful to maximize growth and value from those key assets, we should not neglect to mention the secondary opportunity these deals have brought us. Biopharma is a great example of how we have not only exceeded our initial sales expectations for CINRYZE in Hereditary Angioedema, but have also made excellent progress from other assets within the pipeline.

We have advanced the development of CINRYZE in new indications entering Phase 3 studies of CINRYZE in Antibody Mediated Rejection for patients undergoing kidney transplants. We have achieved some excellent Phase 2 data from maribavir in CMV infection and aim to start Phase 3 studies in this condition later this year. We've also seen some excellent data for SHP621 in the treatment of eosinophilic esophagitis and initiated Phase 3 studies in this unmet medical need earlier this year.

Finally, we've also been doing well with BUCCOLAM sales in Europe and recently received an orphan drug designation for this product in the U.S. Similarly, with the NPS and Dyax acquisitions, outside the core opportunities of GATTEX, NATPARA and SHP643, we have royalty streams resulting from both acquisitions, with the opportunity for more to come as pipeline programs with our partners' progress.

Slide 13. I'd like to take a moment to talk to you about the Shire approach to integration. This is an approach that we apply to all our transactions, but it's particularly important an integration the size of Baxalta. We utilize what we refer to as an inverted pyramid approach. At the top we have our customer-facing employees, salesforces and our patient support organizations, where the degree of change is most limited. We aim to preserve customer interactions by retaining our salesforces and maintaining support for our patients. This helps us continue to deliver commercial excellence and maximize the opportunity to generate sales synergies.

Then we have Manufacturing. Biologics manufacturing requires a highly specialized skill set and Baxalta brings us a world-class manufacturing organization. We aim to retain expertise wherever possible. Baxalta is already in the middle of a network reassessment and we will continue to carefully review the manufacturing network over time and ensure that geographies are aligned so we're operating in the most efficient manner.

In the Research & Development area, we aim to preserve clinical expertise and prioritize innovative products targeted at unmet medical needs. We continually review our programs to ensure resources are allocated appropriately where priorities are highest. At Shire, we strive to maintain a lean operating structure across the organization. We will continue to adopt this approach as we plan for this integration and adapt our existing organizational structure to ensure that we are operating in the most efficient manner.

Kindly turn to slide 14. I'd now like to take a few minutes to update you on the progress we are making with our most significant transaction to-date, the combination with Baxalta. This deal brings us many opportunities in the hematology, in the immunology and the oncology spaces. As we've done in the past, we intend to leverage our existing experience in the rare disease space to maximize the growth and value from these assets and we remain very excited about the potential of this combination to create a sustainable platform for future innovation, growth and value creation.

As no doubt you're aware, the date has been set for the votes for both the Shire and the Baxalta shareholders. We expect the deal to complete on or around the third of June this year subject to shareholder and, naturally, regulatory approval. We've been making great progress on our integration planning activities. Our primary goal is to minimize disruption and I think we've demonstrated that we're doing so with the delivery of the strong results you've seen here today. Both companies' salesforces remain absolutely focused on meeting the needs of patients and customers.

We've held joint Integration Summits with the teams at Baxalta and have had a series of collaborative and productive interactions. Our focus has been on capturing value, maintaining business continuity and being Day 1 ready. Our senior leadership team has been selected and we have defined the organizational structure of the combined company. We are working towards identifying and assessing key sources of synergy and developing a thoughtful implementation plan. We are moving much faster on integration planning than other combinations of similar size and this is for a very good reason; the faster we move, the faster we create certainty for our people and the more prepared we will be at close to serve our patients and customers.

And I'll now turn the call over to Jeff, who'll review first quarter results.

Jeffrey Poulton - Chief Financial Officer & Executive Director

Thank you, Flemming. Good morning and good afternoon, everyone. As Flemming has indicated, we are off to a strong start in 2016. We have delivered double-digit growth in revenues and non-GAAP earnings, continuing the momentum in our business that we demonstrated as we ended 2015. Our focus on commercial priorities and advancing the pipeline remains as we also prioritize integration activities related to the anticipated close of the Baxalta transaction.

Flemming has covered our Q1 results at a high level. I will take you through a more detailed review of the financial results we delivered this quarter prior to providing our outlook for the remainder of 2016, excluding the proposed combination with Baxalta. Starting with Slide 16. Q1 product sales increased 14% from prior year on a reported basis. At constant exchange rates, growth was 16%. This growth includes U.S. pricing actions, but was primarily driven by volume. The U.S. stocking impact was neutral versus the prior year and thus had no significant impact on Q1 growth. I will walk you through the drivers of growth in more detail when covering the next slide.

Royalties have increased 26% from the first quarter of last year to $82 million. This is primarily due to Q1 of 2016 including a full quarter of SENSIPAR royalties. As a reminder, we acquired the rights to this royalty as part of the NPS transaction, which closed late February of 2015. Our non-GAAP EBITDA increased in line with our revenue growth, resulting in a non-GAAP EBITDA margin consistent with that achieved in the same period in the prior year, a robust 46%.

Our strong revenue performance drove the double-digit non-GAAP diluted EPS growth this quarter, with EPS growing 12% to $3.19 per ADS. Non-GAAP cash generation was approximately $500 million, down 5% from the prior year. Stronger operating results were offset by changes in working capital on the timing of payments to our suppliers when compared to Q1 of the previous year, as well as higher acquisition and integration costs related to Dyax and Baxalta.

Turning to Slide 17. At constant exchange rates, product sales were up across our core portfolio. Starting with VYVANSE, net product sales were approximately $100 million higher than the prior year, driven by an increase in U.S. prescription demand compared to Q1 2015, particularly in the adult markets, which includes ADHD and Binge-Eating Disorder, as well as pricing actions taken since Q1 of 2015 and continued growth in sales from our international markets, which continue to grow at greater than 30% versus prior year.

Our HAE franchise continues to perform well. CINRYZE posted an 11% increase in sales to $164 million for the quarter. FIRAZYR sales for the quarter were $128 million, an increase of 39% from the prior year. The growth for both products was primarily driven by an increase in the number of patients on therapy compared with the prior year as well as higher utilization per patient.

Moving to our LSD portfolio. ELAPRASE sales were down slightly on a reported basis, as the impact of changes in foreign exchange rates more than offset the benefit of an increased number of patients. At constant exchange rates, ELAPRASE grew 4% from the prior year. REPLAGAL sales were approximately $100 million for the quarter, a 6% increase from the prior year on a reported basis. At constant exchange rates, REPLAGAL increased 12%. First quarter REPLAGAL growth was primarily due to an increase in the number of patients on therapy as well as the timing of a large order shipped to Japan which benefited Q1 sales by approximately $5 million.

At constant exchange rates, VPRIV sales were flat compared to the prior year, as competitive pressures in the U.S. market offset growth in patients on therapy in international markets. LIALDA sales for this quarter were $168 million or 13% above the sales achieved in the first quarter of 2015. LIALDA's share continues to grow in the U.S., exiting the quarter with a 38.4% market share, representing an increase of more than 2% from year-end 2015. This growth in demand as well as the U.S. price increase in January drove the year-over-year increase, more than offsetting the higher U.S. sales reductions in the first quarter of this year.

The products acquired as part of the NPS transaction, GATTEX and NATPARA, contributed $53 million of growth from the prior year. GATTEX sales for the quarter were $52 million, an increase of $37 million from the prior year, as we benefited from a full quarter of sales in 2016 and a higher number of patients on therapy when compared to the first quarter of 2015. On a pro forma basis, GATTEX sales growth was $26 million, or 97%.

NATPARA contributed $16 million of sales this quarter, as strong growth in patients on therapy continues following the launch in the U.S. in the second quarter of 2015. We are pleased with the performance of both products acquired as part of the NPS transaction and believe our Rare Disease expertise is favorably impacting their sales trajectory.

The final column on the right notes the 2% unfavorable impact of foreign exchange on our reported results in Q1. The $28 million of exchange rate headwinds had the most significant impact on the reported growth of our LSD portfolio, given the global footprint of these products.

Moving on to Slide 18. You will see consistent year-over-year increase in our operations. Our non-GAAP R&D and SG&A costs increased at the same rate as product sales, 14%. The result is relatively consistent margins from Q1 of last year to Q1 of this year. This is a bit of a coincidence, but I am pleased that we have maintained our fiscal discipline by not growing our OpEx beyond Q1 revenue growth.

As a reminder, this quarter includes the operating costs associated with the Dyax transaction as well as a full quarter of costs associated with NPS. In addition, we are preparing for the anticipated launch of Lifitegrast in the second half of this year and advancing a robust pipeline. The net result is that we delivered an impressive 46% non-GAAP EBITDA margin in Q1, reflecting the efficiency of our operating model.

Continuing on to Slide 19 and a summary of our Q1 cash flows. The Dyax cash consideration paid in January was largely funded through term loans and we ended the quarter with approximately $6.8 billion net debt, up from $1.5 billion at the end of 2015. Tax, interest payments and CapEx have increased when compared to the first quarter of last year, contributing to a reduction in non-GAAP free cash flow. For tax payments, Q1 2015 benefited from the recovery of an overpayment of tax. Interest payments increased in the first quarter of this year, primarily as a result of the debt associated with the Dyax acquisition.

Finally, as discussed on the year-end call, we anticipated CapEx to increase in 2016, as we have begun investment in a new biologics manufacturing facility to support our growing business. We remain confident in our ability to generate significant cash from operation, which will allow us to pay down debt while continuing to make appropriate investments in our commercial and pipeline priorities.

Turning to Slide 20. My final slide will cover our outlook for the full year. This guidance includes the operations of Dyax acquired during the first quarter of this year, but does not include the impact of the proposed combination with Baxalta. I will provide guidance for the combined company post-close during our Q2 earnings call.

Given our Q1 results, we are reiterating the 2016 guidance that we provided in February on our year-end 2015 earnings call. As noted on the slide, we continue to expect total product sales to increase between 11% and 14% using the FX rates noted at the bottom of the slide. This would translate to 13% to 17% growth at constant exchange rates.

We expect royalties to increase in the 5% to 10% range as we benefit from a full year of SENSIPAR royalties. The non-GAAP gross margin is expected to be similar to 2015. As a reminder, our 2015 non-GAAP gross margin was 85.5%. Non-GAAP combined R&D and SG&A expenses are expected to increase between 12% and 14% in 2016. The increase is primarily due to investments associated with the anticipated launch of Lifitegrast, operating costs supporting the Dyax business from January 22, 2016 and investment in 14 programs in late-stage clinical development. Given the debt incurred as part of the Dyax transaction, we continue to expect non-GAAP net interest to be 1.5 times to 2 times the 2015 levels.

Our full-year non-GAAP tax rate is expected to be between 16% and 18%. Taken together, we expect non-GAAP diluted earnings per ADS to grow between 7% and 10% in 2015, or 9% to 13% at constant exchange rates. As noted on the slide, our constant exchange rate outlook is based on the rates as of the end of January holding through the year. In summary, momentum in our core business remains strong, driven by executing against our commercial priorities while continuing to invest in our pipeline.

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

Flemming Ornskov - Chief Executive Officer & Executive Director

Thanks, Jeff. In the first quarter of this year, we've made great progress in working towards our goal of becoming the global leader in Rare Diseases. We have announced the combination with Baxalta and completed the acquisition of Dyax and we've done so while delivering very strong revenue and earnings growth, as measured by non-GAAP diluted earnings per ADS. Our employees have maintained drive and focus and continue to outperform.

Before we take your questions, I'd like to emphasize our priorities for the remainder of 2016 that all of us at Shire are most focused on delivering. We aim to complete the integration of Dyax and are planning to close the transaction with Baxalta in June and commence our integration activities then.

We are progressing Lifitegrast for its approval and are preparing for a launch during the third quarter of this year. We are advancing important pipeline assets in Retinopathy of Prematurity and Hereditary Angioedema and in ADHD, and we're expanding and strengthening our manufacturing to support our global growth.

I'd like to thank our focused and dedicated employees, who have been instrumental in the transformation of Shire over the past three years and who will I'm sure continue to outperform as we embark on the next stage of our journey. We are committed to delivering another strong set of results in 2016 and I look forward to keeping you updated on our performance.

And, operator, we're now ready to take questions from the audience.

Question-and-Answer Session

Operator

Thank you. Our first question comes from James Gordon of JPMorgan. Go ahead, sir, your line is open.

James Daniel Gordon - JPMorgan Securities Plc

Hello. Thanks for taking my questions. Two questions, please. The first question for SHP607 or ROP. Can you just talk about what the regulatory requirements are? So what's sort of the magnitude of the benefit on the primary do you need to see for this to be viable on this data set? And what sort of significance would you need, because it is Phase 2 but it's orphaned, and is it the same in the U.S. and Europe?

And the second question would be on the BioMarin gene therapy data looked interesting. How much of a threat do you see or how much do you see that shaking up hemophilia? Do you see that as potentially more promising than other potential future competitors, like (34:00)? And do you think that gene therapy will be very niche, or could they be broad therapies used in all hemophilia patients?

Flemming Ornskov - Chief Executive Officer & Executive Director

Well, thanks very much, James, for the two questions. So, there was one about Retinopathy of Prematurity and there was one about gene therapy and the BioMarin recent data. I'll give a few infill remarks and then I'll pass it on to Phil Vickers, our head of R&D.

I think at Shire we've shown that we deliver and we focus on coming out with data that are differentiated and meaningful. In Retinopathy of Prematurity, these are Phase 2 data. There's a significant unmet need as there's no alternative really to this potential treatment, but it is Phase 2. And it is looking at primary endpoint of Retinopathy of Prematurity and then it has a number of very significant secondary endpoints, bronchopulmonary dysplasia.

As you probably know, I worked several years in neonatal intensive care units, so I know that this is a significant unmet need. We're not going to raise hopes. We're going to wait for the data, but I'll ask Phil to give you a little bit more flavor of the potential trial design, outcome and its magnitude.

As to the BioMarin data, yeah, there's a Phase 1, Phase 2 trial. I think it's early data and it's of course encouraging for hemophilia patients. But I think we have to study closer the expression data. And as you also know, Baxalta 888 and 335 both in hemophilia A and B have programs.

Phil, do you want to comment on ROP and on gene therapy.

Philip J. Vickers - Executive VP, Head-Research & Development

Thanks, Flemming. Thanks, James. Maybe a little bit more color. We are looking toward to the ROP data, which should come mid-year. We've got 121 patients in that study. It's adequately sized we feel based on ROP outcomes data measuring a reduction in the maximum severity of ROP by stage.

And as Flemming mentioned, we're also interested in looking at some key secondary measures: NICU discharge, bronchopulmonary dysplasia, growth parameters, brain development, for example. Obviously, we're looking at those because there may be some link to IDF1, which is the active moiety in that drug for there's a potential link there. That could make a big difference in patients' lives and potentially payers would be interested in that as well.

Of course, being the first in this space it's hard to know how to power the studies to hit all of the relevant endpoints. And as Flemming mentioned, it is a Phase 2 study. When we run our Phase 2s we do anticipate running a Phase 3 study. You specifically mentioned, have we had discussions about what would it take for this to be registrational. We've not had those discussions. I think what we'll do is just see the data and see what the next steps would be. We never rule out doing that, but we always plan for a Phase 3.

With respect to the BioMarin gene therapy, we are obviously acutely aware that other companies are developing potential future products for hemophilia patients. However, with many of them, including this gene therapy, they are early stage, few patients, not seen any long-term safety or efficacy data. And even if those products demonstrate robust safety and efficacy, we expect the transitions to those molecules to be gradual, to be segmented.

Specifically, on the BioMarin gene therapy approach that you mentioned, James, I think we've seen data on perhaps six patients. Five of them observed for five to eight weeks, so a relatively short period of time. I think there were elevations in ALT levels in two of the six patients, so maybe effects on the liver. So it's very early stage, very few patients. And our enthusiasm for the portfolio in Baxalta is not diminished at all by the data.

James Daniel Gordon - JPMorgan Securities Plc

Excellent.

Operator

Thank you. Our next question comes from David Steinberg of Jefferies. Go ahead, sir, you're your line is open.

David Michael Steinberg - Jefferies LLC

Thanks. A couple questions on Lifitegrast. Just wanted to get your view about confidence in attaining both signs and symptoms in the label. It seems like symptoms would be pretty straightforward, given you had two positive Phase 3 studies, but perhaps signs might be a little more difficult given there was just one positive Phase 3 as well as the Phase 2.

And then secondly, any color on your discussions with payers prior to the expected launch? As I understand it, the entrenched competitor has been working pretty aggressively on contracting with payers to lock in favorable terms. And, if that's the case, do you see any impact on the trajectory of your launch? Thanks.

Flemming Ornskov - Chief Executive Officer & Executive Director

Thanks so much, David. This is Flemming. So in terms of Lifitegrast, I think 2,500 patients and a significant safety study. This is the largest database and the only product to have shown both signs and symptoms. We're confident in the data and we have gone to the FDA and we think that the evidence is for signs and symptoms. And that's what we're going to ask for. We will see in July at the PDUFA date, or when it comes, what will be the outcome of that discussion.

Payers. I think we've launched many products in the U.S. You've seen some examples of NATPARA and others. I think we know how to get market access for our products. And, of course, we have a plan. I'm not going discuss comments made by our competitors. I'm absolutely confident that the need for this product, the demand for this product, as our market research shows, if approved, is very significant. I'm absolutely sure that we'll find a way of getting reimbursement for the product, like we've done for all other launch products we've had.

Operator

Thank you. Our next question comes from Jason Gerberry of Leerink Partners. Go ahead. Your line is open. Apologies, sorry. That was next question in the queue. The next one in the queue is actually Louise Chen of Guggenheim. Go ahead, ma'am. Your line is open.

Louise Chen - Guggenheim Securities LLC

Hi. Thanks for taking my questions. So, first question I have here is, I know that the Baxalta deal has yet to close, but how should we think about your longer-term M&A strategy? What will your focus be? Will it be rare disease or other areas?

And then, secondly, a question on Dry Eye. Historically, I know it's been tough to get these drugs through the FDA. So, do you feel there's been a change to the FDA's tone here, that they feel there's an unmet need? And if you get Lifitegrast approved, would you expand more into specialty, or would you keep your focus on rare and orphan diseases? Thanks.

Flemming Ornskov - Chief Executive Officer & Executive Director

Thank you very much, Louise, for these questions. Maybe I may be allowed to take the Dry Eye question first. Yes, the bar is very high, which of course initially is a challenge and then potentially down the line a benefit. We think that with 2,500 patients in our clinical trials with three major Phase 3 trials and extensive Phase 2 program, a safety study called SONATA and significant patient experience and data and short and long-term follow-up, we think that we have an outstanding package. We presented it to the FDA.

As you know, we've refiled earlier this year. I think we had a very clear plan with the FDA what it needed. We think we've met those criteria. That's why we completed and executed I think with great results, 0 for 3. We're very confident that we have a product that meets the criteria. And as you know, we have said that the file is progressing very well with the FDA. But we will see. It has a PDUFA data of July 22 and we remain confident.

No, we're actually not waiting for Lifitegrast potential approval. We have significant other products in our pipeline. We have made an acquisition recently with a company called Foresight that's given us a product for chronic tinnitus, potentially both viral and bacterial. And we're in final discussions with the FDA about the Phase 3 program there. We have a program for autosomal retinitis pigmentosa, that's the autosomal dominant form that has orphan status. And so we're very pleased about that.

We have the Retinopathy of Prematurity that Phil just mentioned and we have another very attractive earlier-stage compound in another major ophthalmic indication. So we will continue to build out that specialty. We see ourself as potential future leaders in true innovation in the pharmaceutical ophthalmic space.

As to the M&A strategy, I think the focus right now is on the integration of Dyax and the closing the deal with Baxalta and the integration planning and execution. Long term, Shire is a company that has grown through use of business development and M&A. That remains unchanged. We have a very active business development department. We continue to look at opportunities. But of course right now the focus is on execution on two major deals, the two largest we've done ever. And that remains our focus for now.

Louise Chen - Guggenheim Securities LLC

Okay. Thank you.

Operator

Thank you. And this question is from Jason Gerberry of Leerink Partners. Go ahead, sir, your line is open.

Jason M. Gerberry - Leerink Partners LLC

Thank you and thanks for the question. Two questions. First just on, for Flemming, with the Baxalta deal now close to closing, just curious your latest thoughts. As you look at the combination of businesses that you have, how actively are you thinking about potentially moving out of certain non-core businesses that could help you reduce the post-deal leverage ratio and bring more focus to the company?

And then my second question just on LIALDA, given the favorable IP update, just curious how we should be thinking about this product opportunity in the next few years. There's going be an authorized generic of Asacol HD in the fourth quarter. And this seems to be a market that is receptive to switching in and out of these agents and managed care getting aggressive with these agents, so just curious how you're thinking about the next few years on LIALDA. Thanks.

Flemming Ornskov - Chief Executive Officer & Executive Director

Yeah, thanks very much. I'll pass later the question on LIALDA over to Jeff and I'll give him a minute or two to gather his thoughts on that. So I'll talk about Baxalta. So in terms of any acquisition we make, any business development deal we make and that starts very fast, we always both strategically and in R&D will take a portfolio review of what is there and what we feel we want to keep and not keep. And that also flows over to our existing portfolio.

And I have many predictions of this stage about what we are going to do or not, but that's just part I think of what happens when you acquire things that you also have to look at whether everything new and old fits perfectly into the strategy. And we go through that process. And of course we also have a significant debt load, although we will very quickly de-lever to I think very acceptable levels, given the strong cash flow.

So that process will start upon close. And we've done that, we just have been through that with Dyax. There are certain of their pipeline assets that we like that we will continue with and there's others that we are not so positive about. But that's a normal process that we go through and that's pretty rigorous at Shire.

Jeff, do you want to say something about LIALDA?

Jeffrey Poulton - Chief Financial Officer & Executive Director

Yeah, sure. Jason, you mentioned the IP win earlier this year. That's correct, it in fact gave us. There are other trials ongoing in our IP department, which has got a good track record of vigorously defending our IP, and we'll continue to do that. I want to note that there's a second hurdle here, too, for any potential generic product to get to market, which is the regulatory hurdle. There's not been an ANDA approved, despite the fact that there's been ANDAs pending with the FDA for five years.

I think from a commercial perspective, we've had a phenomenal run for the last three years, really driven by the sales organization that we've got in the U.S. We've gone from low 20% market share to now mid to high 30%s share in a fairly short amount of time. I'm confident that we're going to continue to grow the brand. We've also had some success through our managed care team with the brand, which was part of the growth that we saw in the first quarter. So, for now, I would expect that we'll continue to see LIALDA grow, Jason.

Jason M. Gerberry - Leerink Partners LLC

Thanks.

Operator

Thank you. Our next question comes from David Amsellem of Piper Jaffray. Go ahead, sir, your line is open.

David A. Amsellem - Piper Jaffray & Co. (Broker)

Thanks. Just a couple of quick ones. So on Lifitegrast, can you give us a roadmap for how we should think about the extent of DTC spend? Bearing in mind that Allergan, of course, has spent a ton on RESTASIS DTC in order to drive that product. And these kinds of products do, to some extent, behave like consumer products. So, that's number one.

And then secondly, on Sanfilippo just quickly. How should we think about next steps there, assuming a Phase 2 outcome is successful? Thanks.

Flemming Ornskov - Chief Executive Officer & Executive Director

Thanks very much. Maybe an intro to the first question and then I will pass over to Jeff to give further comment. We're absolutely confident that we with Lifitegrast have an incredibly strong entrant into the marketplace and potentially the first product with signs and symptoms as an indication. We are making all the relevant preparations, both on the salesforce side and on the consumer side. We have an incredibly experienced team of ophthalmic experts, including myself I think, that have launched multi-billion dollar products in the marketplace, including the U.S. marketplace and internationally.

So I think what we know what we do here. But I'm not going to sit on an IR call and give out our commercial launch strategy. There will be more expenditure, absolutely, also going forward, but that's planned into our budget and in our forecast so I don't expect any surprises there. And absolutely, if you want to do consumer advertising, you probably need to talk to the doctors first. That's at least a good lesson. We probably will start down that route as well, if approved.

The other question you had was basically in terms of Sanfilippo. Do you want to say something about Sanfilippo, Phil?

Philip J. Vickers - Executive VP, Head-Research & Development

Sure. David, to give others some framing for this, we've completed a 1, 2 study for Sanfilippo A. This is one of our three intrathecal programs. As with the other programs, they were all found to be safe in Phase 1, 2 studies. We saw effects on CSF biomarkers in those studies, but it was really a safety study, the Phase 1, 2 study. It's now in the Phase 2b, where we're looking at different doses.

And based on that Phase 1 study, we've got about 20, 21 patients in that study. And what we're now doing is looking at decline in cognitive abilities of those children over 48 weeks. And hopefully we'll be able to slow that decline. Obviously a very high medical need in that space. It will read out mid-year. We anticipate, as with our other (50:02) as I mentioned earlier, then going towards a Phase 3 study. And it will obviously – how we do that will depend upon the data that we get mid-year.

David A. Amsellem - Piper Jaffray & Co. (Broker)

Thank you.

Operator

Thank you. Our next question comes from Ken Cacciatore of Cowen & Company. Go ahead, sir, your line is open.

Ken Cacciatore - Cowen & Co. LLC

Thank you. Just also wanted to follow up. Found it interesting, Flemming, that you used the words in your prepared remarks, enhanced optionality, as part of following the Baxalta close. So just wondering if you could even give a little more granularity on what franchises might be sacrosanct and what ones might not? For instance, NeuroScience and the VYVANSE portfolio, what degree should we be thinking about the potential for optionality as you think about core and non-core going forward? Thank you.

Flemming Ornskov - Chief Executive Officer & Executive Director

No, I think it's normal practice for Shire, as I mentioned. Whenever we do business development acquisition, both on the research side and the commercial side, we take a serious look at everything. I'm not going be predicting what the outcome of that assessment is going to be. I think we have seen that the ADHD business is a significant growth trajectory for us and delivers a lot of cash and delivers a lot of growth.

And it has a potentially incredibly attractive pipeline product with SHP465. And finally, with any business that Shire's in, I'm not going to create uncertainty among the people that are delivering outstanding results about some strategic deliberations that we may or may not have.

I think that it is obvious what the strategy of Shire is and it's obvious that we can execute and it's obvious that at any given time as we grow and we add to the portfolio, we have to make a rigorous assessment of everything in the portfolio, both things we have acquired, but also things we already had, whether we're going keep, we are the best owners for that or whether there would be other optionality. And that process will continue also post the Baxalta integration.

Ken Cacciatore - Cowen & Co. LLC

Thank you.

Operator

Thank you. Our next question comes from Andrew Finkelstein of Susquehanna Financial Group. Your line is open.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Good morning. Thanks very much. Could you just talk a little bit about how you view the sustainability of pricing power in the U.S. market, particularly given the focus industry-wide and given the political environment and how you view that comparing for specialty versus orphan products?

One particular example this quarter would be VYVANSE, where sales growth was about 22%, scripts in the U.S. 10%. So Europe contributed, but strong net pricing there. How sustainable are those trends? And do you expect any changes as we're moving forward or any on the orphan side, any changes in the ability to use patient assistance to assure access to those who need it? Thanks.

Flemming Ornskov - Chief Executive Officer & Executive Director

Yeah, I think it's obvious that when you've been in the Rare Disease business for some time, you're acutely aware of pricing and reimbursement. And in general, the products in the Rare Disease space once on the market typically have limited opportunity for price increases. Actually, many countries, particularly ex-U.S., you more manage over time price decreases, so you have to basically take that into account.

I think for products like LIALDA and for VYVANSE, I think we've shown that we grow mainly through volume growth, which is commercial execution. So I think that's probably the best way of driving your business going forward. I think to rely on price increases, we've seen that that's probably not a sustainable model.

Jeff, do you want to comment on it?

Jeffrey Poulton - Chief Financial Officer & Executive Director

I think the approach is going have to be responsible going forward and I think Shire has a track record of being responsible in how we've used price as a lever to drive growth. I think in our portfolio over the last five years, if you look at the amount of annual growth driven by price, it's mid-single digit. And I think as long as you're responsible and you're bringing highly innovative, high impact therapies to market, I think that you're going to be in a good place.

Just maybe to correct one thing you said, Andrew. I think about for VYVANSE's results for the quarter, about a third of it was price and two-thirds volume. So, again, strong, strong underlying growth from a volume perspective is really what drove the result.

Flemming Ornskov - Chief Executive Officer & Executive Director

If you also look at the weekly data for VYVANSE, you've seen we consistently outgrow the markets, which, of course, I'm sure is driven by Binge Eating Disorder, a high focus on the adult market, which is growing significantly faster than the pediatric market, and finally I think better commercial execution which we started a few years back

Sarah Elton-Farr - Senior Director-Investor Relations

Could we take just one more question, please?

Operator

Sure. The last question then is from Kerry Holford of Exane BNP Paribas. Go ahead, sir, your line is open.

Kerry Holford - Exane BNP Paribas

Hi. It's Kerry Holford of Exane. Two quick question questions, please. Firstly, on Baxalta. We saw quite impressive Q1 numbers from them yesterday, beating company guidance and consensus numbers. So I'd just be interested to hear your thoughts on those numbers. Anything that particularly surprised you or excited you about the assets you're about to acquire?

And then, secondly, just a quick one on guidance. I noticed you're not updating your guidance with new FX rates. I presume that's because of the pending Baxalta merger. Can we expect you to reassess that in Q2? Thanks.

Flemming Ornskov - Chief Executive Officer & Executive Director

Yeah, thanks very much for those two questions. One on the Baxalta Q1 results, which was released on Thursday, and then any impact on guidance, Jeff, and then I'll give some closing remarks. Do you want to take those two questions?

Jeffrey Poulton - Chief Financial Officer & Executive Director

Yeah, sure. I think the thing that's most impressive about the Baxalta results is the top-line growth, 14% at constant exchange rates. And it was really across the portfolio. Very strong. And beyond that, I'm probably not going make a lot of comments. We'll have more detail that we can provide post-close. But that's the thing that stood out for us was the strong double-digit top-line growth. That 14% number was consistent with our growth. 14% seems to be the number this quarter for Shire.

In terms of guidance. You're correct, I didn't update guidance. We know it's coming in Q2, so my perspective was to wait and do it all at the same time at Q2. So we'll look at where the FX rates are at Q2 when we issue the guidance and we'll note what we assume when we provide that update to the market.

Flemming Ornskov - Chief Executive Officer & Executive Director

So thank you very much for your attention today. I think you've shown that we've had another very strong start to 2016. The benchmark was high from 2015, where we also had a very strong year. This is a team and a business that continues to deliver.

Growth is very strong, volume-driven, and I think it's across the portfolio. I think to deliver double- digit growth in revenue and non-GAAP earnings per ADS in the midst of the company's two largest acquisitions, one almost complete, certainly acquired, and now the integration almost complete and the other one with the vote coming up later in May and hopefully a close in the beginning of June, shows that we do not get distracted.

And I think you've seen with our pipeline very impressive progress, both with Lifitegrast, where we all prepare for the PDUFA date in July. I think you've seen impressive data for 465 in ADHD, which is important for the continuation of that strong franchise, which was a key growth driver in this quarter as well, and very important upcoming data. But also just a very large number of clinical trials in Phase 3 or starting in Phase 3 as well. I think the business is in very strong health and continues to deliver and we're absolutely ready for the integration of Baxalta.

So thank you very much and have a great weekend.

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