Shire Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Shire PLC (SHPG)


Q3 2012 Earnings Call

October 25, 2012 8:00 am ET


Eric Rojas - Director of Investor Relations for North America

Matthew W. Emmens - Non-Executive Chairman, Chairman of Management Committee, Chairman of Portfolio Review Committee, Chairman of Senior Staff Committee and Member of Nomination Committee

Angus C. Russell - Chief Executive Officer, Interim President of Specialty Pharma and Executive Director

Sylvie L. Gregoire - President of Human Genetic Therapies Business and Member of Management Committee

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


David M. Steinberg - Deutsche Bank AG, Research Division

Peter Verdult - Morgan Stanley, Research Division

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

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

Ken Cacciatore - Cowen and Company, LLC, Research Division

Jason M. Gerberry - Leerink Swann LLC, Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division


Hello, and welcome to today's Shire 2012 Third Quarter Results Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to pass the call over to Eric Rojas, Senior Director of Investor Relations. Please begin your call.

Eric Rojas

Good morning, and good afternoon, everyone. Thank you for joining us today for Shire's Third Quarter 2012 Financial Results. You should have all received our press release and should be viewing our presentation via our website on If you are unable to access the press release on our website, please contact Erin Kelly on our Investor Relations team at +1 (781) 482-9541, and she will be happy to assist you.

Our speakers for today are Matt Emmens, Angus Russell, Sylvie Gregoire and Graham Hetherington. Before we begin, I would refer you to Slide 2 of our presentation and remind you that any statements made during this call, which are not historical statements will be forward-looking statements, and as such, will be subject to risks and uncertainties, which if they materialize, can materially affect our results.

Today's agenda is on Slide 3. Matt will make some opening remarks about the management succession announcement we've made today. Angus will walk through Shire's financial highlights, future growth drivers and Specialty Pharma and Regenerative Medicine business updates. Sylvie will give an update on the HGT business and Graham will continue with a financial review and update to Shire's full year outlook. And lastly, Angus will make some concluding remarks and open up the call for your questions.

[Operator Instructions] Sarah Elton-Farr And I are happy to follow up with you after the call. I'll now hand the call over to Matt.

Matthew W. Emmens

Thanks, Eric, and good morning, and good afternoon, everyone, and thanks for tuning in today. Before I hand the mic back over to Angus and Graham to take you through the third quarter results, I would like to comment on the management succession announcement that we've made today. After 13 years with Shire and 32 years in the pharmaceutical industry, Shire's Chief Executive Officer, Angus Russell, will be retiring.

You probably know this, Angus has made significant contributions to Shire over the years. And when he joined as Chief Financial Officer in 1999, annual revenues were just over $200 million, and the product portfolio was pretty much just ADDERALL. There were less than 500 employees based mainly in the U.K. and the U.S. Now, Shire comprises 3 businesses with 10 growth-driving products and a very exciting pipeline. We employed over 5,000 people in 29 countries around the world. Annual revenues exceed $4 billion in 2011, and as you would hear today, we have excellent growth prospects ahead of us.

Angus has been an integral part of the Shire team, and as CEO over the last 5 years, has led the team that has delivered this demonstrable shareholder value. As Chairman of the Board of Shire, I want to record our appreciation, that is the Board's appreciation, for his leadership, his commitment and his tremendous contribution to the company.

The Board of Directors has announced that Dr. Flemming Ornskov will join the Shire Board of Directors as CEO designate. Flemming is an excellent successor for Angus and will lead the company into the next era of growth. He joins us from Bayer, where since 2010, he's been Chief Marketing Officer and Global Head of General and Specialty Medicine business, with responsibility for global product portfolio commanding sales in excess of EUR 10 billion.

His 18-year pharmaceutical industry career has included leadership roles at Merck & Co., Novartis and Bausch + Lomb. He led the startup of Ikaria Inc. and has led the IPO of LifeCycle Pharma. He is a non-Executive Chairman of biotech companies, Centaurus and Evotec AG, and is on the Board of Directors for PCI Biotech Holdings ASA.

He has very strong leadership capabilities, significant depth of experience in medicine and health care, and working internationally, and the Board of Shire is confident that Flemming has the ambition and vision to lead us into the future. Flemming will join Shire on January 2, 2013 once he has completed his notice period for Bayer. He will then work with Angus for several months on a handover to ensure a smooth transition to his position as Chief Executive of Shire on April 30, 2013, which is the time of our Shire Annual General Meeting.

Now, I'd like to turn it over to Angus and Graham to take you through the quarterly results.

Angus C. Russell

Okay, Matt, thanks, and hello, everyone. So if we turn to the slide deck for today's presentation, and on Slide 5, just the headline slide introducing my first section of the presentation here. I think these are really the 2 big key messages for the quarter. Fact is, we're well on track now at this time of the year to deliver, again, double-digit earnings growth for the full year. And this is really a quarter when we've seen some very key discussions concluded with regulators, which is now enabling us to talk more freely about how our late-stage pipeline is advancing through Phase II, and at the turn of the year, gradually moving into Phase III, really building the very, I think, significant late-stage pipeline, which will ensure Shire is greatly sustained for many years to come.

So if we turn over to Page 6 and look at just the quick summary of the key financial metrics for this quarter, as I said a moment ago, we're reiterating our guidance for this year at double-digit earnings growth. In the quarter, it's been a little bit of a weaker quarter and I'll leave it to Graham to actually take you through what are some more details underlying that result. But really, it is, what I would call, just a one-snapshot quarter and doesn't take away from the very strong underlying growth that Graham will talk about in more detail shortly.

And so as you can see here, on non-GAAP basis, total revenues up 6%, and you can see the underlying results here on the earnings level of 18%.

Turning to the next slide, increasing number of growth opportunities. I referred to this a moment ago, but here, you'll see it laid out in some detail on the slide. And I think what's instantly obvious from this visual is the very significant number of projects now beginning to stack up in Phase II and Phase III in registration. And indeed, a couple of these, I'll come to in a bit more detail. The LDX programs in negative symptom schizophrenia and binge eating disorder sitting here in Phase II, but it's our confident expectation that we'll be moving these into Phase III trials which we hope will commence around the turn of this year, either at the end of this year or early first quarter next year.

So let's turn over and review some of the highlights for the quarter in a little bit more detail. And on Slide 8, you can see, starting with the Specialty Pharma performance, VYVANSE again grew its share, and prescription growth for VYVANSE continued to be double-digit. You can see here 16% versus the same quarter last year in terms of script growth and that takes us now to a market share of just under 17%. And that's a gain of a full 1% versus the same period last year. Obviously now, we can look back and see the results of this year's back-to-school season, and it seems to have been, again, yet another very strong period of growth for us.

In terms of some pipeline news, we have just completed our first Phase I study for our collaboration with Shionogi on the joint development of VYVANSE for the Japanese market, so a significant step forward in beginning to internationalize our ADHD franchises. At the same time, we filed an sNDA for treatments of ADHD, maintenance treatments in children and adolescents with VYVANSE aged 6 to 17 years of age.

In terms of this globalization of VYVANSE, one of the key upcoming milestones is obviously the European approval. We're continuing to make good progress in that regard, and we hope to show -- share some news with you on that later this year as we hopefully build up into what we hope will be the first launches in Europe in the first half next year.

And then just to remind you, we've talked about this before, but we are progressing, obviously, with our head-to-head study versus CONCERTA. The results of that won't be available until later next year, but obviously, we're continuing with the enrollment and the study's moving forward well.

Moving on to the other ADHD products, INTUNIV. 27% increase in Q3's prescriptions versus the same period last year. And again, rather like VYVANSE, not only have we gained significant growth in prescriptions, but we've incremented our market share upwards again, primarily driven by the use of INTUNIV as an adjunctive therapy combined with a stimulant.

We've also completed here Phase I study for Japan. And again, looking at this globalization of our whole ADHD franchise, we're enrolling pivotal program Phase III program in the European community.

You will have noticed, obviously, in the quarter that we reached first of our patent settlements with Anchen, one of the filers against INTUNIV, and the trial is now taking place with Actavis and Teva.

Moving on to some pipeline news, and I'll refer to some very quick summary forms, so let's just talk about that. As I said, we're going to be advancing -- I am pretty confident of our ability now to advance LDX, as we call it, which is really, VYVANSE, the generic name for VYVANSE, moving that forward into what will be in total then, 3 non-ADHD Phase III programs. I'll come back and talk a little bit more about specific detail at each one of those on the next slide.

And then SPD 602, that's the acquisition we made earlier in the year from FerroKin Biosciences of a product for the treatments of chronic iron overload requiring chelation therapy. It's got orphan drug designation both from EMEA and the FDA. We're now going to move into a second Phase II trial with that product to really initiate studies on safety and efficacy in adults with transfusional iron overload.

Opportunities, we hope, will exist in the future in both hereditary and acquired anemias. And we anticipate the target, really, for the drug ultimately, is to prove, not only the safety and tolerability of the product, but to compare that very much with the existing products in the market.

So now turning to Slide 9 and talking a little bit more in detail about the LDX programs. Starting off with major depressive disorder, we've talked about this before. There were 60 patients -- 6% of patients, I remind you, in depression do not experience the kind of levels of clinical remission that doctors or physicians are looking for. And over 5 million patients in the U.S. have inadequate control of their symptoms. That's a tremendous opportunity and size of market for us. So Phase III trial is ongoing, it's enrolling very well and we expect headline data sometime in the second half of 2013.

Moving on now to the other programs in there, I think, remember, last quarter, we said we had upcoming meetings with FDA. Those have taken place. And in regard to BED, based on that discussion, we're actually now moving forward with our plans to initiation of the Phase III study, which we hope, will kick off sometime around the turn of the year. And just to remind you again, size of market opportunity here. There are no approved medical treatments today for binge eating disorder, and our estimate is there are approximately 4 million adults in the U.S. market alone that suffer from binge eating disorder.

Moving on to negative symptom schizophrenia. Again, an area, as we know, of medicine or disease where there are no really effective pharmacotherapies today. It's obviously a very unique and complex market with a mix of different treatment centers, hospitals, community mental health centers are at the core of that, so a very good target area for us with our kind of specialist business model.

And then again, in the U.S. alone, we estimate a patient population of something like 1.5 million patients who really receive no form of effective treatment today. So again, following some discussions with the FDA, we are going back for a final round-up meeting, but at the moment, our initial discussions have, again, given us the confidence to start moving forward with our Phase III planning. And again, we would expect following the final meeting with the FDA to initiate those studies around the turn of the year.

So now moving on and talking a bit about Regenerative Medicine business. Now, I just wanted to tell you a little bit about what we've been doing since we acquired what was Advanced BioHealing last year. Well first off is we changed the name, it's now Shire Regenerative Medicine business. And you can see the major bullets here on the work that's been accomplished in, really, the first year of ownership.

First off importantly, we've looked at the strategy of the former ABH. We've -- have the leadership team now focusing very much on what the key market opportunities should be in the future. And really, we've decided and agreed now that diabetes and the complications of diabetes are a very significant growth opportunity, in which the need for dermal repair with cell-based products is a very key and significant and growing opportunity. So that will be at the core of the kind of assets. In fact, you know that already, DERMAGRAFT cell-based therapy, for obviously, diabetic foot ulcers. I'll cover it in a little bit, more detail in a moment, a further indication that we're planning to move forward with now in the rare genetic disease.

And then, I remind you, earlier this year again, we brought in VASCUGEL, a product from Pervasis Therapeutics, which is for AV graft and AV fistula, and that's currently in Phase II.

We've been enhancing management leadership capabilities, I mean, clearly bringing into Shire, we have a lot of very experienced expertise in specialist markets. And what we've done now is blend together, really, some new hires from the outside with a couple of senior and very experienced managers from Shire's team who have now joined the leadership team of Regenerative Medicine. So we drafted Naddie Mahamsey [ph] who is now responsible for tech ops there. Matt Pauls, who was the guy who originally launched INTUNIV several years ago, and Matt's got a wealth of commercial experience, and he's been going in -- has been put in there in the last few months.

And that takes me onto the next point and brings us to the specific result this quarter. You will have seen a weaker number, a down number in the quarter, for DERMAGRAFT, and that's really the direct result and consequence of us revisiting and looking at the commercial model in a lot of detail.

As you know, DERMAGRAFT competes in really what's typically a device market. It operates to very different standards from biological products. And we well know that DERMAGRAFT is actually a biological product, and all the products we intend, as I said a moment ago, to bring in the future, will be cell-based biological products. And that requires a different kind of patient-focused marketing model. It's one that Shire has tremendous experience and expertise in executing successfully. That's why we put Matt in the business. So what we've been doing is pulling people out of the field, retraining them in the new commercial model, reorganizing the structure of the sales force. And unfortunately, this quarter and probably next quarter, that's caused some soft numbers on DERMAGRAFT because the people are out of the field as they are being retrained. This will pay significant benefits in the future. We want to ensure that if we're going to make this business, which we will with tremendous success in the future, we have a tremendously good strong solid commercial platform to build on.

So you can see in our statements, we're going to do this now in this quarter early on in the life cycle, next quarter again. And then next year, it's our expectation that you'll see DERMAGRAFT return to its normal trends, and we'll get back on track in terms of what you've seen at past history, those trends will come back and go onwards beyond 2013 and show good growth beyond that.

Also on this slide, but deemphasized a bit because we've talked to them. But just to remind you, we've obviously continuing with our plans to invest in new manufacturing capacity and a whole new campus site at La Jolla, San Diego. And as I said a moment ago, with VASCUGEL being brought in earlier this year, we continue to build our pipeline of opportunities, and we're out there looking for other cell-based therapies now very much focused, as I said, in diabetic complications and other cell-based dermal repair treatments.

And that moves me on to the next slide, 11, and to talk about the latest indication that we now see. I've hinted at this in some meetings that I've done over the last couple of months, that we were looking at a new indication. And today, I'm pleased to be able to share with you more details of that.

So we're talking about a very rare orphan genetic disease, again, called Epidermolysis Bullosa. As I just said, rare genetic disorder. It's extremely painful and can lead to tremendous disability and disfigurement, and indeed early death in relatively young patient populations. There is no approved therapy. Again, it's very much Shire's business model of today looking at diseases that are chronic or acute in nature and where there's so existing treatment or very poor levels of treatment.

It's the case that EB makes the skin so fragile that indeed, the slightest friction causes blisters and skin tears, and as I said in the worst situation, can lead to a premature death. As patients get older, malnutrition increases, recurrent wounds cause fibroblasts to become exhausted and senescent, and eventually leads to the development of stalled chronic wounds.

So a terrible, terrible disease. And DERMAGRAFT, we believe, has shown some early, interesting results, which now, we've discussed with the regulators and we've agreed the target indication, which be the initiation and continuation of healing of these stalled chronic cutaneous wounds in generalized EB. Armed with all that knowledge, it's our plan now to start a pivotal EB trial around the end of this year.

So with that, let me now hand over to Sylvie, who will take you through some of the highlights for the Human Generic -- Genetic Therapies business.

Sylvie L. Gregoire

Yes. Thank you, Angus. Good morning, and good afternoon everybody. It's been another very strong quarter for the HGT business, and I'll start by giving you the highlights relative to our marketed products. And you'll see that we've continued to really add patients on all of our therapies and that's throughout all of our markets worldwide. And then, I'll go on to discuss the progress of our pipeline by first discussing the 2 collaborations that we've made that are important to fuel the continued growth of the business in the long term. And I think you'll find them as exciting as we do. And then I know you're waiting for a status of our programs on the enzyme replacement therapies for 3 of our CNS indications, and I'll do that thereafter. And then finally, I'll talk to you about a new and potentially, very exciting indication for FIRAZYR for the treatment of a new indication with this particular product.

So maybe let's start with FIRAZYR, we're on Page 13 and talk about the product and how it has performed in HAE in this particular quarter. So patients have continued to initiate therapy with FIRAZYR worldwide, but in the U.S. as you know, we've had a very, very strong launch, and we've added at least 24% more patients this quarter than relative to what we had last quarter. And we now have well over 800 patients that are treated with FIRAZYR.

The U.S., as you know, allows us to get much more detailed information on our patients because of the OnePath system where we collect information or know more about the particular patients that come onto therapy. And we've seen then, from the -- that this patient population, it crosses all the spectrum of attacks of frequencies of HAE. However, we seem to have a particularly large number of patients that suffer from a very high frequency of attacks, and we see this through the utilization rate and the reorder rate for the syringes on a per patient basis. So we believe that what drives, really, this utilization rate or the frequency realization is, really, the profile of FIRAZYR, the ability for FIRAZYR, which is stored at room temperature in a prefilled syringe, to be used -- carried on oneself and used on self-administration on demand, is a feature that, of course, is the best profile for treating, really, any attack that seems to evolve in a particular patient.

So despite what I've told you, you've noticed that the revenues Q2 to Q3 2012 are flat. And so, how does that match with the fact that I'm telling you that there's new -- more new patients on therapy? The reason for this is that the, really, the irregular nature of these attacks, combined with the rapid growth that we've seen quarter-over-quarter in the last year is driven by this rapid on-boarding of patients in the U.S., causes a variability, really, in ordering and shipment quarter-to-quarter. So I suspect, when we continue to see this during this rapid growth in the next few quarters or quarter-to-quarter in the future, despite the fact that, of course, year-over-year, we expect continued growth of this product going forward.

So let's turn our attention to the Fabry market now and talk about REPLAGAL. REPLAGAL continues to be the market-leading therapy for Fabry disease. And once again, this quarter, we've seen patients that continue to come onto REPLAGAL therapy having previously treated with Fabrazyme. And as observed, over the last 10 quarters, the vast majority of patients that are newly-diagnosed or are just are coming onto treatment, come on to REPLAGAL. And the revenues this quarter though are impacted by the exchange rate. You will have noticed that there's nearly $10 million of -- at constant exchange rate relative in the particular revenue reported. 60%, as you know, of our REPLAGAL sales are in euros.

In addition, you may not recall, but the quarters 3 last year was following a quarter where a particular Fabrazyme supply shortage had been reported. So that quarter in 2011 was particularly strong with a very high volume of patients switching from Fabrazyme onto REPLAGAL. So this also influences the year-to-year or quarter 3 revenues that you see.

Overall though, I would say that despite competition, we continue to expect growth of REPLAGAL revenues in the future, and that comes, really, from the underlying market that grows at about a rate of at least 5% based on either diagnosed patients that are coming on to therapy or newly-diagnosed patients.

Let's talk about VPRIV now in the Gaucher market. That market continues to be very dynamic and positive for VPRIV. We've seen more patients starting on therapy around the world again this quarter, and our market share is about 24% now worldwide and has reached 39% in the U.S. And market research suggests that newly-diagnosed patients and patients previously treated with other therapies for Gaucher disease choose VPRIV because of its well-demonstrated safety and efficacy profile as well as its emerging differentiating profile.

In May last year -- or this year, I should say, we presented long-term data regarding the positive effect of VPRIV on certain bone parameters very important to the disease. The data comes from a 2-year extension of our Phase III studies. And we're planning to report these results and submit them to regulatory authorities by year-end for inclusion in the prescribing information.

And of course, you'll want to know about the status of our Lexington facility as it regards to VPRIV in the U.S. So I'm happy to report that we have had positive exchanges with the FDA and have indeed filed our complete response. So we look forward to the feedback from the agency and are prepared for any inspections required.

Meanwhile, since the approval of the facility by the EMA earlier this year, we've normalized our ex-U.S. inventory, and in the U.S., we have sufficient capacity to supply the expected growth of the product in the U.S. market.

Now let me turn to our development pipeline, and as I've said earlier, let's talk a little bit about 2 important collaborations that we've done this quarter. We signed an exclusive worldwide license from IGAN Bioscience, a proprietary IgA1 protease for the treatment of IgA nephropathy, a rare kidney disease.

This is a preclinical asset with proof-of-concept demonstrated in animal models and a strong fit with our rare disease portfolio. We'll assume responsibility for this asset going forward and I look forward to being able to update you on the progress of this project in the future.

We also announced yesterday that we have done a novel partnership, which has the potential to bring multiple therapeutic candidates into their pipeline. We signed a long-term, broad-based multiple research collaboration agreement with TIGEM, the Telethon Institute of Genetics and Medicine in Naples, Italy. This unique alliance will allow us to facilitate the research of 13 rare disease indications. Our partnership with TIGEM is another way of us -- for us to expand in our new disease areas and gain new research capabilities.

So in combination with our existing portfolio of research stage candidates, these collaborations really reflect our long-term commitment to invest in diverse technologies, to develop new treatments for people suffering from rare diseases around the world.

If you turn to the next page, we'll now turn our attention to our products that are currently in development, in clinical development in our pipeline. These are intrathecal enzyme replacement therapies for the treatment of CNS manifestations of Hunter, Sanfilippo A and MLD. I'll first highlight a few characteristics of these individual diseases and then give you an update on the status of these programs.

Let's start with Hunter CNS. About half the patients suffering from Hunter syndrome have the CNS manifestations of the disease, and our Hunters CNS program consists of administering enzyme replacement therapy to report directly into the cerebral spinal fluid into the brain. The study is a dose-ranging study in patients already undergoing IV treatment, intravenous treatment, with existing therapy ELAPRASE. The study has been fully enrolled now, and we hope to be having results by the year end. The encouraging safety profile that we see, combined with the encouraging data on CFS gags, which is a substate accumulating in the brain, allow us to plan for discussions with regulatory authorities and next phase study starting in 2013.

Sanfilippo A is a devastating neurological disease with no available treatment. Similarly to Hunter, the San A trial is fully enrolled in a dose-ranging study and results are also expected by year end. Here again, we'll be consulting with the authorities regarding a particular plan for the next study to start also in 2013.

As for metachromatic leukodystrophy or MLD, this is a very rapidly progressive devastating neurological disease of very young children where no treatments exist. And we're pleased to report that we've initiated our Phase I, II trial last quarter, and the trial design is similarly -- similar to the 2 designs that I've talked about a minute ago for the other enzyme replacement therapies. We look forward to being able to provide you with an update on this program as it advances.

You'll see that I've quoted the incident rates for these 3 diseases. The data from ongoing Phase I, II trial and the natural history studies that are also ongoing will give us further insights into the potential impact of treatment with the therapies such that we'd be able to translate these incident figures into an estimate of an addressable market size. So more to come with results early next year on these programs.

Maybe if we turn to the next page now, I can talk to you about a very exciting new potential indication for FIRAZYR. Angiotensin converting enzyme inhibitors are standard of care in cardiovascular disease, and a portion of patients receiving this medication, about 0.5% to 2% of patients experienced a potentially life-threatening angioedema, the side effect really that can occur with the swelling of the upper airways.

The pathway that leads to this particular type of angioedema is the same, the Bradykinin pathway that is involved in the -- in hereditary angioedema. So an investigator conducted a study, a controlled study, of the use of FIRAZYR for the treatment of angioedema attacks in this particular population.

And I won't be able to tell you the results of this study because the investigator hopes to publish them shortly. But what I can tell you is the positive results lead us to file these results by year end with the European Medicines Agency for a potential broadening of the indication for FIRAZYR.

In the U.S., we'll have a discussion with the regulatory authorities, with the FDA, to determine the pathway for this, also, potential new indication. So this is also an important -- could represent an important add-on to the HAE plans that -- forecast that we have for this particular product.

So as we can see, we're really making good progress in the growth of the HGT business. And with the recent enhancement in the leadership team, you'll have seen that we've hired recently new leaders for the MPS franchise, Soren Tulstrup, who is the ex-CEO Santaris, joined us for that post. And for the angioedema franchise, Frédéric Chereau, the ex-CEO Pervasis, joined us as well. We're well poised to continue our growth to our either internal candidate-to-candidate pipeline or with external opportunities.

I will now hand up to Graham who will go over financial results.

Graham Hetherington

Thank you, Sylvie. Good morning, good afternoon, everyone. I know many of you have a very busy day, so I'm going to try to be brief and focus on first the ongoing strong growth prospects of the business; second, the short-term dynamics that Angus outlined that have impacted the third quarter and finally, reinforcing our double-digit guidance in 2012 and increased confidence in 2013.

So turning to Slide 17. You can see the product sales are up 6% compared to Q3 last year after adjusting for tougher European foreign exchange headwinds in the quarter. Importantly, product sales, excluding ADDERALL XR, were up 13% at constant exchange rates, demonstrating the ongoing delivery of long-term, strong growth from our core portfolio.

Total revenues of $1.1 billion grew slower than product sales due to the expected lower royalties.

Our continued investment in our promising pipeline has held back EBITDA in the quarter, which was down 5%. However, non-GAAP earnings for ADS were up 6% as we benefited from our reducing tax rate of 18% this year compared to 25% last year.

Our business model continues to deliver excellent cash flows, generating $355 million of cash in the quarter, up 20% on 2011. You'll see in the appendix that our net cash position has increased by $700 million this year-to-date, and we ended the quarter with cash of over $1.3 billion. This strong cash flow is enabling us to put in place a $500 million buyback program, which we'll execute over time. This program will not constrain our cost strategy of investing to support the growth profile of the business.

Turning now to Slide 18 in revenues. The really important headline is the strong underlying growth from our core portfolio of 13%, which you can see highlighted at the bottom of the chart. That said, our 1% growth in total revenues to $1.1 billion this quarter was lower than we've seen recently.

So I'm going to highlight 3 key short-term dynamics: There's, of course, this: First, revenues from ADDERALL XR were down in total by $59 million or 34%. Within this, ADDERALL XR's product sales were down $47 million. Over 1/2 of this was due to an unusually high product sales number last year when sales deductions were temporarily low, up 47% compared to this year's more normal level of 63%.

Prescription demand also fell as we now compete against an additional generic from Actavis. Royalties from ADDERALL XR also reduced, as we expected, by $12 million as we now receive a significantly lower royalty rate following the launch of Actavis' generic.

The second short-term dynamic is DERMAGRAFT, and as Angus described, we're significantly restructuring our sales commercial teams at Regenerative Medicine. And with the temporary loss of direct sales presence, product sales were down $16 million.

As Angus said, we expect the run rate for DERMAGRAFT sales to recover during 2013 as the new commercial team become fully effective, and we remain confident about the medium to long-term prospects for DERMAGRAFT and our Regenerative Medicine business.

And the third dynamic is foreign exchange. Reported sales were adversely affected by weaker European currencies in the quarter, which reduced the reported sales by $28 million for Shire overall.

It's worth remembering that Shire is, to a large extent, naturally hedged against foreign exchange movements at the EBITDA level, and the dollar impact on EBITDA in the third quarter was less than 20% of the impact on revenues.

If we exclude ADDERALL XR, product sales grew by 13% on a constant currency basis. This is an excellent result with significant contributions from VYVANSE, which is having a strong back-to-school season. We exited the quarter with market share of 17% and with U.S. prescription growth of 16%.

We've seen some slight de-stocking in the quarter of $6 million at the gross level for VYVANSE. INTUNIV product sales increased by 23% or $13 million, with higher sales deductions marginally diluting the growth in prescriptions.

LIALDA continues to perform well, up $14 million or 16%, with market share gains in the U.S. more than compensating for the impact of tough conditions in some European markets.

Our HGT business saw good growth again in the quarter, with product sales up 16% using constant exchange rates. The foreign exchange impacts on this business, which we've included on this slide, were about $20 million in the quarter.

Turning to the specific products, REPLAGAL was up 2% against last year, which was, as Sylvie said, a particularly strong quarter. VPRIV was up 21% and ELAPRASE up 8%. Product sales of ELAPRASE in the quarter were affected by the timing of shipments, particularly in Brazil where a large shipment was delayed into the fourth quarter.

FIRAZYR has delivered another encouraging quarter with a reported product sales up $23 million and increased numbers of patients on therapy. The variable nature of HAE attacks and fluctuations in the growth rates of new patients has caused some uneven order volumes in the third quarter, and as a result, sales were marginally down compared to the second quarter of this year.

Turning now to Slide 19. We continue to invest in our increasingly late-stage and exciting pipeline, with R&D investment increasing 22% this quarter compared to the third quarter last year and by 17% year-to-date. SG&A has increased by 8% year-to-date, but the rate of growth continued to slow as we forecasted.

This quarter was down year-on-year, reflecting our continuing close management of costs and some favorable foreign exchange benefit. Overall, combined R&D and SG&A growth has slowed to 11% for the year-to-date, which are supporting an increased EBITDA margin of 31%.

Turning to Slide 20. Let's look at our full-year outlook for 2012 where we reiterate double-digit earnings growth. We continue to expect good product sales growth for the full year of around 12%, slightly lower than previously guided. This reflects a further quarter of lower DERMAGRAFT sales and the adverse effect of foreign exchange rates we've absorbed in the third quarter.

We've recently reached the settlement with GSK, which will result in us recognizing additional one-off royalty income of $38 million in the fourth quarter. With this, we now expect total royalties and other revenues to be better at 15% to 20% lower than last year.

We're continuing to invest in R&D but SG&A trends mean that we now expect the growth of combined full-year non-GAAP R&D and SG&A to be towards the lower end of our previous guidance of 10% to 12% year-on-year growth. Our tax rate expectations remain in the range of 18% to 20% for the full year and beyond.

Taking all of these dynamics together with our year-to-date results, we absolutely remain on track to deliver double-digit earnings growth in 2012.

Looking forward to 2013, we remain confident in the growth that will come from our portfolio of marketed products. We're planning to significantly increase our R&D investments in a number of late-stage clinical trials that Angus has described. And at the same time, we're increasingly confident in our ability to deliver sound earnings growth for 2013 and to deliver increased growth beyond that.

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

Angus C. Russell

Thanks, Dan. So if we just turn to my last slide, and I think, I hope from that presentation, this heading on this slide really sums it up. We're making tremendous progress again in Shire. As Graham said, and I said at the introduction, we're well on track now to deliver another year of double-digit earnings growth. And we've walked you through this morning the performance of our products, and as Graham said, the underlying business, our core portfolio of 10 products continues to grow very strongly, and it's that broadly-based portfolio that will drive growth for not just this year and next but many years to come.

Another big piece of news this morning is our ability to be able to share with you a lot of, what I would say, a very exciting late-stage pipeline opportunities. Relatively low-risk projects that are, in some ways, line extensions, but line expansions in some major new areas of treatment that provides significant upside for the company's growth again well into the future. And I hope that gives you now greater transparency and insight into the excellent future growth opportunities that we will have for launches in the period of, probably, small ones in the next 2 or 3 years, but beyond that, certainly significant launches I hope in '15, '16 and beyond.

We're also investing though in the early-stage pipeline. We're investing in novel technologies, new ideas, things like genetic platforms, new areas will still be highlighted in terms of collaborations to further our experience and knowledge and treatment possibilities in the rare genetic disease area. A very exciting kind of platform and ones again that we hope will lead to breakthrough developments on new products in years to come.

And finally and most importantly, as we begin to get towards the end of this year and as Graham and I talked to the teams across Shire and we get more insights into the prospects for the next year and the costs and investment that we need to make next year, we're having now, growing confidence in our ability to deliver another year of sound earnings growth next year and indeed increased growth beyond that.

So with that, let me hand back to the operator, and we'd be happy to answer your questions.

Question-and-Answer Session


[Operator Instructions] Our first question is from the line of David Steinberg of Deutsche Bank.

David M. Steinberg - Deutsche Bank AG, Research Division

First question is, looks like it's your second consecutive quarter of de-stocking for VYVANSE. It seems a little bit odd particularly since it's the back-to-school period. I was wondering if you could comment why 2 consecutive quarters. And then also in your press release, there's on the INTUNIV patent litigation, it talks about the post-trial briefing schedule is concluded by November 1. I guess the trial ended in mid-September. Could you walk us through, give us a little more granularity on the timeline for a potential judge's decision?

Angus C. Russell

David, it's Angus. Let me deal with the second one, maybe I'll take that first, and I'll hand over to Graham and give you comment on the de-stocking on VYVANSE. But as you said, you laid out very well, of course, I was in possession of all the detail. But yes, we have the INTUNIV trial with Teva -- Teva and Actavis. And as you said, we're now into post-trial briefings and meetings. After that really, it's very difficult for us to be more prescriptive in regard to timing. It's down very much to the court roster and particularly the judge's schedule. What we could say about this judge, I mean, if ever you can look at judges in terms of time frames, et cetera, we expect it will be a few more months, David. This judge seems to historically have done that. He's a very good judge. I think people who attended the trial, we saw the common share be in-line with our own thoughts. I think this is not an easy case. We clearly have very good claims on our patents. The team did incredibly well, I think, in the trial presentations. And so we expect it will be a few more months. Of course, I'll just say as a tail end to that comment, we're always open to any constructive proposals from the other side in regard to any settlements that make sense to us. So we'll continue to explore those possibilities as we're waiting for the judge to make final determination here. So with that, let me just pass over to Graham and he'd give you a bit more insight maybe into the de-stocking issues.

Graham Hetherington

Thank you, David. As you quite rightly point out, we would normally expect during this back-to-school season to see some small increase in inventory or inventory remaining flat. As you know, we distribute VYVANSE through a number of wholesalers in the U.S. who are contracted to hold the range of days of stock out there and they're operating within that range of days. The reality is for -- during the third quarter is they didn't keep quite up with the growth in prescription demand during the back-to-school season. And yes, we did see a very small level of de-stocking again in Q3. We would expect that to come back in Q4 as they catch up with prescription demand. But relative is that de-stock represents less than 2% of our quarter's shipments, so it really is de minimis. But we would expect that to return as we go forward.

David M. Steinberg - Deutsche Bank AG, Research Division

Okay. And just to clarify your first point, Angus. So the clock starts ticking on the judge's decision based on the end of the trial or based on this post-trial briefing that's going to conclude on November 1?

Angus C. Russell

Well, we don't know. I can't really say any more, I think, David. I mean, post-trial briefings usually are about just clarifying some points. Judge may have some more questions of clarity in whatever in discussion. But that detailed it's obviously very confidential so we wouldn't go into that. So I say, I think, best guidance I can give you is we don't expect something kind of imminently. We think it will take a few months is our best guesstimate I can share with you. But there's nothing precise about that other than looking at past precedence with this judge and knowing that our team did an excellent job and we believe there's a very robust arguments for us in this case.


Our next question is from Peter Verdult of Morgan Stanley.

Peter Verdult - Morgan Stanley, Research Division

Pete Verdult, Morgan Stanley. Two questions, one for Matt if he's still -- you're still around and one for Sylvie. Matt, could you maybe just talk a bit more about Flemming and the credentials he brings to Shire and how we should be thinking about what to expect. I realize it's quite early to ask this question, but there's been a clear strategy in place at Shire when you were CEO and obviously, when Angus has been CEO in the last few years. I'm just trying to understand what potential areas would need tweaking going forward? And then for Sylvie, Sylvie, could you just talk about some of the updates and your thoughts about some of the potential oral therapies that are waiting in the wings in both Fabry and Gaucher given some of the recent data, Phase III data that we've seen in upcoming Phase III. I'm interested in your thoughts there.

Matthew W. Emmens

Peter, it's Matt. I am still here and I have been here. I'm have been in the background for a while. I would -- I wouldn't look for any dramatic change in our strategy. I think that Flemming is buying into the strategy that we have, and that's what excited him about the job. I would tell you that in our search, we did look for a number of things. The company has become much more international. And as you saw, he's a Dane and he speaks 4 languages and he's worked all over the world in many therapeutic areas. And so as we've expanded our therapeutic areas that checks that box, it checks the international box. He's got both marketing and selling experience as well as R&D experience, as well as business development experience, as well as analyst experience on your side and IPO experience. So if you look at boxes that we look for in an expanding company going forward, he certainly has the experience. He likes our strategy. I would expect him to carry on pretty much the way we've gone. We're going to stay a specialist company. We love the orphan area. But we also have to keep up our Specialty Pharma business. So he's aware of that, he's done both things and his expertise, he's got an MBA, he's got a Master's in Health. I mean, he's a physician. He has a lot more degrees than I do, and he's got a lot of international experience and he's excited to come. I think it's going to be enhancing rather than shape shifting.


Our next question is from the line of Gary Nachman at Susquehanna.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

For Sylvie on the intrathecal programs, if the data in the current trials are positive, what would the next phase look like? How long do you think those will take. Just whatever sense you have at this point would be helpful.

Angus C. Russell

All right. We're just conscious as well, the operator jumped in before we had a chance for Sylvie to answer Peter Verdult's question on the Gaucher and Fabry markets. So perhaps Sylvie can deal with Peter's questions first and then move on to the intrathecal program after.

Sylvie L. Gregoire

Sure, Peter. So I'll take the questions one by one or the diseases one by one because they may be slightly different in terms of the outlook of the impact of oral medications. Let's start, perhaps, with the Gaucher market. Substrate reduction therapies like Eliglustat or Miglustat represented obviously another approach for the treatment of Gaucher disease. And Eliglustat is still in Phase III and I have 2 more trials to report, so we have seen the top line results just recently on one particular outcome. It's a bit early really to say based on that one outcome that was published there on the Phase III trial what the impact of really this treatment will have on the overall market. What is known though is that enzyme replacement therapy. It's a bit early really to say based on that one outcome that was published there on the Phase III trial what the impact of really this treatment will have on the overall market. What is known though is that enzyme replacement therapy has been around for over 20 years now, and patients and physicians know what to expect very well from that therapy. There's also no limitations on utilization of these therapies in children and in pregnant women. So these are all important factors that I'm sure physicians will consider in deciding who gets treated with oral therapies if and when they become available for Gaucher disease or if it becomes available for Gaucher disease.

And in terms of Fabry disease, as you know, we were well aware of the Amicus program because we were in collaboration with Amicus for a period of time. This program that is being developed obviously is being developed both for single use and for combination. And again, we'll have to see the results from these trials in order to see the impact of this particular therapy on the existing ways of treating Fabry disease, which to this date has been, again, also for up -- about 16 or 17 years enzyme replacement therapy. Of course, one wishes for patients that there might be some place for oral therapies and -- but we'll have to really wait, I think, until we see the results to see what place they take in the treatment of diseases. And then maybe I'll switch to the intrathecal program. These programs, in general, like many orphan programs, are expected to have about 2 phases of development in terms of a Phase I, II, in which we use [indiscernible] and what dose should be used, as well as what endpoints should be used in the following trial. So certainly for Hunter CNS was just the first one that I've talked about earlier. The next pivotal [indiscernible] trial would be considered most likely to be a pivotal trial based on -- depending, of course, on the results that we see. The length and the duration, however, of these trials will depend very much on what endpoints are chosen for the pivotal trial, and those will have to be discussed with regulatory authorities and the population, the specific population that is being studied which might make enrollment slower or faster depending again on how narrow the population needs to be in order to demonstrate safety and efficacy. So I think once we have the results early next year, it will be much be easier in these conversations with agencies to tell you, so from a time frame perspective, how much time is needed for the -- during the next phase trial and then those results to move forward with these programs. Clearly, one thing is these programs started a while ago. As you can see, recruitment of the population takes quite a while even when it's a captive population like we have with ELAPRASE. So I hope this is helpful. But maybe there's more to come in the first quarter next year.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Okay, that's great. And, Angus, if I could squeeze another one in quickly. Just DERMAGRAFT, if you could just talk about the restructuring of the sales force. What was the issue that was there previously? And what are you guys doing differently? And I guess how have you changed the number of sales reps, if you have done that at this point?

Angus C. Russell

Yes, sure. I mean, there's a not lot more I can add to things, so I'll

just repeat it and see if there's something else I can say. But what I was drawing attention to is many of us know that the device world operates at different standards than pharmaceutical products and biological products particularly. So really, if you remember the history of DERMAGRAFT, it was a product that was approved in the U.S. many years ago as a device, and it competes today against a lot of pressure wound dressings, et cetera, traditional bandages, pressure wound dressings. And so I would say the experience of the people who are initially hired was very much out of that device world because that's the world they were competing in. Yet it's very clear that things are tightening up all across this industry in regard to compliance, promotional practices, et cetera. Shire has got long experience of 2 things -- 2 or 3 things, I would say. One is good compliance. We've been used to this. We moved many years ago actually under Matt's leadership here. We've put in a compliance officer. We went through the entire therapeutic areas in our own traditional business and had to do a lot of retraining and education of reps to talk about the modern era that we live in, what's allowable, what's not allowed. Those standards are different, I would suggest, in the medical device world. I would describe it, they're a bit on capture. That was something we knew going into the acquisition. And we knew there would be a moment in time when we needed to effect that change. We've been doing that gradually. And what's happened this quarter is we just, having put now all our training materials together, really got to understand that business, got to understand the market in the past year. We put those 2 things together, Shire's experienced the understanding of what the market is today, but where it needs to go to, and that's why we're effecting change. And as I made the point, I know it's a bit disruptive for a couple of quarters in terms of having some softer numbers. It's small in the big picture of Shire's business, quite frankly, and we have every confidence that when we go back with reps out there, back into the field, fully trained in today's modern standards for doing business, we're going to get back on trend very quickly again next year. In regard -- I mean, we've let a few people go, and that's just the nature of the beast. We did that. There's nothing unusual. In other words, we did this in the previous years in Shire. We had some people who were dinosaurs, I'm afraid. You let a few people go because they're not going to change the past. And so there's been a bit of a change in letting a few reps go, and we've hired new reps to replace. So I imagine that over -- at the end of the day, a commercial team will be not changed significantly. It will be the same kind of numbers that we had going into this process. And at the same time, we've put a number of Shire's experienced zone managers and zone directors and regional directors in place in key territories, again, really to drive what I would say more of a cultural change. That's what this is about. There's a bit of obviously training, as I said, and that's why we're pulling the reps out of the field and training them in batches now. But a lot of this is also about culture tone from the top and just making sure, as I said earlier, we got a solid platform. And as we look forward to hopefully new indications like epidermolysis bullosa coming down the pike, then I want to make sure we've got a very solid platform and a compliant platform to work off in the future judged by modern standards. So that's what it's about.


Our next question comes from the line of James Gordon of JPMorgan.

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

Two questions, also one clarification. First question was just, Matt mentioned the company becoming more international. And there was the FX hit this quarter, but it's not that easy for us to estimate actually what the FX hits are going to be when you don't have geographic-split products. So you think you'll start to provide a geographic breakdown by product anytime soon? And would you maybe do that for VYVANSE once we get the EU launch, so we can see how that's proceeding? The second question was on the buyback. Why do it now? Is it opportunistic on the valuation or is it reflective of a longer-term shift in the strategy? Could this be one of many buybacks? And also just a clarification. On the royalty dispute with GSK and the resolution there, there's the one-off benefit in Q4, but will you now be receiving more royalties beyond this year in future years or is that it?

Angus C. Russell

So maybe if I do the filling in the middle, I'll just make some comments around strategy and the impact of a buyback, et cetera, and why now. I'll hand over to Graham who, I think, can talk a bit about geographic split of sales and probably give us some insight into that and to talk about the future and also for about future trends on those royalties with GSK. What you've seen clearly in this quarter, but it's been a trend, Graham and I take many questions on that on the road, James, which is growing strong cash generation of this business. $350 million alone in this quarter, up 20% on the same period last year. Very clear when you extrapolate, this company's well above $1 billion of cash generation a year. And so like any company and if you look at the gross cash side, you know we have $1.1 billion worth of convertible debt still left there. So in gross terms, our cash at the end of the quarter is actually standing at $1.3 billion, earning almost nothing today in today's interest rate environment less than 1% on $1.3 billion. That becomes highly dilutive to a company over time, so just sitting and amassing more cash, and it's our job to manage the entire business in shareholders' best interest. And therefore Graham and I talked about this and presented that to the board, and we're all agreed that having a facility in place, and I stressed that, it's a facility, doesn't mean we're going to immediately use it, and the words say that we'll use this over time going forward, but it gives us now the first authority of a significant delegated limit to Graham and I to actually manage the capital of the company in a very optimal fashion. That absolutely does not take away from the core base of our strategy, which as you know, as in the past and will continue the future to be one looking for good acquisition opportunities and bringing them into Shire. And so I think it strikes a balance between, as they say, an initial program that shows enough capacity to manage the kind of cash flows we'll be dealing with going forward, but actually does not limit in any way or constrain our ability to pursue good acquisition opportunities. So that's the balance we're kind of striking here. All of that, obviously, as I said earlier, in the best interest of shareholders and creating the best value. So with that, let me pass it over to Graham. And Graham...

Graham Hetherington

Let me just talk first to the geographic split. I mean, certainly we will -- if this would be helpful, we will consider some elements of geographic split going into the future. What we've done up until now, and it's in terms of helping the market with the impacts of foreign exchange, is we've each year given a ready reckoner [ph] of the impact of foreign exchange. And at the Q4 results, we outlined the fact that our plan for 2012 assumes a euro-dollar rate of $1.31. And that what we identified was that a 10% appreciation of dollar against the euro would impact revenues by 1.5%. And in the third quarter, we actually saw the dollar appreciate on average across the quarter by over 11%. And if you use that ready reckoner, that gives a $27 million negative, which ties into the $28 million that we've just reported. But certainly, we'll certainly consider whether we include small geographic split.

In terms of royalties, there will be some small ongoing royalties as a result of the settlement. I think just to try and position us for the market generally looking forward over the next few years, I would expect royalties in relation to 3TC and Zeffix annually being initially about $30 million fading over the next 3 or 4 years to something like $20 million a year, something like that.


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

Ken Cacciatore - Cowen and Company, LLC, Research Division

Angus, I don't know quite how to ask this, but can you give a little bit more clarity on kind of the timing here? Clearly disappointing to some that you're leaving, and clearly exciting to have Flemming join. But can you give a little bit more clarification on the timing and the decision behind it? And then I have a follow-up question.

Angus C. Russell

Yes, sure. I think Matt mentioned them, but I'll go over them again. So Flemming's at Bayer in a very senior leadership position, obviously running a substantial part of their pharmaceutical business today, and so we've agreed with Bayer. Matt negotiated that with Bayer that Flemming needs to see out the rest of this year and transition his current significant leadership responsibilities there in Bayer for the balance of this year. I'm sure he and I will have the opportunity, nonetheless, in that timeframe to touch base and start the process of talking about things. I mean, we've already had, he and I had a couple of meetings already. From then, he'll officially join Shire, and as I said, he'll join the Board of Directors as with the title of CEO designate on the 2nd of January when we all get back after the holidays next year. And he'll focus primarily initially on taking over what's been my responsibility the past few months of focusing on overseeing very much the Specialty Pharma business and leading that business, and obviously at the same time gradually getting to know the other businesses in Shire and preparing himself for taking over from CEO. As Matt said, that will be taking over from me. And when I step down, effectively leave the company, will be the end of April, and that's consistent with the timing of us holding our annual shareholder meeting, which provides very -- sort of good opportunity obviously in rounding all this out in a proper fashion. So that gives us, starting the process now, a chance to talk a little bit in the next 2 months, but we'll get really into the significant transitioning and handover for the first 4 months of next year.

Why now? Well, as Matt said, I mean, I won't repeat those points. Matt said the company's moving into new challenges, industry moves on, business moves on, and you see Shire's growing portfolio and growing range opportunities and most importantly growing footprint geographically. And I won't repeat them but Flemming's background and career speak to that very much. In regard to my timing, I mean, it's very important to me, 2 or 3 things. I feel like 13 years -- it said that in the release today, 13 years with Shire, a very long period of time. It's been the most amazing period of my career. We've achieved incredible things here together at Shire all of us. And I think back to the days of joining a little company with -- based basically in the U.K. and the U.S. only with one product that was no patent on it and 90% of our business. And so yes, I take pride in the fact what we've all achieved here, which as you know, we've turned up into one of the most admired and respected companies in our space. We now have these 10 core products, so in other words, a much more broadly based business with all of them enjoying significant exclusivity into the future. And so that's been a real transition. And then of course, we're now in something like 30 different geographies. So for me, it was important to leave the company having managed that transition got us the other side of, if you like, ADDERALL and ADDERALL XR and at the other side of that and transitioning into this new world and this broadly based portfolio. And it's great today to be able to announce it and say we're reiterating double-digit EPS guidance this year, seeing next year our increasing confidence in further good growth next year and increased growth beyond that. So that was important to me to leave this company in absolutely the best shape possible in a situation, a company that's much admired and handing on to somebody who I think has tremendous skills to meet the challenges that will inevitably lie in the future. But maybe Matt's sitting here with me still so, Matt, do you want to add anything else?

Matthew W. Emmens

Well, I think Angus has done one hell of a job. I think that if you look at -- I call him 3.0, if you look at the sections of the company or the era. The first era was the ADDERALL era, and the second was basically starting to expand the company and the third was implementing all the things we needed to have to bring us today, and the next one is to continue to do that in obviously different ways, but mostly relying on the base that's been built. So I want to thank Angus for his contributions. He's turned his head towards, I don't know, race cars and families. He wants to go play, so we appreciate what he's done.

Angus C. Russell

We can assure that everybody is managing this transition in a very professional and committed way. And I think you all know me well enough to know I'll be giving this 120% of my effort until the day I walk out the door for the last day, which will be obviously a very emotional day for me. But we'll manage this forward. We still got some challenges. I'm very much involved in all of those for the next few months. And I look forward to obviously seeing all of you again. So anyway, let's not dwell on all those things. Let's move on now [indiscernible]

Ken Cacciatore - Cowen and Company, LLC, Research Division

Certainly. Well, I'll do that. I'll just say congratulations in advance. And then maybe with the decision on the share buyback, maybe just discussing business development. If you're comfortable at all talking about size that you would be willing to go up to as opposed to some of the other deals have been a bit smaller. Can you kind of give some perspective on what we're looking at from a business development standpoint in terms of how high or how large and may be kind of what areas?

Angus C. Russell

Yes, I think sort of like, I don't know, maybe it's $752 million would be -- no, I'm joking. I mean, the point, Ken, is that I've always said, to me, it's not about size. I mean, the simple fact to state, size the company Shire is and the kind of liquidity and access to liquidity we have, we could do anything from small to substantial acquisitions. That's not the issue, you know that. The issue here is to do things that are truly in the interest of building this company of continuing to add to our already substantial growth prospects and doing that in a way that adds value for the shareholders when measured on whatever it is, return on invested capital being one of the most significant measures there. That's what Graham and I and the team and the board are all focused on here. So I don't think of it ever in those terms of what's the size. Cover the areas, I mean, just to cover that, it's usually -- anticipate that's the question. Clearly, anything in the rare genetic disease area is of interest, it's a model that plays extremely well even in today's harsh economic environments. We're finding that, that business when you're in a key chronic conditions like that holds up well and performs well. Specialty, there's a few legacy products for the whole industry. You're seeing now these impacts play out big time here in the world of more mature, older, less differentiated products, that's a terrible place to be today and will continue to get even worse, I'm sure, going forward. Gladly, Shire doesn't have too much of that. What we have left is legacy, and we see those as sort of cash amortizing assets. In terms of specialty, also significant part of our core business, ADHD, a whole new lease of life with the new uses in VYVANSE. And what I would point to there is our interest in hematology. You saw us bring in and I commented on moving into another late Phase II study in regard to the new chelating agent SPD 602. So that area of hematology fits our model extremely well, very small physician group, easy to reach, easy to deal with, and still a lot of rare, and unusual blood disorders out there that require better effective treatments and represent again acute chronic conditions. So that's one area. We're looking at neurodegenerative diseases, things like autism. We've mentioned before parts of our carry-away program on INTUNIV includes work in regard to -- carry-away granting, I should say, work on autism, and we'll see all the results of that play out later this year and hope to discuss that with you maybe on the next call or sometime soon. And then Regenerative Medicine. I already commented on that earlier, and we see that in certainly this area of focus on now, as I said earlier diabetic complications and dermal repair with cell-based therapies being an interesting area. So all of those are areas we're very keen to add to our portfolio. And as I said earlier, share buyback doesn't get in the way. We have significant cash generation to do that. But, Graham, do you want to add anything?

Graham Hetherington

No, I think I just want to reinforce that we only contemplated the share buyback program in the context of our core strategy of investing in building this business, both organically and through acquisition. And our current cash position, our confidence in our cash generation, our borrowing capacity ensures that we've got total strategic flexibility to pursue that strategy even with this share buyback program.


Our next question is from the line of Jason Gerberry at Leerink Swann.

Jason M. Gerberry - Leerink Swann LLC, Research Division

First question for Graham. Just looking at the gross margin and thinking about sort of how the gross margin will progress. Obviously, I think the GSK one-timer should help the full year number. But is 85% that we saw this quarter kind of the number to be thinking about moving forward? And I then have a follow-up.

Graham Hetherington

Well, I think -- I mean, there's one, Jason, there's one technical aspect, which is our gross margin percentage, as we've reported, excludes the impacts of royalties because clearly that is a distorting influence. The shape of the portfolio, I think, sustains gross margins going forward to the similar sort of level. And as we move into 2013, once we've got a tighter grip on the shape of that, that will be part of the detailed guidance that we provide early in 2013. I hope that helps, Jason.

Jason M. Gerberry - Leerink Swann LLC, Research Division

For Sylvie, if you could just give us an update on the REPLAGAL patient numbers. Just trying to get a sense of how the patient number looked this quarter versus last quarter. I'm looking at the CER growth, it looked like it probably grew a little bit on new patient starts, but I wonder if you can confirm that.

Sylvie L. Gregoire

Yes. We have seen growth in patients numbers quarter-over-quarter. We are now have approximately just a little over 2,900 patients that are treated with REPLAGAL worldwide. And so it continues to -- we continue to add on. The majority of the growth obviously comes from new patients that are coming on either to REPLAGAL, from newly diagnosed patients or patients that are already diagnosed but coming onto therapy. We take the vast, vast majority of these patients in all the markets, too.

Jason M. Gerberry - Leerink Swann LLC, Research Division

Are there warehouse patients coming into the fold?

Sylvie L. Gregoire

Yes, there are. There are a large number of patients. There's an estimated diagnosed, untreated group of patients of about 3,000 around the world that are, for some reason, they don't meet the criteria of a treatment just quite yet or haven't advanced in their disease sufficiently that the physician started to treat them. So there's a large portion of patients in these that are, I wouldn't call them warehoused, but maybe pooled and will initiate therapy. And those patients come on to therapy every month.


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

Keyur Parekh - Goldman Sachs Group Inc., Research Division

I have 2, if I may. The first one for Matt. Matt, as we kind of think about Shire 3.0, as you called it, how should we think about the longer-term growth prospects for this company, given what we've seen with Shire 1.0 and 2.0? And then secondly for Graham, as we kind of think about the evolving shape of the P&L next year, you alluded to meaningful growth on the R&D side. Just wondering if you can give us a sense of how you're thinking about the SG&A line going into 2013 and '14.

Matthew W. Emmens

I'll start. As we said, we remain on track to deliver a double-digit full year earnings growth for 2012. We're confident that we can do a sound earnings growth in 2013 and beyond that. I would tell you from a board perspective, our intent is to continue Shire as a growth company, and it certainly has the engine to do that to open these current product portfolio, both in all 3 businesses. But we will continue to be an acquisitive company in terms of technologies, platforms and projects. And we look at that every time. So the board is very confident that this will continue to be a growth company, and we are going to do what is necessary to do that.

Graham Hetherington

And moving forward in terms of the income statement's shape, I think that the best way I'd characterize it in 2013 is good top line growth and supporting significant increases in R&D. SG&A directionally flat year-on-year, which supports a sound earnings growth that we've talked about. I think interestingly, we are seeing that Shire has invested significantly infrastructure over the last few years, and that's going to enable us to keep the SG&A line going forward relatively flat in subsequent years as well, which is going to support the ongoing operating leverage which Shire is going to demonstrate.

Angus C. Russell

Okay. So that was the last question. So with that, we thank you all again for your time. I'm very aware you all have a very busy day with a number of companies reporting out today. So again, thanks for your questions. Thanks for your interest, and I wish you all a good rest of the day.


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

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