Shire Plc (SHPG) Q1 2017 Results - Earnings Call Transcript

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Shire Plc (NASDAQ:SHPG) Q1 2017 Earnings Call May 2, 2017 9:00 AM ET


Ian Karp - Shire Plc

Flemming Ornskov - Shire Plc

Jeffrey Poulton - Shire Plc


Kerry Holford - Exane Ltd.

Peter Verdult - Citigroup Global Markets Ltd.

Jason M. Gerberry - Leerink Partners LLC

Jo Walton - Credit Suisse Securities (Europe) Ltd.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Vincent Meunier - Morgan Stanley & Co. International Plc


Ladies and gentlemen, welcome to Shire's 2017 First Quarter Results. For the first half of the conference, all participants are on listen-only mode, so there's no need to mute your individual lines. Just to remind you, the conference is being recorded.

I'm now pleased to present our host, Ian Karp, Head of U.S. IR. Please begin.

Ian Karp - Shire Plc

Good morning and good afternoon, everyone. Thank you for joining us to discuss our Q1 2017 results, which were issued earlier today. You should have received our press release and can view the presentation on Shire's website. For those unable to be the webcast, slides that accompany today's call are located on the Presentations and Webcasts page of Our speakers today are Chief Executive Officer, Dr. Flemming Ornskov, and Jeff Poulton, Shire's Chief Financial Officer.

Before we begin, please refer to slide two of our presentation, which provides information about certain statements we make today that are forward-looking statements within the meaning of the Securities laws, including those regarding our development programs and future financial results.

Statements made during the call that are not historical statements will be forward-looking statements and, as such, will be subject to risks and uncertainties, which, if they materialize, could materially affect our results. The forward-looking statements in this presentation speak only as of today and we undertake no obligation to update or revise any of these statements. Additional information regarding these factors appears in our SEC filings.

Following our presentation, we will also open up the call to Q&A. We request that you ask only a maximum of two questions so that everyone has a chance to participate. We also will 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, Ian, and hello, everyone. Shire is off to a strong start to 2017. Q1 showed high growth across the portfolio, which, coupled with effective resource management, led to robust EPS growth. These results underscore that, for Shire, 2017 is all about growth, improving efficiency and paying down our debt. I'm pleased to report that we've made significant progress towards these goals in the first quarter of this year.

Additionally, we've achieved important advancement of our innovative clinical pipeline, which we believe will further help fuel our long-term success. Jeff Poulton will take you through the financial details of the first quarter and the highlights on our full-year guidance. And finally, I'll make a few closing remarks before we move into the Q&A time.

So please now turn to slide number four. Before I provide details of our first quarter performance, I think it's important to set a bit of context in terms of where we are today in our ongoing journey as a world-leading biotech company focused on innovation in rare and highly specialized diseases. As I've said before, last year was a transformational year for Shire as we completed the acquisitions of both Dyax and Baxalta, providing Shire with additional scale, diversification and, most importantly, bolstering our leadership position across rare diseases. We exited the year with a new sense of purpose and a reinforced and reinvigorated vision, where innovation and patient focus are at the core of everything we do.

As we now look at 2017, our mission could not be clearer. Our focus is on fueling growth from commercial performance improvements, new product launches and pipeline progression. And we are equally committed to becoming more efficient and paying down our debt.

As we look beyond 2017, I see a tremendous opportunity for further growth as we leverage our increasingly differentiated rare disease commercial, R&D and manufacturing capabilities. We expect to continue to improve our margins, generate increasing amount of cash and redeploy capital to maximize both shareholder value and improve patient care.

So please now turn to slide number five, and let me now highlight how our business performed in the first quarter of this year. From a growth perspective, I'm pleased to say that we achieved strong quarterly sales and non-GAAP earnings per share growth. Importantly, on a pro forma basis, product sales grew an impressive 9%, driven by growth across the vast majority of our product portfolio. Additionally, we saw a significant increase in non-GAAP diluted earnings per ADS. Finally, we also saw important advances in our clinical pipeline, which we believe will be critical to our future growth profile.

In terms of improving efficiency, we made tremendous progress on the integration of the Baxalta business, with key milestones being met. We're already seeing efficiency gains from our efforts, and our EBITDA margin for Q1 was 44% compared to 40% in Q4 of last year. But much of this improvement was due to the phasing of costs related to gross margins and are not expected to continue throughout the year. We're beginning to see some sustainable cost improvements being generated from actions we took in the second half of last year and the first few months of this year.

Finally, we continued to pay down debt, which in addition to the nearly $1 billion we paid down in the second half of 2016. We clearly remain on track to deliver and achieve a non-GAAP net debt to EBITDA ratio of 2 times to 3 times by the end of this year.

So please now turn to slide number six. I'd like to now focus on our financial highlights, and Jeff will take you through this in greater detail a bit later in his presentation. On a reported basis, including the consolidated Baxalta results, we achieved product sales of over $3.4 billion, an increase of 110%. The legacy Shire portfolio continued to perform very strongly, with 11% reported sales growth from the quarter. Growth on the legacy Baxalta business was 8% for the quarter on a pro forma basis, which was at the high end of our annual expectations already given of mid to high-single digit growth. Non-GAAP earnings per share increased 14% compared to Q1 2016, and this includes the additional shares issued as consideration for the Baxalta transaction.

Turning now to slide number seven, I'll describe some of the key drivers of our strong product sales growth this quarter. In Hematology, we achieved sales growth of 4% on a pro forma basis. This sales growth was in line with our expectation and was largely driven by increasing sales and the timing of some international orders for our inhibitor therapies, which were up 12% on a pro forma basis.

Next, our Genetic Diseases franchise posted 14% growth, where our hereditary angioedema business was a clear highlight. We saw 38% growth from CINRYZE as we were able to improve supply of the product following some disruptions in the third quarter of last year. We continue to focus on providing a stable supply to the market going forward. Demand continues to be robust for our hereditary angioedema products, driven mainly by new patient starts and by increased product utilization.

Across the rest of the portfolio, we continue to see strong growth from a number of key products and key franchises. For example, our ADHD business continues to be an important growth driver. Our flagship product, VYVANSE, continued growth in its 11th year on the market, with 11% growth compared to the first quarter of last year, and is now the third most prescribed branded product in the United States.

I'll also highlight Immunology, which was particularly strong in this quarter. Immunoglobulin sales were up a 10% on a pro forma basis, and we are very pleased with the initial uptake and feedback we're getting on our newly launched subcutaneous product called CUVITRU, which was launched in both the U.S. and Europe.

Finally, XIIDRA continues to perform very well in just its first six plus months on the market in the U.S. I remain very pleased with the launch so far and encouraged by XIIDRA's increasing market share growth despite only largely being able to compete right now for patients with commercial insurance, which is only about 50% of the potential market. We're building this brand into a blockbuster like we did with VYVANSE, step-by-step, keeping in mind we have patents until 2029 and expect few potential competitive entrants before XIIDRA's patent expiry. I'll provide more detail of some key launch metrics in just a few minutes.

So now please move to slide number eight. Q1 has also proven to be a very productive quarter in terms of key pipeline milestones, as we continue to advance the deepest and most innovative pipeline in Shire's 30-plus year history. In terms of regulatory milestones, we've received a number of important product approvals, particularly in international markets, where we are actively working to expand our base in business.

Perhaps the most significant news was the EU Conditional Marketing Authorization for NATPARA. This will be the first and only product approved as an adjunctive treatment for patients with chronic hypoparathyroidisms who are not adequately controlled on standard therapy.

Another important milestone was the approval of INTUNIV in Japan, which will be co-promoted by Shire and our partner in Japan, Shionogi. As you may know, the ADHD market is growing rapidly in international markets, and INTUNIV will be an important driver of future ADHD growth, as Japan currently represents the third largest ADHD market in the world.

We also advanced a number of programs from our clinical portfolio. We received a June PDUFA date for our next-generation ADHD product, called SHP465 and, if approved, we're excited about the possibility of further expanding our leadership position in ADHD in the U.S.

In addition, we initiated Phase III trials for two of our key late-stage programs, SHP640 for infectious conjunctivitis, and we also initiated a second Phase III trial for SHP620, which is our compound for the prevention and treatment of CMV infections in transplant patients.

Finally, on the 1 of May, Shire announced it agreed to license the exclusive worldwide rights to P-321 from Parion Sciences. P-321 is a Phase II investigational epithelium sodium channel inhibitor for the potential treatment of dry eye disease in adults. Shire will develop and, if approved, commercialize this compound, which could be complementary to XIIDRA and expand our leadership position in ophthalmics as well as provide another important treatment option for patients with dry eye disease.

So let's now talk more about XIIDRA, and please turn to slide number nine. I'll now highlight some of the commercial progress we've seen so far with XIIDRA. Q1 was another strong quarter for XIIDRA. In March, we had our best month to-date in terms of total XIIDRA prescriptions. And in just over six months on the market, we have seen more than 400,000 prescriptions written, while we at the same time gained 22% share of the total market.

XIIDRA is the only product indicated for the treatment of the signs and symptoms of dry eye disease. The ultimate key to our success will be to achieve and activate the millions of dry eye disease sufferers who rely on frequent over-the-counter wetting drops to provide temporary relief of their dry eye disease symptoms. Our strategy has included the use of direct-to-consumer advertising, coupons and samples to encourage the trial uses of XIIDRA. We continue to think that in these early days, the best measure of success comes from the total number of patients who are prescribed XIIDRA and the positive feedback we continue to hear from both our physicians and our patients.

So let me now share some of the data we have to highlight our early and clear success. The chart on the top shows the total U.S. dry eye disease prescription volume for 2015 to 2017, which had essentially been flat until the launch of XIIDRA six-plus months ago. Following our launch in September last year, the market grew 19% through the end of last year. The green line represents total prescription generated in the first quarter of 2017, up 24% compared to the first quarter of 2016.

As you look at XIIDRA's market share across all payers, XIIDRA continues to take share and now commands roughly 22% of the total market. Importantly, this very impressive gain has been primarily driven by our ability to command share in the commercial insurance market, where XIIDRA has broad coverage. In the commercial market alone, our share is, of course, much higher than 22%. As you may know, we do not have broad Medicare coverage yet. I remain optimistic that we will be able to improve access to the Medicare population, who accounts for more than 40% of the current dry eye disease market.

Finally, we remain confident XIIDRA is much more than just a U.S. opportunity. In addition to Canada, where we filed for approval late last year, we also recently filed for approval in Israel, and we remain on track to file in the EU later this year.

So let's now turn to slide number 10, and here I'll provide an update on the progress we've made with our hereditary angioedema portfolio. We work tirelessly to established and growth our leadership position hereditary angioedema and this is a mission that we're committed to maintain and grow. Q1 was another terrific quarter for the franchise, where we saw overall growth of 21%, driven by increasing diagnosis and treatment rates.

Perhaps, and most notably, we also saw improvements in our CINRYZE supply situation after some disruptions in the third quarter of last year. Longer term, we expect to be able to provide approximately 30% of the CINRYZE supply from our own manufacturing facilities, which will hopefully help improve our overall CINRYZE production capabilities.

As proud as I am about the growth of CINRYZE and FIRAZYR, I believe the future of hereditary angioedema treatment could potentially be transformed as we get approval of SHP643 and successfully can bring it to patients. This, of course, is our low-volume subcutaneously administered antibody program that we're starting as either a once-a-month of once-every-two-week injection.

We were thrilled to see the initial Phase Ib data in the New England Journal of Medicine in February this year and now await the top-line results from the pivotal and essential Phase III trial, which we expect in the second quarter of this year. If approved, SHP643 has the potential to improve the lives of patients with hereditary angioedema and expand the utilization of prophylaxis therapy for this rare and often quite debilitating disease.

So let's now talk about slide number 11. So before I hand the presentation over to Jeff, let me say a few words about the progress we are making on the integration of Baxalta and our generation expectations for synergies. As many of you are aware, a key part of the rationale to acquire Baxalta was our belief in the inherent efficiencies that could be recognized by operating as one company. Q1 has been another period of rapid integration, keeping us on target for our overall synergy expectations.

In addition, I decided to streamline and simplify some of our function in an effort to continue to reduce costs and simplify our overall structure. The consolidation of international offices progressed in Q1 and we identified and announced additional planned site relocations within our U.S. commercial business. We also made good progress integrating our various disparate systems between Shire and Baxalta.

Additionally, a significant number of business services have been transitioned from Baxter to Shire, which has also been a key priority for us during the first year of integration. Finally, we are well on our way to improving our EBITDA margins and I fully expect that, over the long term, Shire will increasingly operate as a highly efficient organization.

At this point, I'll turn the presentation over to Jeff, but will come back at the very end with some final remarks before we go into Q&A. Jeff?

Jeffrey Poulton - Shire Plc

Thank you, Flemming. Good morning, good afternoon, everybody. I'm pleased to be presenting Shire's Q1 2017 results. Our focus on execution has led to another strong quarter. After discussing our results for Q1, I will provide comments on our 2017 full-year financial guidance, which is unchanged from last quarter.

Starting with Slide 13, financial summary of reported results, reported product sales for Q1 2017 were $3.4 billion compared to $1.6 billion for Q1 2016. This represents 110% year-over-year growth, driven primarily by, including Baxalta results, which contributed approximately $1.6 billion of product sales during the quarter.

Pro forma combined product sales increased 9%, with legacy Shire product sales increasing 11%, while legacy Baxalta product sales increased 8% on a pro forma basis. Royalties and other revenues for the quarter were $160 million, an increase of $78 million or approximately 95%. This increase was primarily due to the inclusion of $46 million of contract manufacturing revenue acquired as part of the Baxalta transaction. Our non-GAAP combined R&D and SG&A spend was $1.2 billion, an increase of 88%, as the results include Baxalta operating costs. Comparing sales growth to growth in operating expenses, you can see the operating leverage we are continuing to drive from the combined business as we execute on our synergy plans.

Non-GAAP EBITDA in the quarter was $1.6 billion, an increase of 90%. We achieved a 44% non-GAAP EBITDA margin for the quarter. As expected, this was down 5% from 2016 due to the lower gross margins in the legacy Baxalta business. As a reminder, this ratio is now reported as a percentage of total revenue.

The non-GAAP effective tax rate for the quarter was 16%, down 2% on changes in the geographic mix of profitability due to the Baxalta acquisition. Non-GAAP diluted EPS per ADS was $3.63 for the quarter compared to $3.19 in Q1 2016, a 14% increase. Net cash provided by operating activities increased 18% in the quarter to $459 million, primarily due to higher sales associated with including the Baxalta business. I'll provide more detail on cash flow shortly. In summary, our Q1 results were strong, reflecting robust sales growth, good cost discipline and a relentless focus on execution.

Moving to slide 14, I will provide more detail on our net product sales for Q1 2017 on a pro forma basis. As noted previously, we are pleased by the 9% pro forma growth in the business, driven by strength across a number of franchises and some timing benefits from large orders and our new Baxalta business, which, as we have called out before, may lead to some added lumpiness between quarters.

Starting with our Hematology franchise. Product sales were $871 million for the quarter, an increase of 4% on a pro forma basis. Both the hemophilia and inhibitors franchises benefited from the timing of large orders in our international markets, with a net benefit of $40 million in sales in Q1 2017 versus Q1 2016.

For the Genetic Disease franchise, product sales totaled $696 million for the quarter, representing 14% growth. CINRYZE drove much of the growth, as we continued to add new patients and we benefited from restocking the distribution channel, adding $30 million of sales in the quarter. We will remain focused on ensuring stable CINRYZE supply for the remainder of the year.

We have the opposite situation for FIRAZYR, with approximately $30 million of destocking in the quarter following a very strong Q4 2016. Like CINRYZE, FIRAZYR benefited from an increase in the number of patients on therapy.

Moving to Neuroscience. The franchise grew 4%, with sales of $653 million. This growth was primarily driven by VYVANSE, which grew 11%, with strong performance in both U.S. and international markets. In the U.S., an increase in patient demand and the benefit of a price increase was partially offset by modest destocking in the channel. International growth was approximately 35%, as performance in our ex-U.S. markets remained strong.

Our Immunology franchise had sales of $676 million in the quarter, growing 12% on a pro forma basis. The franchise benefited from both patient demand and the timing of international orders, with a net benefit from international orders of approximately $30 million. We believe demand growth was in line with our overall market growth expectations and are pleased with the contributions from our subcutaneous portfolio. HYQVIA continues to grow and CUVITRU is exceeding our early launch expectations.

Our Internal Medicine business reported sales of $419 million for the quarter, up 9%. This growth was driven by the performance of GATTEX and NATPARA, as both products are adding patients as we continue to educate the market on the clinical benefits of these products.

Oncology had sales of $58 million in the quarter or up 13%. Both ONCASPAR and ONIVYDE contributed to this growth. ONIVYDE was recently launched in certain international markets and we are pleased with early results, particularly in Germany, and expect to see further growth as we expand into additional international markets.

We are also pleased with the performance of XIIDRA since launch, and I expect increasing contributions from this product as we progress through the year. XIIDRA contributed $39 million in sales during the quarter. As of March, XIIDRA reached a 22% market share in the U.S., benefiting from robust overall market growth of greater than 20% since the launch of XIIDRA.

The quarter was also impacted by $1 million in destock compared to launch stocking of approximately $15 million in Q4 of last year, which impacted our sequential growth comparison. In summary, product sales growth was 9% on a pro forma basis for Q1 2017, with contributions across our diversified portfolio.

Moving to slide 15, Q1 2017 performance metrics on a reported basis. As you can see, there is strong growth and product sales as well as increases in non-GAAP R&D and SG&A spend. As previously mentioned, these increases are primarily attributable to including the Baxalta business from June 3, 2016.

On the ratios, I would highlight that we are now reporting ratios as a percentage of total revenue. We believe this provides a simpler calculation. For sake of clarity, slide 28 in the Appendix compares to ratios calculated under the current and previous methodology of reporting ratios as a percentage of net product sales.

Moving to our results. Our non-GAAP gross margin declined from approximately 87% to 78%, given the inclusion of the legacy Baxalta products, which generally have lower gross margins than legacy Shire products. At 78%, our Q1 non-GAAP gross margin was above our full-year guidance range of 74.5% to 76.5%, which remains unchanged. This was driven by the phasing of certain product manufacturing costs, primarily related to legacy Baxalta products.

We expect the benefit we saw in Q1 will reverse during the year, given the larger and more complicated manufacturing network that we acquired with Baxalta. We expect more variability quarter-to-quarter in our reported gross margins. I will comment further on gross margin in a few slides when I discuss our 2017 guidance.

Non-GAAP R&D as a percent of total revenue was down 2%. Non-GAAP SG&A was also down 2%, as we benefited from the early delivery synergies while also continuing to invest in new product launches.

Now moving to slide 16 and our summary of our cash flows for the quarter. As I mentioned previously, our net cash provided by operations was approximately $460 million in Q1 2017, an increase of 18%, primarily due to strong cash receipts from higher sales, including the contribution from Baxalta, partially offset by costs related to the Baxalta integration and a $346 million DERMAGRAFT settlement. Net cash from operations more than doubled in the quarter when excluding the impact of the Department of Justice settlement payment related to our former DERMAGRAFT business.

CapEx of $212 million is primarily due to the inclusion of Baxalta CapEx. Importantly, debt pay-down was $423 million in Q1. We expect to continue to generate strong net operating cash from our portfolio of products and plan to use that cash to pay down debt in the near term. We remain on track to achieve our goal of a non-GAAP net debt to EBITDA ratio of between 2 times to 3 times by the end of 2017.

Slide 17, the final slide, covers our guidance. We are reiterating the guidance we issued last quarter. I will add some color on phasing for sales and gross margin. Starting with product sales. Our full-year guidance remains unchanged. But consistent with last quarter when I provided guidance, I highlighted that we expected first half 2017 growth to be lower than the full-year growth due to strong first half 2016 comparables, particularly for the legacy Baxalta franchises. I am reiterating this expectation, which implies a lower rate of growth in Q2. We have provided historic 2016 quarterly pro forma product sales on the right side of the chart to aid quarterly forecasting.

On gross margin, as I previously mentioned, in Q1 we benefited from the phasing of certain manufacturing costs primarily related to the legacy Baxalta products. We continue to forecast gross margin to be within previously communicated guidance of 74.5% to 76.5% of total revenue, as the phasing benefit from Q1 is offset in future quarters. This does imply that upcoming quarters will have lower reported gross margins. All remaining line items of the guidance I issued last quarter also remain unchanged.

And, with that, I'll turn the presentation back over to Flemming.

Flemming Ornskov - Shire Plc

Thank you, Jeff. As you heard on today's call, Shire is clearly a high-growth company making significant progress advancing our innovative pipeline, integrating the Baxalta business and improving our cost structure. Q1 was another strong quarter for our business, as we remained focused on growth and efficiency while, at the same time, keeping the needs of our customers and patients at the forefront of everything that we do.

So if we now turn to slide number 19. So in closing, let me remind you on this slide a final time about our priorities for the remainder of this year. Our focus will continue to be: executing our current brand strategies and successfully launching new products, further integrating the Baxalta business, progressing our innovative pipeline, optimizing our portfolio and activities and paying down debt.

So with that summary, I'll now turn the call over to the operator to open the Q&A portion of this call. Operator?

Question-and-Answer Session


Thank you. Our first question comes from Kerry Holford of Exane BNP Paribas. Please go ahead. Your line is open.

Kerry Holford - Exane Ltd.

Thank you. It's Kerry Holford at Exane. Couple of questions, please. Firstly, on LIALDA. That's a little weaker than we anticipated this quarter. Given the commentary in your slides that you're continuing to gain market share, can we conclude this comes at the expense of price? Or any stocking issues to be aware of for that drug? Should we expect this trend to continue through the remainder of the year?

And then secondly, on the Baxalta synergy targets. So you're reiterating the $700 million by the end of year three. I just wonder why that looks rather conservative, given the rapid progress you're making on these cost lines post-Baxalta. Thank you.

Flemming Ornskov - Shire Plc

Yeah, I think you can say it was a soft quarter for LIALDA. It was a 4% growth. And script growth was significantly higher; it was more than double that. It was 9%. There was a price increase last year. And we also had some higher gross-to-net that slowed it down a little bit. But I don't think there's anything about the outlook. We are very positive about LIALDA. And I think it continues to be a very strong product and it's totally in line with our expectations.

We're totally confident in the synergies we've laid out. As you recall, there was already a significant increase in the first synergies. So we are committed to the $700 million in year three post-close as our synergy target and the $300 million for the first year, post-close, which we are still in. So on both, no change in outlook.

Jeff, any additional comments?

Jeffrey Poulton - Shire Plc

On LIALDA, you asked about stocking. Very modest impact on the quarter. I think what Flemming said was right. Good underlying demand growth. We significantly outgrew the market, which is why we took share. Script growth was 6% against the market that was down 2% in the quarter.

The headwind was gross-to-net increase. And that was largely driven by the timing of the price increase that we took. Last year, we took that in Q1. This year, we took it in Q4. And there's a net benefit in the quarter that you take that, where you get a credit back on inventory that the wholesalers are holding. So that didn't occur in Q1 this year like it did Q1 last year, Kerry. So I think that's the biggest driver of the lower growth in Q1.

Kerry Holford - Exane Ltd.

Thank you.


Thank you. And our next question comes from Peter Verdult of Citi. Please go ahead. Your line is open.

Peter Verdult - Citigroup Global Markets Ltd.

Thank you. Peter Verdult, Citi. Just two topics, please. Firstly, for Jeff, on the gross margin. You made it clear in your comments that Q1 benefited from the phasing effects of Baxalta. But I was hoping to push you a bit more on stress about the level of conservatism you're applying here. I mean, put simply, what has to go wrong for your gross margin to end up in the bottom half of your projected 74.5% to 76.5% range?

And secondly, for both of you. Flemming, on Ophthalmology, could you just give some sort of quantification on the gross-to-net dynamics for XIIDRA for the remainder of the year and then give a little more detail on how you see the commercial potential of 620 and the recently announced assets of 321? Thank you.

Flemming Ornskov - Shire Plc

Yeah, so maybe we start with the Ophthalmic question. So we're not giving specific information about gross-to-net. As I said on the call, I continue to be very optimistic. This is a product with a patent to 2029. I look at the competitive landscape and I see that quite limited going forward, with not a lot a lot of new product entrants. There's some genericization that could happen, of course, in the market.

We see significant unmet need. We see opportunities for new products that will differentiate that are coming to the market. So we just acquired the opportunity to develop one such product in collaboration with Parion. Different mechanism, clearly differentiated, and it shows our commitment to innovation in the dry eye market.

And if I look at 22% market share of 400,000-plus prescriptions written so far, our so far only being available in the commercial market and not in the full commercial market, I think we've had a very strong uptake and we've dramatically increased the overall growth of the market, which looks also good for the long-term prospect of the dry eye market. And we filed in Canada last year, we have filed in Israel and we're on track to file also in Europe. So I think the outlook is very strong for XIIDRA.

We clearly want to build the market. We want to build trial experience with XIIDRA. And, with that, we have had coupons and we've had sample programs. Again, with, in mind, likely build other blockbuster brands like VYVANSE over the longer haul, and that's exactly what we're doing with XIIDRA. And we continue to be committed to the market. And I think the new product, which will be a supplement to XIIDRA, if approved one day, is a perfect match for us and our continued building of a leadership position in the dry eye market.

And Jeff, conservatism on (34:53)?

Jeffrey Poulton - Shire Plc

Yeah. So, you're right, Peter. I mean, Q1 did benefit from favorable phasing of certain manufacturing costs, and those are largely related to the Baxalta products. And we believe that these phasing benefits will reverse over the remaining three quarters of the year, and we're sticking with our guidance of 74.5% to 76.5%, which is consistent with the margins that we delivered in the second half of 2016 after the close of the Baxalta transaction.

I think the commentary I'd make here is we do have a much larger and more complex manufacturing network than we had previously. And this will result in some variability in the gross margin line quarter-to-quarter. I think we see that with some of our competitors that also have large plasma networks. So we're sticking with the guidance. We think it's at the right level.

Peter Verdult - Citigroup Global Markets Ltd.

Thank you.


Thank you. And our next question comes from Jason Gerberry of Leerink Partners. Please go ahead. Your line is open.

Jason M. Gerberry - Leerink Partners LLC

Hey. Good morning, and thanks for taking my question. First question is just on SHP643. Curious if you can just talk a little bit about the market dynamics and how many patients you think are out there on oral androgen that could potentially convert to 643 in the U.S. market?

And then my second question, with XIIDRA, it sounds like there's exclusive formulary access for XIIDRA on a subset of UNH PDPs. Curious if you could sort of quantify that. And as we think about 2018 formularies, is there a concern that payers start to award exclusive formulary positioning to the lowest bidder? Or do you think that there's ultimately going to be a place on the formulary for both products? Thank you.

Flemming Ornskov - Shire Plc

Thanks, Jason. So on 643, I remain very optimistic. I think what I saw when we did the deal with Dyax is a differentiated, innovative product with very strong efficacy, convenience and safety data. And I think if you look at the data that was published in the England Journal of Medicine in February of this year, they mirror that.

We are in the process of completing the Phase III. We should get data in the second quarter of this year. And I think that 643 has a potential to be a clearly differentiated product, both in terms of its convenience of dosing, the less frequency. It can be every two weeks or every month. Depending on the data, we'll have to see, of course. Very small volume subcutaneous and had very strong efficacy data in its Phase Ib. So I think if Phase III comes out strong, it has the opportunity to be a significant change agent in the overall hereditary angioedema market.

The market is not fully penetrated. We continue to see strong growth, both from new patients, from more utilization. And I'm sure that if that profile can be repeated, there will be both opportunities in the treatment market and in the prevention market. But, of course, depending the trial outcome, the data and eventual label, if approved. So I remain very optimistic about that.

For XIIDRA, and I think on androgens, of course, ex-U.S., that's a large part of the market. And you also know that that's in itself a significant opportunity, I think, mid to long-term. On XIIDRA, yes, we have currently mainly access to commercial plans. And I think we have good penetration. We have 80%-plus coverage. I think we have an opportunity to continue to expand that. Yes, there has been various deals that were exclusive, but I think we've shown that we've gained access in record time in the private commercial market. And I'm absolutely sure that we will also be successful eventually in the Medicare market. So I look also very optimistic on 2018.

And if you compare to a lot of other potential blockbusters that have been launched by very competent companies over the last year, I think XIIDRA clearly stands out by the speed and access that it achieved early on in its lifetime. And I'm very pleased what the team has achieved there.

Jason M. Gerberry - Leerink Partners LLC

Great. Thanks, Flemming.


Thank you. And our next question comes from Jo Walton of Credit Suisse. Please go ahead. Your line is open.

Jo Walton - Credit Suisse Securities (Europe) Ltd.

Thank you very much. Two questions, please. Just to push you a little bit on XIIDRA. The consensus sales forecasts for 2017 were about $290 million. Given the relatively low sales in the first quarter, are you still comfortable that that is something that is achievable?

And secondly, just looking at the Baxalta legacy products, very strong growth in the Bio Therapeutics, which is presumably albumin, maybe albumin in China. I wonder if you could tell us a little bit about that and also give us more information on the CUVITRU launch and how that's progressing.

Flemming Ornskov - Shire Plc

Yes. So I think, like I've had the fortune in my life to be involved in quite a number of blockbusters that are being built, whether it was my opportunity at Merck with FOSAMAX, the first kind of differentiated key product coming into the osteoporosis market, (40:35) in the hypertension market, whether I look at Eylea or Lucentis and, recently, XARELTO, I've seen one characteristic of all these blockbusters is you build them step-by-step. And we are applying exactly the same approach to XIIDRA.

I'm actually sure that we are off to a very good start. We are committed to the guidance we've given for the year. We don't break it down to individual product guidance. But I am absolutely committed to a continued strong launch of XIIDRA, despite some challenges initially in getting formulary access, which we overcame, to a large extent, in the private sector. Now we have to overcome them in the Medicare sector. I'm actually convinced to that this product is on a trajectory to become a blockbuster.

As pertains to the Immunology business for Baxalta, I think we have added additional sales force or are in the process of. We have strengthened the commercial execution. We've been more aggressive in some of the tender business, particularly ex-U.S. And we've shown more focus and more dedication to the launch of CUVITRU, which, I think, was a bit underfunded in the Baxalta plan. And we're off to a very, very strong start. And it's also spilling over to HYQVIA. And I'm absolutely that these will be very successful products, but we're not giving specifics at this stage.

Jeff, anything you want to add?

Jeffrey Poulton - Shire Plc

Sure. So on the Immunology or Bio Therapeutics results, Jo, you had it right. It was very strong albumin orders shipped to China that drove the strong growth in the quarter.

Jo Walton - Credit Suisse Securities (Europe) Ltd.

Thank you.


Thank you. And our next question comes from Andrew Finkelstein of Susquehanna. Please go ahead. Your line is open.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Thanks very much. I was hoping you could address a little bit about the Hemophilia business and what some of the dynamics you see there, including the conversion of patients to ADYNOVATE and whether we may see closer to mid-single digit pro forma growth as we move throughout the year. And then also could you comment on whether the unchanged guidance for the year contemplates at all potential risk to LIALDA?

Flemming Ornskov - Shire Plc

So maybe to talk about the Hemophilia business. I think one of the strengths of Shire has always been our commercial acumen. I think we've shown that in a number of franchises, including LIALDA that you just mentioned, and I also think in the ADHD market. So we're applying the same acumen to the Hemophilia business. We think that there's opportunities in the commercial execution in the U.S., and there's also opportunities ex-U.S. And in particular also, in participating successfully in a lot of the tenders ex-U.S. There's a lot of tenders going on. 60% of the overall market is ex-U.S. So I think we're starting to see some signs of success there.

It's quite clear for me as we move forward that ADVATE is the cornerstone of the therapy, ADYNOVATE is an option for certain patients and myPKFiT is another huge focus that we put on because individualization of therapy is increasingly of importance. So I think we have a very strong and differentiated portfolio and I think both ADVATE and ADYNOVATE play key roles there.

And the key for me right now, together with my team, is to strengthen the medical and commercial execution and also be more successful in participating in tenders ex-U.S. and to drive the uptake of myPKFiT, which I think benefits the overall outcome as proven in the literature.

Jeff, do you want to take the other part?

Jeffrey Poulton - Shire Plc

ADYNOVATE, just to give you a little bit of detail, Andrew. It's annualizing around $200 million right now in revenue. We're launched in the U.S. and Japan. We're starting to launch across Europe. So expect continued growth from that.

As it relates to LIALDA, no, we don't anticipate an impact this year from generic competition.

Andrew Finkelstein - Susquehanna Financial Group LLLP

Thanks very much.

Ian Karp - Shire Plc

Operator, I think we have time for just one more question now.


Thank you. Then our final question would be from Vincent Meunier of Morgan Stanley. Please go ahead. Your line is open.

Vincent Meunier - Morgan Stanley & Co. International Plc

Thank you for taking my two questions. The first one is a follow-up on the Baxalta integration. So I'm trying to identify the remaining uncertainties and the moving parts. Can you update us on the review of the manufacturing network? And should we expect that review to have a material impact or just be incremental?

The second question is on CINRYZE. You say you are progressing in order to provide internal capacity to supply roughly 30% of the total demand. So when will you reach full capacity? And could you quantify the related stocking effect in Q1 for the remainder of the year? Thank you.

Flemming Ornskov - Shire Plc

So maybe if we talk about the two questions, so I think the network strategy, so, as you know, there are 17 manufacturing sites in seven different countries There's I think about 14,000 employees overall I think in our manufacturing network. So we are conducting currently an assessment of the network. We have started to run the network as a so-called integrated network. That process has already started on the Baxalta versus just 17 discrete manufacturing sites. So we hope in the second half of this year to have line of sight of what are the opportunities there.

So I think it's too early for us to give any specific guidance on any impact. We'll give that later in the year. But none of the synergies other than some overhead reduction from the integrated management of these sites like in IT, HR and finance, we have not included any other financial figures for the network study and the outcome and the synergies we could drive there.

Jeff, do you want to take CINRYZE? I think the only thing we can say is that when we acquired ViroPharma, we acquired with that a collaboration with Sanquin and shortly thereafter, they also had a Warning Letter, which has since been lifted. So we had some significant constraints on the manufacturing site which was holding back our ability to fulfill demand. We then reentered negotiations with Sanquin and got an opportunity ourselves to supplement their production with our own. That technology transfer is in place. And we think we can have up to 30% of the supply coming from our own manufacturing network. It's probably an 2018 phenomenon versus a 2017 phenomenon.

Jeff, anything you want to add?

Jeffrey Poulton - Shire Plc

Yes, maybe just to add to a couple of things, Flemming. I think in terms of stocking on CINRYZE, for the balance of the year, I would not anticipate additional channel stocking over the course of the year. So I'll just repeat that. We don't anticipate additional channel stocking for CINRYZE for the balance of the year.

Maybe one comment on synergies. I always like to think about it in terms of the EBITDA margins because I think that's easier for people to think about and perhaps model. We had talked about getting the business back into the mid-40%s margin range as we delivered the synergies. Just an update on early progress. Second half of last year, obviously, just after the deal closed, our margins were in the 38%, 39% range. In the first quarter, it was 44%.

Now, we've highlighted the fact that we had about a 3% margin benefit from cost of goods sold in the first quarter that we don't anticipate recurring. So even normalizing for that, we were at about 41% in the quarter. So we're already very early on starting to show some benefit of the margin starting to inch back into the 40%s and hopefully on our way to the mid-40%s here over the medium term. Just wanted to be clear on that.

Flemming Ornskov - Shire Plc

So I think, with that, thank you so much for your questions. I think as you saw from the numbers, a very, very strong start to the year for Shire. We are off to start where we show high growth across the portfolio. You highlighted many of these great successes already in your questions. But it's also coupled with, what Jeff outlined, a very effective resource allocation and management, which led to a very robust earnings per share growth.

So, a very strong start to a year. Still three quarters to go, but I remain optimistic about our guidance. And I think we've shown that the integration of Baxalta is on track. But most importantly to me is that we're a company focused on rare and highly specialized diseases. Our pipeline is essential to me. We continue to progress that very, very well, with some key milestones this quarter as well. And I'm also very pleased to say that on May the 1st we added another potential, very differentiated, very interesting dry eye compound, if approved one day, could be a significant additional (50:00) in the rapidly growing innovative Shire Ophtha portfolio.

So, with that, thank you very much. And it was a busy day for all of you, but thanks very much for listening to our call and asking great questions.


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

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