Shire Plc (SHPG) Q2 2016 Results - Earnings Call Transcript

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Shire Plc (NASDAQ:SHPG)

Q2 2016 Earnings Call

August 02, 2016 9:00 am ET

Executives

Sarah Elton-Farr - Shire Plc

Flemming Ornskov - Shire Plc

Jeffrey Poulton - Shire Plc

Philip J. Vickers - Shire Plc

Analysts

Graham Parry - Bank of America Merrill Lynch

Peter Verdult - Citigroup Global Markets Ltd.

Johannah H. Walton - Credit Suisse Securities (Europe) Ltd.

Keyur Parekh - Goldman Sachs International

Richard James Parkes - Deutsche Bank AG (Broker UK)

Ken Cacciatore - Cowen & Co. LLC

Andrew Finkelstein - Susquehanna Financial Group LLLP

John T. Boris - SunTrust Robinson Humphrey, Inc.

Operator

Hello, and welcome to today's Shire's 2016 Second Quarter Results Conference. For the first part of the conference all participants are in listen-only mode, so there's no need to mute your individual lines and afterwards there will be a question-and-answer session.

I'm now pleased to present our speakers; Sarah Elton-Farr, Head of IR; Flemming Ornskov, MD and CEO; and Jeff Poulton, CFO. Speakers, please begin.

Sarah Elton-Farr - Shire Plc

Thank you. Good morning, and good afternoon, everyone. Thank you for joining us to discuss our second 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 web site. The various table (0:54) to view the webcast, slides that accompany today's call are located on the Presentations and Webcast page of Shire's corporate web site 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 which are forward-looking statements within the meaning of the securities laws. Including those regarding our development programs, future financial results and statements regarding the recent combination of Baxalta. Statements made during this call with the most 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 - Shire Plc

Thank you, Sarah, and hello, everyone. We are pleased to be with you today to discuss our second quarter 2016 results. During today's call I'll update you on the strong progress we have made this quarter on the execution of our strategy to become the leading global biotechnology company focused on rare diseases and highly specialized conditions. The completion of the combination with Baxalta has advanced the journey towards our goal significantly. I'll talk you through some of the performance highlights of this quarter and give an overview of how the combination with Baxalta has positioned Shire for future growth. I'll also give you an update on the progress we are making on the integration. We've made some significant advances with our pipeline this quarter and I'll talk you through some of these as well. Jeff will then take you through what's been a very strong Q2 performance from both our legacy businesses. Finally, I'll make a few closing remarks before we move into Q&A.

Let's now all turn to slide number four. First I'd like to take a moment to highlight the most significant of the many major achievements we've had this quarter. The completion of the combination with Baxalta is transformative for Shire, giving us the leadership position in the rare disease space, multiple franchises with category-leading product and the ability to generate strong earnings growth for the future. We've made significant progress on the integration and while some decisions remain to be made, we've already determined our organizational structure, completed a pipeline prioritization exercise, and made the decision to maintain a presence in oncology.

Approximately 50% of rare disease indications are in oncology, and we're fully dedicated to support the growth of this franchise. This commitment is well in line with our focus on rare diseases and highly specialized conditions. We look forward to showcasting the progress of this franchise with milestones anticipated later this year and additional global expansion in the future. We already demonstrated our ability to leverage our growth through both organizational transformation and through M&A where the OneShire initiatives and deals such as ViroPharma, NPS and Dyax. We aim to achieve similar success with the integration of Baxalta. We've revised the synergy targets we gave you back in January of this year, and through a detailed bottom up analysis that increased the cost synergies we are targeting by 40% to at least $700 million, three years post the close.

We are also expecting an attractive combined non-GAAP effective tax rate of 16% to 17% by the end of 2017. Longer term, we're confident of margins trending to the mid-40% range. This upgrade to the synergy targets leads to enhanced deal financials. Jeff will give you more detail later on the presentation.

Please now move to slide number five. Let me show how we continue to deliver strong growth and follow in about some of the major highlights of the quarter. From a financial perspective, we continue to deliver on both the top and the bottom line. On a reported basis including Baxalta consolidated from the 3 of June we achieved product sales growth of 57% on a reported basis and 58% on a constant exchange rate basis. On a pro forma basis, both the legacy Shire and legacy Baxalta businesses have performed strongly with pro forma sales growth up 19% for the legacy Shire business and up 12% for the legacy Baxalta business. Earnings growth also benefited from the consolidation of Baxalta as well as the strong performance of the legacy Shire business.

We also continue to progress our innovative pipeline. I'll just highlight three of the most significant events here. We received FDA approval for XIIDRA for the signs and symptoms of Dry Eye Disease and plan to launch for this later this quarter. We are very excited about bringing this new product to the market. The only prescription eye drop approved in the U.S. specifically to treat both the signs and the symptoms of this condition. We achieved some very encouraging results for SHP607 in the treatment of certain complications of prematurity with top line analysis of our secondary endpoint showing clinically relevant effects on severe complications related to lung and brain damage in premature kids. These data support further development and we plan to talk to the FDA about further studies required for future registration.

We've also continued to expand our pipeline through business development with the licensing of global rights to Pfizer's investigational biologic compound, now called SHP647, which is under evaluation for the treatment of moderate to severe inflammatory bowel disease. Planning for a Phase III program is already underway and this new product, if approved, would complement Shire's established and leading GI portfolio.

Please now turn to slide six. As I mentioned, both our legacy businesses continue to perform very strongly and both generating double-digit pro forma sales growth. Our hematology business delivered Q2 pro forma sales growth of 13% on a constant exchange rate basis driven by new products and a strong performance from our inhibitor therapies. Our genetic disease franchise continued to demonstrate excellent growth powered by our Hereditary Angioedema portfolio, both CINRYZE and FIRAZYR sales are growing strongly as we add increasing numbers of patients. CINRYZE were up 25% for the quarter and FIRAZYR sales rose 31%.

VYVANSE also continues to deliver excellent growth with increase use in adults driving the volume growth. Overall, the Neuroscience franchise grew at 23% during the quarter. Growth in our immunology business was 3% for the quarter on a constant exchange rate basis. Growth in new product sales in the U.S. was offset somewhat by timing of tender in international markets. 19% growth in our Internal Medicine business was driven by another strong performance from LIALDA with GATTEX and NATPARA also aiding growth as we continue to increase the number of patients on therapy.

Moving to slide seven. I'm going to take a moment to talk about where Shire stands today now that we have completed the combination with BAXALTA. As you will recall, when I became CEO of Shire three years ago we laid out a strategy for long-term growth and global biotechnology leadership with a focus on rare diseases and other highly specialized conditions. We started this journey for putting in place an effective and efficient organization that allowed us to establish a foundation for growth. We established a culture of innovation and developed a patient-centric rare disease mindset. The combination with BAXALTA has taken Shire to a position of global leadership in rare diseases with a leading position in a number of rare and specialty therapeutic categories. The combined company has a compelling financial profile as well as enhanced diversification and optionality. This will provide a strong platform to drive our future performance.

Please now turn to slide eight. I'd like to take a moment to highlight why we find the rare disease space so attractive and why having the leadership position in this space is of high value. Firstly, rare diseases brings a large opportunity for innovation. There are over 7,000 rare diseases but only 5% of those have therapies available today. But, this number is increasing and that is evidenced by the increasing share of regulatory approvals they represent. This wealth of scientific opportunity is well-suited to Shire's business model where we augment internal innovation with business development such as licensing or M&A providing us with numerous attractive opportunities to expand our portfolio. Rare diseases pose a significant medical burden for patients and healthcare systems. These conditions are often chronic, lifelong, and life altering. Healthcare systems around the world recognize the value that our rare disease therapies bring.

Global leadership in rare diseases is important to us, as is a global footprint. To have an international presence is crucial in maximizing the opportunity awkward (11:14) conditions. When there are so few patients you need to reach as many as possible of them around the globe. The combination with BAXALTA has expanded and accelerated our international reach. We have a world leading patient support network, which is essential to success when supporting serious chronic conditions that require additional healthcare support such as home infusions. The combination also benefits us in the R&D space. We have an expanded range of therapeutic areas in which we now have relationships and expertise affording us greater optionality as we grow our business.

Our expanded manufacturing base is another benefit to our leading position in rare diseases. We now have highly specialized plasma collection and fractionation expertise and expanded biologics manufacturing base and have greater capabilities in protein and cell engineering.

Please join me on slide number nine. The combined business has multiple franchises with category-leading products. As you can see from our combined portfolio we have leadership positions in hematology with our leading and long-established presence in hemophilia, in genetic diseases with a leading position in Hereditary Angioedema and in lysosomal storage disorder, in immunology where we have the broadest range of options available to treat patients with primary immune deficiency and other conditions that use Lialda based (12:41) therapies.

Immuno-science, where our leading ADHD presence continues to generate strong growth and we continue to develop new options for the growing adult market. Internal medicine where we have a strong and growing presence in the GI market as well as a number of products for other rare and specialized conditions. In addition, we have a growing franchise in oncology with an emerging commercial presence and innovative compounds already in development. And last but not least with the FDA approval of XIIDRA in July we have the basis of what we believe will become a leading ophthalmics franchise. We're following XIIDRA with a range of other exciting ophthalmic assets in the pipeline, and we are committed to developing a leadership position in ophthalmics.

Turning to slide 10. Shire's had much recent experience in bolt-on integrations with the acquisitions of ViroPharma, NPS and of Dyax and we have leveraged our learnings from these smaller scale deals to the BAXALTA integration. Perhaps more relevant, though, given the size and complexity of Baxalta, is our recent experience in conducting large-scale organizational transformation.

Shire, you may recall when I joined in 2013, was run with a divisional organizational structure. This led to a degree of inefficiency of duplication, which was not sustainable as we embarked upon our next leg of growth. I initiated the OneShire reorganization, and we moved to a simpler, streamlined integrated organization with a simple R&D function allowing for better allocation of capital across programs and business development opportunities. We switched to an execution-based commercial function, which led to greater focus on driving sales growth and driving commercial excellence.

Within 18 months of starting OneShire, we had delivered several percentage points of margin improvement. The legacy Baxalta business operated on a divisional structure akin to that which Shire used prior to 2013. We are moving the Baxalta business to the simpler Shire structure. We did this very successfully with the OneShire transformation, and we are well on the way to achieve similar success with the Baxalta integration. Our goals are to eliminate duplication, improve resource allocation, strengthen strategic alignment, and increase the focus of commercial execution. As a result, we anticipate our EBITDA margins improving toward the mid-40% range.

Let's now turn to slide number 11. I'd like to give you a quick update on what we achieved to date with the Baxalta integration. We have reached a number of significant milestones already. We have defined our organizational structure, a very simple structure that allows us to operate in a very efficient manner that allows the franchises to focus on commercial execution. We have allocated synergy targets by business area and given timescales for those synergies to be achieved. We have the senior management in place and talented employees from both the legacy Shire and Baxalta businesses.

At the senior leadership level, we have a 60%/40% split between legacy Shire and legacy Baxalta employees. We have completed a major pipeline prioritization exercise. We reviewed the entire pipeline and have made the decision to discontinue eight programs from across the Shire and the Baxalta heritage pipelines. Our decision and one decision worth noting was the decision to terminate Bax 335 the factor IX gene therapy program. We have shifted focus to a next-generation preclinical program demonstrating our commitment to gene therapy within hemophilia. Our hemophilia A gene therapy program is ongoing, and we plan to enter clinical studies later this year. Finally, we've initiated a procurement cost review and also have commenced a review of our manufacturing network.

Let's now join each other on slide number 12. The combination of the Shire and Baxalta pipelines offers an incredibly strong platform for potential future growth across all development stages. We continue to make significant advances at all stages of our pipeline. The combined company has over 40, over 40 programs in clinical development. We show these in full in the appendix to our slide deck. We have multiple late-stage assets with several key approvals of launches expected in 2016. We have U.S. launches for XIIDRA and VONVENDI planned later this quarter. During the quarter, we announced the completion of the decentralized procedure to support European approval of CUVITRU. The addition to our portfolio expands our subcutaneous and our globulin offering expanding choice for patients seeking self-administered options to meet their needs.

We also expect the U.S. approval later this year for CUVITRU and EU approval for NATPARA in hypoparathyroidism. We recently received a positive opinion from the CHMP in Europe for ONIVYDE in metastatic adenocarcinoma of the pancreas in patients who have progressed following gemcitabine-based therapy and anticipate approval later this year. We have multiple programs in Phase III studies. Enrollment in our Phase III study of 643, the compound we achieved through the acquisition of Dyax in Hereditary Angioedema is progressing very well indeed, and we anticipate receiving top line results in the first half of 2017.

Two Phase III studies of Maribavir in CMV viremia and transplant patients are planned to also start later this year. And we recently added to our late stage pipeline for the licensing of global rights to SHP647. We acquired that from Pfizer, it's an investigational biologic being evaluated for the treatment of moderate-to-severe inflammatory bowel disease.

The Phase II pipeline also continues to progress with encouraging result received on SHP607 in certain complications of prematurity. Although the study did not meet its primary endpoint of reducing the severity of ROP or retinopathy of prematurity it did clearly demonstrate clinically relevant effect and secondary endpoints related to development of severe Branchopulmonary dysplasia, BPD or chronic lung disease type and severe intraventricular hemorrhage, also-called IVH, a type of brain injury, both of which have clear lifelong negative indications for normal development. We look forward to talking to the FDA about follow-on steps for this program.

We've also received an FDA fast-track designation for the second of the Lumina assays. SHP626 for the treatment of NASH with fibrosis, a Phase 2 program is currently being planned. Overall, 75% of the clinical programs we have in development are in the rare disease space, furthering our position as global leader in rare diseases. The investment we are making in our innovative pipeline is central to our future growth, and we're very pleased by the progress we are making.

Turning to slide 13, XIIDRA. Probably the most significant advance we've made in our pipeline recently was the approval of XIIDRA in the signs and symptoms of dry eye disease happening in July of this year. This is a milestone achievement for Shire. And we are very excited to bring to market what is the only prescription eye drop indicated for the treatment of both signs and symptoms of this widespread condition. The label received from the FDA clearly demonstrate the effect of XIIDRA on signs and symptoms of dry eye disease. Our sales force is fully hired and comprises high-caliber individuals with significant expertise and experience in eye care and a deep understanding of the ophthalmic industry. We've initiated product information promotion, channels are being filled, and a full in-market launch is planned for later this quarter.

Dry eye disease is an undertreated condition, and the opportunity in this space is significant. Up to 60 million people in the U.S. alone diagnosed with dry eye disease, we estimate only one million are receiving prescription therapy today. The unmet need is considerable, and we are hugely excited about XIIDRA's potential. The launch of XIIDRA is a very good example of Shire's ability to enact successful value creating mergers and acquisitions. In just over three years, Shire has become an emerging leader in ophthalmics thanks to bold and strategic acquisitions that have delivered a rapidly growing pipeline in ophthalmics. We are very committed to the ophthalmics space, and we'll continue to invest in developing our portfolio of assets within this franchise.

Moving to slide 14. Another late-stage program that continues to progress well is SHP465, a novel and complex triple-bead release system from mixed amphetamine salt for the treatment of ADHD. We received top line results from this Phase III forced-dose titration study in adult patients in June. These data will form part of a class two submission planned for later this year. There's a segment of the adult market that still has unmet needs for non-residual control, and we believe that SHP465 can address this need. We anticipate approval of SHP465 in the Q2 of 2017, with launch to follow in the second half of 2017.

Moving to slide 15. Before I hand over to Jeff, I'd like to take a minute to point to the key upcoming clinical and regulatory milestones we have in the second half of this year. We already have the XIIDRA approval and the full in market launch is planned for later this quarter. Also on the way this quarter is the U.S. launch for VONVENDI, the first recombinant therapy for von Willebrand's disease, which is the most common hereditary bleeding disorder. Later this year we anticipate EU approval for ONIVYDE in pancreatic cancer and U.S. approval for CUVITRU, our pro line free subcutaneous immunoglobulin product for the treatment of immune deficiency disorder.

Other major milestones this year include the anticipated EU approval for NATPAR in the treatment of hyperparathyroidism and the resubmission of SHP465 in the treatment of ADHD. We are very excited about the advances we have made in our pipeline this year to date and the further significant developments we expect in the remainder of this year.

I will now turn the call over to Jeff who will review the second quarter financials and update you on where we stand with respect to guidance for the full year. Jeff.

Jeffrey Poulton - Shire Plc

Thank you, Flemming. Good morning and good afternoon, everyone. I'm pleased to be presenting Shire's second quarter financial results. This will be the first quarter that the results will include the legacy Baxalta operations. For the reported results, legacy Baxalta operations are included from June 3, the date that our acquisition of Baxalta closed. I also will share pro forma quarterly revenue totals and growth rates for the legacy Baxalta franchises to ensure there is transparency in the year-over-year performance of the business. After commenting on the results for the quarter, I will provide more detail on the upgraded guidance we released earlier today.

Starting with slide 17, the financial summary of reported results. Reported revenues for the quarter were approximately $2.3 billion compared to approximately $1.5 billion for the second quarter of 2015. This represents 57% year-over-year growth for Shire. The legacy Baxalta business contributed approximately $560 million of revenues into the close and grew 12% on a pro forma basis. Excluding this contribution, legacy Shire product sales were up an impressive 19% from the prior year. I will discuss individual franchise performances on the next slide.

Royalties and other revenues for the quarter were $107 million, an increase of $25 million or approximately 31% from the prior year. This increase is primarily due to the inclusion of $21 million of contract manufacturing revenue acquired with Baxalta. Our non-GAAP combined R&D and SG&A spend is approximately $934 million for the quarter, up 34% from the prior year on a reported basis. For the legacy Shire business, the non-GAAP combined R&D and SG&A expenses increased approximately 9% from the prior year with increases driven by early launch preparations for XIIDRA. This growth rate represents prudent cost management during the early Baxalta integration planning and implementation.

Non-GAAP EBITDA for the quarter is approximately $1 billion, an increase of 56% from the second quarter o f2015. This growth rate is consistent with the growth of our revenues and we achieved a 40% non-GAAP EBITDA margin for the second quarter, a margin largely consistent with the second quarter of 2015. The non-GAAP effective tax rate for the quarter is 16%, at the low end of the expected range provided for 2016, this compares to 13% in the prior year as the rate in the second quarter of 2015 was positively impacted by the timing of certain tax events not repeated in Q2 2016.

Non-GAAP diluted EPS for ADS was $3.38 for the second quarter compared to $2.63 in the same quarter of the prior year, a 29% increase reflecting the strong performance of the legacy Shire business and the first-time inclusion of the Baxalta results. Non-GAAP cash generation was $853 million for the quarter, an increase of 69% from the prior year, primarily due to strong cash receipts from higher sales and the timing of payments of accounts payable and other accruals. I will further discuss cash flow in greater detail in a few slides.

Moving to slide 18, which highlights pro forma sales performance across our franchises for the second quarter, starting with the hematology franchise, pro forma revenues were approximately $960 million for the quarter, an increase of 12% from the comparable period in the prior year. For hematology, growth was driven by our factor VIII products and by strong performance from our inhibitor therapies. The year-over-year growth in the international markets was particularly strong, which was favorably impacted by the timing of large tender orders.

For the genetic disease franchise, product sales totaled approximately $690 million for the quarter. This represented 16% growth over the prior year with all products delivering year-over-year growth. The growth in our HAE portfolio was particularly strong as both CINRYZE and FIRAZYR benefited from an increase in the number of patients on therapy as well as higher utilization for patients. In addition, both products benefited from modest price increases since the second quarter of 2015.

Moving to neuroscience, franchise grew 23% compared with the prior year. This growth was primarily driven by VYVANSE where the product continues to grow in both our U.S. and international markets. In the U.S., the growth was driven by strong year-over-year prescription growth particularly in the adult segment of the market as well as price increases taken since the second quarter of 2015. It is also worth highlighting that VYVANSE grew 44% in international markets and is now annualizing at greater than $200 million in sales.

Our immunology franchise grew 2% on a pro forma basis from the second quarter 2015, as constant exchange rates pro forma growth was 3%. The growth rate for our immunoglobulin therapies was negatively impacted by the timing of tenders in our international markets. In the U.S. the franchise grew approximately 4% driven by HYQVIA and sales of our bio therapeutics therapies.

Our internal medicine product sales were up 19%, primarily due to growth in our gastrointestinal products. Lialda sales were up 23% driven by strong growth in U.S. prescriptions, resulting in a market share of 39% at the end of the quarter. Lialda also benefited from pricing and the impact of stocking in Q2 2016 compared with destocking in Q2 2015. GATTEX and NATPARA, the product suite buyer (29:02) with NPS in Q1 2015 continued to perform well with sales up 19% and 237%, respectively, as we continue to add more patients on the therapy for both products. GATTEX sales were also negatively impacted in the quarter by destocking.

The final franchise I will comment on is oncology. Oncology contributed approximately $50 million of pro forma sales for the quarter driven by sales of Oncaspar. Oncaspar, which was acquired in Q3 2015, contributed approximately 4% of Baxalta's 12% pro forma growth during the quarter. We would expect this impact to decrease in future quarters with sales now being included in prior year from Q3 onwards. As you can see, we have a diverse and strongly performing portfolio of franchises and products in rare diseases and other specialty indications. Our portfolio has grown approximately 16% during Q2 on a pro forma reported basis from the prior year, significant growth given the size of the business.

In a few slides, I will comment on our expectations for the balance of 2016. Moving to side 19, which summarizes our first half performance metrics on a reported basis. As you can see, there is strong reported growth in revenues as well as increases in non-GAAP R&D and SG&A spend. These increases are all impacted by including the Baxalta results as of June 3, 2016. For SG&A, the year-over-year increase also includes the cost of preparing for the launch of XIIDRA.

Regarding ratios, the primary change from the first half of 2015 is in our reported non-GAAP gross margins which decreased from approximately 86% in the first six months of 2015 to 83% in 2016. Given that the legacy Baxalta products generally have lower gross margins, we expect our gross margin will continue to decrease in 2016 as we include a higher percentage of sales from the legacy Baxalta franchises in our overall results. I will comment further on gross margins, operating expenses and EBITDA margins when discussing our full year and longer-range guidance.

Please turn to slide 20 and a summary of our Q2 cash flows. As I mentioned previously, we generated approximately $850 million of cash in Q2 but presented a 69% increase over Q2 2015, primarily driven by strong cash receipts from higher sales and the timing of accounts payable. Tax, interest and CapEx have increased when compared to the second quarter of last year. For tax payments Q2 2016 was higher, primarily due to higher profits associated with increased sales. Interest expense increased compared to prior year due to the additional debt associated with the Dyax and Baxalta acquisitions. CapEx increased primarily due to initial investment in our new Biologics Manufacturing facility in Ireland and due to the inclusion of Baxalta CapEx from June 3.

We expect to continue to generate strong operating cash from our portfolio of products and plan to use that cash to pay down debt in the near term. As you can see, our net debt has increased significantly from the beginning of the year following the Dyax and Baxalta acquisitions and now stands at just under $24 billion.

The final four slides will cover our updated guidance. I will provide detail on current expectations from our combined operations in 2016 and an update on synergy targets now that we are a couple of months into the integration. I will also provide some color on our mid- to long-term expectations. As you can see on slide 21, as a combined organization, we are expecting between $10.8 billion and $11 billion in product sales for the year. On a full-year pro forma basis, this represents reported growth of approximately 10% compared with 2015 or approximately 12% on a constant exchange rate basis. First-half 2016 pro forma growth for the combined business was 14% reported or 16% on a constant exchange rate basis.

So we are anticipating a moderation of growth in the second half of 2016. We expect that this moderation will impact both businesses as second-half 2016 sales comparatives are more challenging for both the legacy Shire and Baxalta franchises. For the full year, we expect the legacy Shire business to grow in the mid-teens and the legacy Baxalta business to grow in the mid- to high-single digits on a pro forma basis. With the addition of the contract manufacturing revenues from the Baxalta transaction, we now expect royalties and other revenues to be between $490 million and $530 million for 2016. We expect non-GAAP gross margins in the 77% to 79% range for 2016. This reflects the mix of business of the combined company, incorporating the legacy Baxalta franchises as of June 3.

For non-GAAP combined R&D and SG&A, we expect to incur between $4.1 billion and $4.4 billion in expenditures. This includes an appropriate level of investment to ensure the launch success XIIDRA as well as other recently launched products across those businesses and to progress our robust pipeline. For 2016, the guidance incorporates expected operating expense synergy savings based on our expected updated target of at least $700 million brand and synergy savings by the end of year three post-close of the Baxalta acquisition.

I will provide more detail on the revised synergy expectations on the following slide. We expect non-GAAP net interest and other expense to be between $400 million and $450 million, primarily driven by the debt associated with the Dyax and Baxalta acquisitions. We expect the full year non-GAAP tax rate of between 16% and 18%. Taken together, we are expecting non-GAAP diluted earnings per ADS of between $12.70 and $13.10 for 2016. This compares favorably to current consensus expectations. It's worth noting that our guidance assumes 778 million of fully diluted average ordinary shares outstanding during 2016. This is comprised of 640 million in the first half of the year with an increase to 916 million in the second half of the year, following the equity issued as consideration in the Baxalta acquisition.

My final comment on this slide will be on CapEx. We are expecting to expend approximately $800 million on CapEx in 2016. This includes initial investment for Shire's new biologics manufacturing facility in Ireland as well as the legacy Baxalta run rate from June 3, driven primarily by its large manufacturing footprint.

Turning to slide 22, I want to update you on where we are with the synergy targets two months into the integration. As a reminder, we anticipate synergies in three areas, operating expenses, taxes and revenues. We're now projecting at least $700 million of operating cost synergies in year three post-close. This is 40% higher than our original year-three target of $500 million, and I will go into more detail on the incremental savings on the next slide.

Regarding taxes, our guidance remains at a 16% to 17% combined non-GAAP effective tax rate in 2017 and beyond. As it relates to revenue synergies, we remain confident we can accelerate growth as a result of leveraging the broadened commercial infrastructure, particularly the combined international commercial footprint, and applying out best of both commercial capabilities across the joint portfolio.

Now moving to slide 23, I will take you through the components of the increase in the expected operating cost synergies. We now expect to achieve operating cost synergies of at least $700 million in year three. Again, this represents an increase of $200 million or 40% from the original savings target communicated upon deal announcement. The estimated synergies have been raised following extensive efforts across the business to identify and develop specific plans to streamline our combined operations. The collaboration between the legacy Shire and legacy Baxalta employees in developing these targets gives us confidence in their achievability. We estimate 50% of the savings will come from SG&A with the majority of savings from streamlining our central corporate functions and reducing overhead.

We expect that approximately 30% of savings will come from R&D where we have already prioritize our combined portfolio. And lastly, we expect that 20% will come from our manufacturing operations as we eliminate above site redundancies, and seek to leverage the combined scale of our operations to deliver direct material procurement efficiencies. Based on the work we've completed to date, we now expect to achieve approximately $300 million of savings in the first 12 months post deal close and at least $700 million in savings by year three.

Turning to slide 24, where I will cover our longer-term expectations. As mentioned when discussing the operating cost synergies, we have become more confident about the benefits of this combination as our integration activities have progressed. We now expect accretion to reach low-double digits, which compares favorably to the mid to high single-digit accretion projection that we communicated upon deal announcement. In addition to the improved operating cost synergies and earnings profile, we expect to deliver attractive topline growth with projected double-digit compounded annual growth delivering at least $20 billion in revenues by 2020.

From an efficiency standpoint, we expect our EBITDA margins will be trending to the mid-40% range given our operating cost synergy plan, which is consistent with the margins delivered by the legacy Shire business. As Flemming mentioned previously, we have a track record of delivering efficiency gains dating back to are OneShire initiative in 2013 and 2014. Our goal is to utilize the enhanced level of expected operating cash flows to reduce our debt such that our net debt to EBITDA range is between two times and three times by the end of 2017.

To summarize, we reported strong results for the second quarter. We have identified additional operating cost synergies as the Baxalta integration efforts progress, and we are more optimistic about both our short and longer term financial performance.

With that, I will turn the presentation back to Flemming.

Flemming Ornskov - Shire Plc

Thanks, Jeff. So to summarize, we're delivering on the execution of our strategy. We are now the leader in rare diseases and high specialized conditions. As you saw this quarter we delivered strong results while completing the combination with Baxalta and building for the future. We've made significant progress on the integration; our organizational structure is defined, our management team is in place, and we're working toward capturing value through synergies. We're about to launch XIIDRA, our first move into the ophthalmics area and potentially our biggest launch to-date.

We're advancing our pipeline with multiple assets in late stage development. Our focus on commercial excellence is paying off, and we are allocating resources to invest in innovation and future growth drivers while maintaining our strong cost efficiency drive in other areas.

I would like to thank our focused and dedicated employees who have been instrumental in the transformation of Shire over the past three years. The team at Shire is committed to delivering another strong set of results in 2016 and over the longer term as we deliver on our goal of product sales of $20 billion by 2020. I look forward to the rest of the year. I look forward to keeping you updated on our performance at Q3 results and at our planned Investor Day on 10 November in New York.

I'd now like to turn the call to the operator and to open to Q&A. And as we said, Jeff, myself, and Phil Vickers, our Head of R&D, will be very pleased to take your questions. Two per person please.

Question-and-Answer Session

Operator

Our first question comes from Graham Parry of Bank of America Merrill Lynch. Go ahead, sir, your line is open.

Graham Parry - Bank of America Merrill Lynch

Great, thanks for taking my questions. So first question is on the portfolio regime now that the deal is done. You gave us a bit of a flavor as to some of the assets that are discontinued. But are there any larger segments of the business that could be up for divestment over time?

And then secondly, if you could give us some guidance for normalized rates of CapEx going forward? So you said $800 million for 2016. But, this has been for both Baxalta and Shire, perhaps exceptionally high level of CapEx here. So as you look to 2017 and beyond, what sort of CapEx to sales ratio is perhaps, or absolute levels of CapEx should we be expecting? Thank you.

Flemming Ornskov - Shire Plc

Thanks a lot, Graham. I noted two question. One on portfolio, and the other one on CapEx. I will take the first two on portfolio, and then pass it on to Phil. So on portfolio what we have looked at currently have been the R&D portfolio. As I've said, we have also looked broadly at the company and the only decisions we've made is to integrate Oncology. We gave the reasons for that, and we still have an ongoing review of biosimilars where the review is a little bit more complex. Like any responsible management team, and in concert with our Board of Directors at any given time, we look at the portfolio, but the focus over the last few weeks were for Phil and his team working with the legacy Shire and Baxalta management teams to find all the gems in our pipeline, and we have a lot of them. What do you think, Phil?

Philip J. Vickers - Shire Plc

Yeah, we certainly do. Just to give you a little bit more flavor of the process that Flemming touched on, we think it's always important to do a periodic review of our pipeline. We did this when we went through the OneShire initiative, and we recently did it again with the acquisition of Baxalta. And really the focus is, what's the best use of our R&D dollars to drive forward the highest priority programs? We did this using heritage Baxalta and Shire leaders together. Those people from the program that had actually worked on them, very systematic criteria that we used, and we considered both strategic fit and the underlying science.

The new pipeline committee made recommendations to the executive committee that then actually endorsed those decisions. We made decisions on eight programs, which were – we made a decision to discontinue and reinvest those funds in higher priority programs. Now, actually of those eight, there were four from Shire and four from the Baxalta organizations. Four were from Phase I or for preclinical programs. For example, messenger RNA replacement therapies, a couple of very early stage programs in the Shire portfolio.

We had three Phase II programs. One of them was the SHP625 program in adults where we're really focusing that on the positive data we've got in the pediatric population, and a couple of them were new potential indications in the oncology space where we decided to get the first clinical data out before deciding what the next indications would be. And then the final one was the Bax 335, the factor IX gene therapy program that Flemming mentioned earlier. But even with that, those eight programs, we still have over 40 innovative programs that we're excited about from clinical development.

Flemming Ornskov - Shire Plc

So thanks very much, Phil. Jeff, do you want to talk about CapEx? Is it going up, down, staying flat, or what?

Jeffrey Poulton - Shire Plc

I will give you the view. So next year in 2017, it will go up. That will be the first year that we will have Baxalta included in our CapEx numbers for the full year. And, we do have the ongoing construction of the new Shire facility in Ireland. So I would anticipate a number probably closer to $1 billion in 2017. And I would anticipate roughly level in 2018, and then you'll start to see it moderate. We will be largely complete with the facility in Ireland, and the new Covington fractionation plant comes on line in 2018 as well. And I would anticipate we'll see the numbers come down probably closer to $700 million over time.

Flemming Ornskov - Shire Plc

Thanks so much. Thanks, Graham. So maybe operator we have time for the next person to ask two questions or one, if you would like.

Operator

Thank you. The next question in the queue is Peter Verdult of Citi. Go ahead, sir, your line is open.

Peter Verdult - Citigroup Global Markets Ltd.

Hi. It's Peter here from Citi. Can you hear me?

Flemming Ornskov - Shire Plc

Yeah.

Peter Verdult - Citigroup Global Markets Ltd.

Hi, sorry. Just two questions. Flemming, one strategy question if I may go, coming back to that and then, want to sell on SHP647. Just trying a bit to understand how, including the intense competition in immuno-oncology, how Shire plays in that game with the Baxalta pipeline, and also how you're thinking about the bio similar programs in the context of actually a strategy that you've laid out in terms of wanting to be a global leader in rare diseases. That's question number one.

And then just, Phil, could you maybe just put a bit more meat on the bone on SHP647, the made comments (45:55) you had licensed from Pfizer. I mean, Phase III ready but with a relatively small upfront, almost to me it sounds too good to be true. So, I'm wondering if you could just give us a bit more flavor as to what you liked from the phase II data that's out there from OPERA and the TURANDOT trials, and what looks like a perspective – sorry, what looks like a crowded market, how you're going to position this asset. So, just like some more flavor on SHP647 as well, thanks.

Flemming Ornskov - Shire Plc

Thanks very much. So I heard two questions. In the middle of the line it was a little bit challenging. So the first one was basically a paraphrase. Do you really think you have a leg to stand on in immuno-oncology? So maybe I answer that, and then the second one was how could you get SHP647 so cheaply from Pfizer? It's too good to be true. So in terms of the immuno-oncology, I think that this is not a commitment at this stage for Shire to be spending significant resources, research, or commercially on building up a major oncology structure. I think like we built other franchises, we do it step-by-step. We have some good assets. One is on the market with Oncaspar. We have ONIVYDE coming ex-U.S.

We thought the best use of our resources was to streamline the franchise continual with the ongoing launches, and make the business as profitable and high-growth as possible. There is also pipeline assets post the prioritization in the portfolio, and we'll continue to assess. We're very pleased with the team; we're very pleased with what they've done. It's a very competitive space. But, what they're in is basically often oncology, and that fits well. Half of the 7,000 rarest diseases today are based in the oncology space. So we think there's a good fit also with the commercial model. And I think that is not to talk about us being competitive in other areas of immunology where we know we probably would not. We do have collaborations in these other areas. There's two external collaborations, one in this space also with Symphogen in Denmark, and we are pleased with those collaborations.

As to SHP647, I think we paid a fair price for that. I think people had the same comments when we in-licensed Lifitegrast, an outsider, from SARcode. I think that was a high value-add deal. I think people had the same questions when we licensed SHP607 from a Swedish company for the complications of neonatology. So maybe we are good at identifying assets. We're actually having looked at the Phase II data, very, very confident that SHP647 could be a competitive entrant. We of course have also seen some of the news in the media about some of the other compounds that may look less promising as they did some time ago.

But, Phil, do you want to say something? You're pretty excited about SHP647. Isn't that true?

Philip J. Vickers - Shire Plc

Yeah, we are. We are excited about it. For those not as familiar, it's a monoclonal antibody against MAdCAM which interacts with alpha 4 beta 7 integrins via the TURANDOT study that was referenced in the question where we saw remission and mucosal healing was significantly greater a couple of doses compared to placebo. And, the OPERA study they also did – had – there's some encouraging data in there, but we do recognize there was a relatively high placebo response in that study.

But we're very positive about it. We think that there is a niche for this, that the patients who are getting the TMS alpha inhibitors, some of them are refractory at the beginning and some of them develop refractiveness, and so there's a niche for this. But we're now engaging the regulatory authorities and the plan is to run the Phase III next year after we have fully defined the design of that study.

Peter Verdult - Citigroup Global Markets Ltd.

Thank you.

Flemming Ornskov - Shire Plc

And, I think a cognizant factor that I have observed since 2013 is people being highly critical of our GI franchise. I think the numbers for LIALDA speaks for themselves. I think we've added well with GATTEX and I think there's another good thing. I think if you look at the market share gain that LIALDA has had over the last two years to three years, I think it speaks to our commercial acumen also in the GI space. So with that, maybe we take the next question?

Peter Verdult - Citigroup Global Markets Ltd.

Thank you.

Operator

The next question – thank you. The next question comes from Jo Walton of Credit Suisse. Go ahead, your line is open.

Johannah H. Walton - Credit Suisse Securities (Europe) Ltd.

Thank you. My two questions. Looking at the 2020 guidance, you're going for $20 billion of sales. Consensus on the Street is much closer to $18 billion. I wonder if you could tell us where you think the biggest deviation is where we are under-appreciating the opportunities. Is it Lifitegrast? Is it stronger growth in Baxalta? What might that be? And secondly, just looking at the hemophilia franchise, I wonder whether you could tell us whether you feel that the Sippet study is going to make a difference to the balance between plasma derived and recombinant factor rate going forwards?

Flemming Ornskov - Shire Plc

So thanks very much, Jo. I know the two questions, 2020 where you thought we were a bit of a stretch with the $20 billion. I think we like to take on stretches, but I'll let Jeff comment on if it's a good or exceeding stretch. And then on the Sippet study, which, for those of you that aren't into that, was a study where there was a question raised where the plasma with hemophilia with the von Willebrand factor maybe had some benefits in inhibitor formation. So I'll let Phil comment on that.

So Jeff, the stretch, what do you think?

Jeffrey Poulton - Shire Plc

Sorry. Yeah, I don't know that there's one specific outlier, Jo, in terms of the difference between the Street and where Shire is. I would say it's probably more across the board. Maybe a couple things to comment on. I think Lifitegrast is one. I think slowly the consensus numbers have been coming up over time, but I still think that there's a difference between what we think we can achieve. I think we've been on record for a period of time now saying we think that's a billion dollar plus in 2020. I don't the Street's quite there yet. I think when it comes down to the Baxalta business. I think we're probably a bit more confident than the Street is at this point. But that's probably it. Again, I would say it's more across the portfolio than it is a, one specific product at this point where there's a difference.

Flemming Ornskov - Shire Plc

So, Phil, you and I have been involved in many discussions about the Sippet study. Have you reached a conclusion, or what's your conclusion?

Philip J. Vickers - Shire Plc

Well, I think there's ongoing discussion about the Sippet study, Flemming, as we've discussed. We commend the investigators for running this randomized study, but we also recognize there are some limitations of the study. For example, there's ongoing discussions about the impact of the geography, there's a number of confounding factors and it's difficult to know exactly how those factors apply to any specifics, any specific products. The data, the presentation at the recent WHF (sic) [WFH] (54:29) meeting. It means the medical community is still uncertain. It does not have an answer on how to proceed regarding recombinant versus plasma derived products bearing in mind that data. One thing that we have been very impressed with, the legacy Baxalta organization is their engagement with key opinion leaders in this space. It's obviously very deep and so, as well as forming our own opinion, we're engaging those key opinion leaders to help shape our thinking around this and how we move forward. So we're in the middle of that process now, I would say.

Flemming Ornskov - Shire Plc

And, certainly from a data point factor is something we're very interested in given VONVENDI's upcoming launch, so.

Philip J. Vickers - Shire Plc

That's right.

Flemming Ornskov - Shire Plc

It's an area of big interest and we're learning every day and it's all good stuff. So, thanks very much for the two questions. And operator, maybe we are ready for number four. And, I guess we're going to have two questions.

Operator

Thank you. The next person in the queue is Keyur Parekh of Goldman Sachs. Go ahead, sir, your line is open.

Keyur Parekh - Goldman Sachs International

Good afternoon. Thank you for taking my questions. The first one broadly on synergies. Flemming, you're kind of guiding to at least $700 million by year three. But, I suspect a lot of the network efficiencies might come beyond 2018. If you just help us think about the broader picture cost savings over a five-year, seven-year period, that would be very appreciated. That's question number one. And then question number two. As I think about Lifitegrast, XIIDRA where do you think we under appreciate, the Street under appreciates it unfortunately? Is it on market penetration, is it market expansion? How do you see that shaping up in the near term? Thank you.

Flemming Ornskov - Shire Plc

So, thanks very much, Keyur. There was two questions. One on synergies and then one on XIIDRA and Lifitegrast and the pending U.S. launch. So maybe on synergies. I know, of course, a lot of people have come up with many different numbers. The first number we came out with, $500 million, was basically a top-down number. We had done significant analysis. This is a bottoms-up analysis. We've worked intense for the last three months with that. We put it at $700 million plus. We have people that six weeks into the integration just take a cautious approach. We are always trying to over-deliver, but $700 million plus is what we are committed to. As you know, that is year three, full-year three post the deal, $300 million year one. But Jeff, do you want to add some color to the synergies?

Jeffrey Poulton - Shire Plc

Yeah, one of the things that Flemming highlighted in terms of an update on the integration effort was that we have initiated a network review of the manufacturing network, and that's something that will probably take us six months or so to complete. So I think it would be premature to make any comments at this point on longer-term implications for the manufacturing network. But we're starting that thinking.

Flemming Ornskov - Shire Plc

And, I think in general on synergies these are of course only the cost synergies. There's also revenue another synergies and I think the team is totally committed. This is not just an exercise. This has been brought down at the franchise an individual function level. XIIDRA and Lifitegrast, the launch, yeah, I know there's a lot of speculation, a lot of talk about how competitive it's going to be. I've launched many products together with the team that I have on the ophthalmic side. They are incredibly experienced. They have many successes in their past, be that in back of the eye, in front of the eye.

Any launch Shire is doing is well planned, it's well resourced, and we are doing exactly what you're supposed to do. Number one, make sure the product is available. So it's in or on its way to the distribution channel and they need to get it from the distribution channel to the pharmacy, so that if prescriptions are being written that they are available in the pharmacies. That's all on track. Second thing, and that's of course something that people will always speculate about, we are talking to all the relevant payers in the US. We know and we have also seen with other product launches recently that, that has created also among investors some nervousness. I'm very confident with the team I have that we will also overcome this.

And finally is to be ready for the commercial execution, have the material, of course we have the PIs. So we're, of course, also seeking all the relevant approvals for all our promotional material. To see where the uptick is going to come from, share growth, share distribution between us and other compounds in the market or from expanding the market, I think it's too early to tell. There's certainly a significant untapped market here also for patients that feel that potentially the option available today, or options available today, does not fully meet their needs, but let's update you once we have some more data under our feet, so to speak.

So operator, should we take number five to ask questions?

Operator

Thank you. The fifth question comes from Richard Parkes of Deutsche Bank. Go ahead, sir, your line is open.

Richard James Parkes - Deutsche Bank AG (Broker UK)

Hi. Yes. Thanks for taking my questions. A couple really on hemophilia. First I just wondered if you could just discuss what impact ADYNOVATE having in the U.S. market since the launch. What kind of penetration rates it's achieving. And then secondly, just on your second generation factor IX gene therapy program, just wondering what it is that makes you more confident about that program? Maybe kind of outline what it was about the current program that made you discontinue. Thanks very much.

Flemming Ornskov - Shire Plc

Yeah, I think in general, as we get into the hemophilia and hematology markets, our confidence, certainly my confidence, has grown significantly. There's a very strong team coming from Baxter, now Baxalta, now part of Shire, and I am very pleased that, that team has continued to work within Shire. So of course, given the significant position that now Shire has in hemophilia and in the main treatment options, which as you know factor VIII substitution, I think that a replacement – I think that we feel very confident about ADYNOVATE, I think it's off to a very good launch. Jeff, any specifics you want to comment on there?

Jeffrey Poulton - Shire Plc

Yeah, I guess a couple things. I think that one of the things that we're keeping a close eye on is factor VIII market share in the U.S. And I think that we see that fully stabilizing this year and we think that has to do, at least partially, with the successful launch of ADYNOVATE. In terms of sales numbers, I think based on Q2 results, it's annualizing at greater than $100 million dollars. And obviously it's growing quite rapidly given that it's just in the initial launch phase. I think what may be one other thing to keep an eye on is, it just launched in Japan in late Q2. So we think that's another attractive market for ADYNOVATE. So we'll continue to keep you updated on this as it progresses.

Flemming Ornskov - Shire Plc

Yeah, and I think, as Jeff said, this is an incredibly experienced team, both at the managerial level, the strategic level, the marching level, but also the customer facing organization. And I think that's been a recent part of a huge success of this franchise has had also with other competitive entrants. Yes. Your second question, there's a lot of interest in non-factor developments including gene therapy. We're also at Shire participating in all of those aspects. Today is not the time to comment on each of those. We still think that factor substitution, or factor placement is still going to be the cornerstone, but on the non-factor treatments, do you want to talk about factor IX and why we went to a backup compound and what our commitment to factor VIII and factor IX gene therapy?

Philip J. Vickers - Shire Plc

So yeah, we, the company focused on rare genetic diseases. We think it's important that we do have a commitment to gene therapy in hemophilia and in other areas as well. And we went over, and we're delighted actually, one of the things associated with the acquisition of Baxalta was their depth of experience in aspects of gene therapy, including the manufacturing side of it as well. So we were delighted to get access to the talent and expertise in that space.

With regards to the specific factor IX, we went over that in a lot of detail with the Baxalta colleague – legacy Baxalta colleagues that were working on that program. For the lead, for the lead compound, which was Bax 335, there was excellent expression, actually. Excellent expression seen with that particular vector. It's an AAV8 vector, so the adenoviral vector. We were very pleased to get access to. So the expression was good but it was a little inconsistent between different patients, and with time for some patients, the level of expression decreased. And we think that's a very important thing to factor in when considering all gene therapies, is the expression going to go down over time.

So it did go down and we think it's very important for the community out there for us to bring forward the highest quality asset we think we possibly can in this space. So we went over some of the technical reasons why we might be seeing that inconsistency and somewhat of a decrease in expression over time. And, have some factors that we think could account for that and we're building those into the design and the constructs that we're using for the gene therapy. So it's really not any decrease in our commitment to the program. It's just that we're going to change the molecule and move forward for the compound that's now in preclinical. And the factor VIII gene therapy program goes forward unaffected.

Flemming Ornskov - Shire Plc

And I think it's also fair to say that we continue to be incredibly committed to the cornerstone of hemophilia treatment which is the substitution or the replacement not only with ADVATE and ADYNOVATE but of course also with Bax 826 which has a lot of promises as a future entrance into this market. So we're incredibly pleased also with its aspect of adding a great franchise to our portfolio.

Philip J. Vickers - Shire Plc

I agree, Flemming. And we've been very impressed by the serial innovation that we've seen in the hemophilia space where the fact is, the longer acting factors, the gene therapy, it actually mimics some of the kind of serial innovation that we pride ourselves on. For example, in hereditary angioedema, in Hunter's Syndrome. It's very akin to the kinds of thinking that we had in the legacy Shire organization.

Richard James Parkes - Deutsche Bank AG (Broker UK)

Thank you.

Flemming Ornskov - Shire Plc

Okay. Well, thank you so much. Thanks. Maybe the next two questions, I imagine?

Operator

The next questioner is Ken Cacciatore of Cowen and Company. Go ahead, sir, your line is open.

Flemming Ornskov - Shire Plc

Operator, you are fading out a little bit so you need to get close to the microphone. But I could decipher it with half an ear, that I'ss Ken Cacciatore. Is that true, Roland?

Ken Cacciatore - Cowen & Co. LLC

That's right. Thanks, Flemming. I appreciate it. Thanks, guys. Congratulations on the results to date. Just two quick questions. One on XIIDRA. You were mentioning formulary discussions are progressing, and you have confidence in the team. Maybe you could just tell us your early thoughts on pricing specifically as it relates to that. And then secondly, on the neuroscience division, clearly you have SHP465, and right now neuroscience is focused more on the psychiatry. There's a movement disorder component to neuroscience, as well. Just wondering as we look at that franchise how you're thinking about investing in it, would you be contemplating or willing to go more into movement disorders? Just general thoughts as you try to maintain your franchise leadership there. Thank you.

Flemming Ornskov - Shire Plc

Thanks so much, Ken. So, yeah, I think it is now in the public domain that we have similar price to RESTASIS. I think the strategy for us with XIIDRA and the launch of XIIDRA is that we want to remove any barriers for this product being prescribed and being available for the many patients that would like to see another option for dry eye disease. And we're confident that also we will overcome eventually the payer barrier, if there is such a barrier. I think the label or the evidence-based, the value that XIIDRA potentially brings to patients, payers and providers, and finally also the opportunity that patients will see in this product. I think over time we will overcome the various entry barriers there may be.

I think we've all seen with new product launches, I'm as confident as I can be in the team that it takes its time, but I think the good news here is the facts will speak for themselves. So I think on the third quarter, we'll have much more facts to talk about, but I can only say I remain incredibly confident in the compounds.

With neuroscience, yes. Your observation is right, I may make one correction. We also have BUCCOLAM for a specific part of epileptic disorder ex-US. SHP465 is a compound where I think the data that we showed both in peds and in adults were outstanding data. I think we are now putting the package together, and we will refile or resubmit and hope that this will be on the market in 2017.

Yeah, the neuroscience is performing incredibly well. I'm very proud of what you could call the turnaround that the team has done since 2013. The growth rate speaks for themselves. Yes, would we like other compounds in neuroscience? The answer is absolutely right. We just right now have almost $24 billion reasons not to, which is the debt we have. And I think Jeff and I and the rest of the Shire management team and Board is totally committed to paying down debt as fast as we can. And we put our guidance – we want to get to two times to three times EBITDA by 2017. So I don't think you'll see us engage in major acquisitions. Should there be some attractive compounds coming our way for licensing at reasonable prices, like the one with Pfizer, we will certainly take a serious look at it.

Ken Cacciatore - Cowen & Co. LLC

Thank you.

Flemming Ornskov - Shire Plc

Okay. Operator, number seven. What do you think?

Operator

Thank you. The next question comes from Andrew Finkelstein of Susquehanna Financial Group. Go ahead, sir. Your line is open.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Good morning. Thanks very much. I was hoping you could address, first of all, with XIIDRA, does it affect your expectations for the ramp, depending on whether or not there is the new multi-dose delivery for RESTASIS in the back half of this year, which would certainly give a new marketing message to your competitor? And then any update on plans for taking that molecule to other countries outside the U.S.? And then you talked a lot about oncology, where do you see within more orphan-related oncology, is the opportunity around the scientific innovation that's available? Or given there's a lot of competition for assets, what specifically do you – are you looking to target there? Thanks.

Flemming Ornskov - Shire Plc

Well, thanks very much. I noted two questions. One on kind of XIIDRA and the launch. Yes. As I said, I'm absolutely sure there is an incredibly competent competitor out there, and patients and physicians will have choices. And I'm absolutely sure that this marketplace will not rest. There will be continued innovation. But I really don't focus too much on the competition or what the competition may do in the future. I think the team and I are focused 110% on XIIDRA, on preparing the launch, making the product available and doing the best job we can. I think as I said several times, later in the year we will get a good inkling of how it's going.

The other day I had an opportunity just to look back, and sometimes people think in quarters versus years. I think there was even criticism at the time of the launch of VYVANSE in the U.S. that it was not going fast enough. I think we are approaching $2 billion in annualized sales, and if I look at the sales curve since the launch, it's only gone one way, which is up. So I feel confident that this team will also do very well with XIIDRA. And we will take the effort and the time it takes to make it a success.

Ex-U.S. we have, as I think I've said recently, engaged with health authorities, our regulatory team have. Ex-U.S., we've talked to several of the key markets, and we're very confident of the potential filing there, whether it's going to be a centralized or country by country, I think we will update you later. Japan is of course another interesting market, and so is of course, Canada.

Oncology, it's interesting, you asked two question, one on ophthalmology and one on oncology. When I came to Shire in 2013, and one of the first acquisitions I made together with the team was to acquire SARcode Bioscience with a dry eye product called Lifitegrast. It was not exactly a jubilant response. People were very skeptical of you could build an ophthalmolic franchise. I think we now have four or five compounds, many of them first or potentially best-in-class in the pipeline still. I think that I feel confident that also in oncology. I'm not speculating about future assets or whether we're going compete with Astra Zeneca, Celgene and the very long list of interested parties here. I'm interested in maximizing the assets we have. We have three assets, and we have some great partnership. That's what I'm focused on, and later I'll see if there is more to do, and I have a great team. That's what I'm focused on.

Sarah Elton-Farr - Shire Plc

If we could just take one more question, please.

Operator

Thank you. And the next person on the line is John Boris of SunTrust. Go ahead, sir, your line is open.

John T. Boris - SunTrust Robinson Humphrey, Inc.

Thanks for taking the questions, and congrats on the initial results here. Flemming, as you have visited some of the Baxalta operating units, one thing, obviously, would seem to be real important are top line synergies, especially in light of the disconnect between your $20 billion target and where consensus is. You've acquired some really decent assets, and the U.S. seems to be a pillar for launch execution on a couple of your HAE assets, of which you have three. You have the NPSP assets, of which you have two. When you visit those affiliates abroad, one would think that you could thread the registration of those products and the selling of those products on a global basis.

How are you thinking about prioritizing that in the contribution from those assets, in the top line? And then secondly, on gene therapy side, we've seen Pfizer recently move on Bamboo; BioMarin recently came out with some data on their gene therapy program. As you've looked at your internal gene therapy program that you have in place, especially in hemophilia, what do you like about what you have? And what else do you think you need in the gene therapy area? Thanks.

Flemming Ornskov - Shire Plc

Thanks very much. So I would say that as I've traveled around, I think it's very important for you to understand, I'm not saying that in a derogatory sense, just think about this if you take a step back. Shire was 6,000 people to 7,000 people. Baxalta is significantly more, almost 16,000 people to 17,000 people. So we now have a 23,000-person company. Shire was in less than 50 countries, 60 countries.

We're now in 100 countries, approaching 70 countries where we have our own. So this is a dramatic change for Shire and for Baxalta. The combined company is a truly global company with a very good distribution of sales. U.S., ex-U.S., a little bit more U.S. than ex-U.S. So it is quite clear that there are significant revenue synergies, and we, of course, will be achieving them. Given just the complexities of revenue synergies, we decided today not to go into great detail about that, but we, of course, have internal targets that we'll stick people to and we're very confident that this is a significant number.

I'm very pleased that everyone on the call today thinks that it's a stretch target, the $20 billion in 2020. I will take that back to the board next time I have a board meeting so I can just underline that I like to take on stretch targets and deliver on them, or overachieving them. On the other part, gene therapy, I think, as Phil said, incredibly impressed with everything going on, on the Baxalta heritage, mostly in Vienna. But, Phil, like you, you've been there a few times, so you must be even more impressed than I am.

Philip J. Vickers - Shire Plc

Yeah, we are. We've been talking now for some time about our growing interest in gene therapy and wanting to get access to the right vectors and experience in manufacturing and such like. So yeah, we get some process development and manufacturing in that space, which is a very impressive organization in Austria. We think the vector design is a critical element of success and we've been impressed, again, by the colleagues that we have in Vienna, who are becoming experts in that space. And aspects of other elements of successful gene therapy, like understanding potential pre-immunogenicity and how you might be able to overcome some of those challenges. There's some really good thinking from the team there.

I think this is kind of classic gene therapy where you'll get a protein and try and express it. Get a gene and then try and drive expression of that gene in particular tissues. But now we're also looking at things which are beyond that and you asked about areas that we might be looking at in the future. I think there's some aspects of gene editing as well as just gene replacement that are of interest to us. We have a lot of working aspects right now. So we're considering what our strategy should be in that space at the moment.

Flemming Ornskov - Shire Plc

So thanks very much. I know it was a long call today, but there was also a lot of facts. May I leave you with two observations and a few facts? The two observations, one, I had several members of the Board of Directors in last week visiting our global and international infrastructure in Zürich in Switzerland. And after the day, one of the board members took me aside and said, Flemming, it's quite interesting, I can really not see who is ex-Shire and who is ex-Baxalta. I took that as a huge compliment that we are on track with the integration.

Number two observation, I will say to you I thought Shire was very patient centric. I can say that Shire has found its match in Baxalta that is equally patient centric. So I think that speaks well for the future growth and focus of this company.

And then the facts, I think you've seen that once again, Shire has been able to do a major integration or reorganization program like OneShire integrating NPS, integrating ViroPharma, integrating Dyax and not lose a single beat in delivering very strong results. And the same is the case for our Baxalta colleagues. So again here, an excellent match.

So with that, I will leave you. Lots of exciting things, many launches, VONVENDI. I know all eyes are on Pfizer. And I thank you again for your big compliment that I've taken on with a team a big stretch of $20 billion by 2020, but we are absolutely committing to delivering that number. So with that, thank you very much, and have a great day.

Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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