Shire Management Discusses Q2 2012 Results - Earnings Call Transcript

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Q2 2012 Earnings Call

August 01, 2012 9:00 am ET


Eric Rojas - Director of Investor Relations - North America

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

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

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

Kevin L. Rakin - Chief Executive Officer of Advanced Biohealing and President of Regenerative Medicine


Ken Cacciatore - Cowen and Company, LLC, Research Division

Peter Verdult - Morgan Stanley, Research Division

William Tanner - Lazard Capital Markets LLC, Research Division

Brian Bourdot - Barclays Capital, Research Division

Jo Walton - Crédit Suisse AG, Research Division

Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division

David G. Buck - The Buckingham Research Group Incorporated

David Amsellem - Piper Jaffray Companies, Research Division


Hello, and welcome to Shire's 2012 Second Quarter Results Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Eric Rojas. Please begin your call.

Eric Rojas

Good morning and good afternoon, everyone. Thank you for joining us today for Shire's Second Quarter 2012 Financial Results. By now, you should have all received our press release and should be viewing our presentation via our website on If for some reason you have not received the press release or are unable to access our website, please contact Souheil Salah in our U.K. Investor Relations department on +44-1256-894-160, as he will be happy to assist you.

Our speakers today are Angus Russell and Graham Hetherington. Sylvie Gregoire and Kevin Rakin will be available for Q&A as well.

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. Angus will talk about Shire's recent business highlights and future growth drivers. Graham will continue with the financial overview and update Shire's full year outlook. And finally, 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 offline for any subsequent questions.

I'll now hand the call over to Angus.

Angus C. Russell

Thanks very much, Eric, and good morning, good afternoon, everyone. So let me turn to Slide 5, and this just summarizes the revenue results that you've seen today. Really speaks again to the balanced nature of our product portfolio. I'll review some of the product highlights during the quarter, but it's fair to say that our 9 core products continue to drive growth in the business on an international basis. And you can see that here with total revenues up 14% to over $1.2 billion in the quarter and within that, again, a strong product performance of growth of 16%.

Turning over to Slide 6. That has not only gone down through the income statement but has been added to with other elements around costs that Graham will no doubt go through in more detail later. But that leaves us in a position where non-GAAP operating income is up 23% to $420 million this quarter, and non-GAAP diluted earnings per ADS are up 26% to $1.68.

Turning to Slide 7 and just really giving a snapshot here in pictorial form of what I said a moment ago. To the right-hand side in the blue bubbles, you can see those 9 core products that are driving growth on a global basis. As you can see from the bullets on this slide, we expect there to be multiple drivers of growth, but the first one is the continued growth in existing markets. On top of that, many of these products have recently entered new geographies and, therefore, we believe there is potential for strong growth in those new territories. And that will also add to the growth in existing markets.

Behind that, you see an emerging strong late-stage pipeline. The lead program really being VYVANSE in ex U.S. markets, particularly the European filing, but we're seeing ongoing growth in market share in both Canada and Brazil where they’re already launched. And I'll review the state of the ADHD market globally in a little -- few moment's time.

Behind that, the new uses of VYVANSE programs. VYVANSE in major depressive disorder is already underway. And then we are in the midst of discussing what we hope will be further late-stage trials in both binge eating disorder and negative symptoms of schizophrenia.

And behind that, one of our newest assets that we added to the portfolio with the FerroKin Biosciences acquisition earlier this year, SPD 602 now is a product chelating agent for iron overload. And behind that, you can see we're still working on a number of programs in the earlier stage pipeline.

In Specialty Pharma, we have Carrierwave projects, hematology projects and the Movetis assets. In HGT, the intrathecal programs, which I'll touch on again in a little while. And behind that, in Regenerative Medicine, another new asset we brought in, VASCUGEL, adding to our platform in DERMAGRAFT .

So with that, let me turn over to Slide 8, really introduces to you for the first time our renamed business unit, what used to be just ADHD. And really, this is a point into the future that recognizes the expansion of our interest beyond ADHD into other psychiatric disorders. And so we've renamed the business unit now Behavioral Health, with the slogan, as you can see, that we unleash potential in patients who to date have struggled in life because of their psychiatric disorders.

So turning on and starting to review in more detail that particular business unit and looking at the global ADHD market on Slide 9. The worldwide market today has now grown to be in excess of $8 billion this year. It continues to be one of the fastest-growing therapeutic areas in the industry.

In the U.S., in the year to date, we've seen just over 9% volume growth. But in the rest of the world, in Europe, Canada and Brazil, we're also seeing double-digit growth, which is very encouraging, given our aspirations to grow our franchise internationally. Most importantly, Shire's key brands, with diminishing branded competition and no new competitive entrants on the horizon, continue to grow faster than the market as they gain market share.

So the diagram here just gives you a little bit more detail of the dynamics in the U.S. market in the first half of this year. What you see with VYVANSE is that we grew 21% overall in volumes, and you can see in the split here between pediatric and the adult market. Adult growth, still exceptionally strong period-on-period here in the year to date, 34% growth. But in pediatrics, also, very respectable growth of 14%. You can see total market now nudging up to close to 5 million prescriptions in volume terms.

INTUNIV equally doing well. You can see exceptionally strong growth again, 46% overall growth this year and nudging up to now well in excess of 1 million prescriptions in 2012.

Turning over and just looking a little bit more in detail at the split in the market. And we believe that VYVANSE is poised for continued success in both adult and adolescent markets, really backed by maintenance of effect data, which we published another Phase III study in regard to LDX. It’s one of the pivotal filing studies in regard to our EU filing this year that showed very good outcomes again in the pediatric and adolescent areas of the market in terms of maintenance of effect.

Adult consumer campaigns are actually helping to focus people's attention on the adult market, the lack of treatment and diagnosis, and it’s still a very big market that has potential in years to come.

And then we announced head-to-head studies versus CONCERTA, had a lot of questions as to why we're doing that. But simply put, it's to demonstrate that we have the most valuable product in buybacks in the market, one that we believe is superior to CONCERTA. We showed that in a reference study in our EU filing again. And with that as a basis, we decided to conduct a head-to-head study really to answer a question that's been out there for years in this market. And we'll look forward to seeing the results of that study sometime next year.

If we look now at the chart here in the diagrams, we'll see the split between pediatric market, defined as 6 to 17, includes adolescents as well; and then adults defined as 18 plus. And what you see here in the pediatric market first is compound average growth rate since 2007 through 2011 of 5%. TRx, you can see, prescriptions here in that period, 6 million now reaching. And on adult, we can see very strong growth, more than double the rate of growth in compound average growth terms in that post '07 to '11 period, 13%, and total prescriptions over that period of double the pediatric at 12 million. And what that really means is you can see the re-bouncing of the market from the position where adult was in 2007, 38% of the market, to where in 2011 it’s at 47%. And I believe this year, we're now at roughly 50/50 split in the market at this moment in time as adult continues to grow faster than the pediatric and adolescent segment.

Now turning to the next slide, Slide 11, and looking at the international potential for ADHD. It's a fact that today, that market is more than $1 billion with the EU representing about 50% of the ex U.S. market. VYVANSE or VENVANSE, as it's known in Brazil, as I said earlier, is growing both share -- share in both Brazil and Canada.

We believe we remain firmly on track for a European launch in the early part of next year. We're in active discussion with the regulators and so far pleased with the progress we're making in regard to our filing in the EU.

And I’ll just remind you that, a bit further out in time, that we have collaboration now with our partner Shionogi in Japan. And we're in the early stages of, again, formulating a development program, which, I hope, will eventually see VYVANSE brought to the markets in Japan.

And beneath this, you can see a chart which shows you looking that looking at the similar period of 2007 through 2011, compound average growth in international markets has actually been 16%. And you can see the breakdown by major regions here, which shows that Europe is the largest market segment, as I said, about 50% of the market roughly now overall. But still good opportunities in Canada, the Pacific Rim and Latin America. And it’s our intention, as I said, over the next few years to be the major leading force in ADHD treatment in all those regions, supported really by VYVANSE, primarily with, I'll remind you, solid strong competition in a matter [ph] patent that goes out till 2024 in these international markets.

And behind that, as you know, we're working on INTUNIV, which has the potential to receive data exclusivity in the EU for 10 years from launch. And we're in a Phase III program in the European market with INTUNIV too.

So turning over again now and just looking at Slide 12 and reviewing the new uses program, just to update you again as to where we are at the moment. Major depressive disorder, just to remind you, that 60% of patients with Major Depressive Disorder do not experience what's defined as clinical remission. And more than 5 million patients have inadequate control of symptoms in the U.S. market alone. So with that opportunity and armed with the proof of concept data that we showed you in Phase II, we announced, as you remember, a Phase III program. Happy to say that study is enrolling quite rapidly, and we anticipate seeing data from that study in the second half of 2013.

Moving on to binge eating disorder. There are no approved medical treatments today for this psychiatric condition, and yet, the estimate is that there are around 4 million adults with binge eating disorder issues in the U.S. market alone. We hope to be able to initiate a Phase III program around the end of this year, pending the outcome of our discussions with the regulatory authorities. And we're starting first sight with the U.S. market and with the FDA in that regard.

Moving to the next category, negative symptoms of schizophrenia, where there are no pharmacotherapies available today directly. It's a unique and complex market with hospitals, community mental health centers at the core of treatment and where the estimates put the patient population that still suffers significant issues in regard to negative symptom schizophrenia to around 1.5 million patients in the U.S. We hope to initiate a clinical study in the first half of next year, again, pending discussions with the regulating authorities, which are upcoming shortly.

The final item that we showed you some proof of concept data, we just wanted to cover as well, was excessive daytime sleepiness, EDS. For the time being, given the very rich opportunities that I've gone through, the strength of the data we generated, having reviewed the competitive landscape in the markets, for the time being, we’ve decided to de-prioritize excessive daytime sleepiness and concentrate our efforts on what we think are the best opportunities that I outlined above, the 3 areas.

Now turning to HGT on Slide 13 and reviewing the performance again of HGT. First, starting really with that performance, looked out on a long time period from when we acquired the business back in 2005. And from the chart here, just wanted to remind everybody that at the time we bought that business, its annualized sales were $94 million, and it had one product on the market, REPLAGAL for Fabry disease.

And by 2011, what you see on this chart is sales in excess of $1.2 billion, and now we have 4 very good products, highly differentiated products, coming onto the market and showing good growth in all their various treatment areas. This year, sales will again growth to probably exceed something around $1.4 billion so, again, very healthy growth on top of the performance last year.

Looking down that, we see the most recent launch, FIRAZYR in the U.S. market for hereditary angioedema. Really pleased with how well that launch is going. Sylvie is here on the call today and, I'm sure, will give more information behind that, but we're seeing good growth. And beyond, we're looking at potential new indications of FIRAZYR, and we hope to potentially provide you with some update in the second half of this year.

VPRIV showing very strong global growth, again, up 31% on the same period last year, really being driven by what's now become a highly competitive product profile. So we're delighted to see many new patient starts on this product in the existing quarter. I'd say it's shown probably one of the strongest performances in the 3 enzyme replacement therapies this quarter.

REPLAGAL, strong market leadership. Now if I look at the ex U.S. market position, we certainly now have a very large market share, and I'll review that in more detail on the next slide, in a market, which continues to grow at the world Fabry market, we estimate to have growth potential over the next year of somewhere of 5% to 8%. And we hope to maintain a leadership position in this market as we go forward.

And ELAPRASE is one of the areas where we've recently in the past few months launched ELAPRASE in new territories again where there's increasing diagnosis of Hunters patients. And that offers the opportunity to see continued growth with ELAPRASE into the future.

Behind the 4 marketed products, we're doing a lot in the pipeline. We continue to extend our range of early-stage collaborations to provide further long-term opportunities in the treatments of rare diseases. And in terms of development, we have our early-stage programs in both Hunters CNS, Sanfilippo A&B and metachromatic leukodystrophy. And that's using our novel approach of intrathecal delivery. And again, we would hope to be able to share some early information from that later this year when we get to see some of that early proof of concept work.

So turning over and looking at specifically the performances in the second quarter. As I said a moment ago, very pleased with the early launch returns on FIRAZYR in the U.S. market where we continue to increase patient numbers and we're seeing new start forms continue to increase. We have now around the 1,000 start forms received from something like 450 treating physicians. And I just said we expect to see steady ongoing increase in the number of new starts on FIRAZYR in the U.S. market. 25% of diagnosed patients in the U.S. have now received therapy, and that has driven our sales in the quarter up to, on a global basis, with still growth in the European market, up to $32 million, up from just $6 million in the same quarter last year.

Turning to REPLAGAL. And I mentioned a moment ago about our leadership position in the ex U.S. market. And you can see here that the ex U.S. market share is now over 80%. And again, we're continuing to see new patient growth throughout the current quarter and, of course, in previous quarters.

The charts on the right plot that for you over the most recent years. And the most recent data in Q2 2012 does take into account the transitions of patients in the U.S. from our emergency access programs, and we've now transitioned those to our competitor. And these numbers account for that. So net of that transfer, you're still seeing an increment in new patient starts on a global basis. As I mentioned a moment ago, we believe that growth will continue, driven by continued expansion and diagnosis of Fabry patients on a global basis. And I said, that estimates growth to be perhaps in the 5% to 8% range per annum going forward.

Turning to VPRIV. Again, very strong performance, the strongest of the enzyme replacement therapy performances this quarter. On that basis, global market share now, as you can see, has increased to just over 25%. And the U.S. market where we've been launched the longest shows market share now around 40%.

I wanted to emphasize that we can meet all anticipated demand for VPRIV, and that really takes us on to the next bullet point. And I know, again, Sylvie is available to give more insight with that, but we continue to work on the full response to the FDA. And we believe we're still on track for a reinspection of our Lexington facility before the end of the year. But again, despite that facility still needing to be approved for VPRIV in the U.S. market, we're very confident of our ability to supply all our products on an ongoing basis at this moment in time from our existing manufacturing capability.

Turning to Slide 15 and now just reviewing Regenerative Medicine and the long-term growth potential. So DERMAGRAFT, what this chart shows on the right-hand side of the page is really the market opportunity where, today, we have about 30,000 patients treated with DERMAGRAFT. But you can see from the bullet points on this slide that the estimate is that 26 million U.S. residents today have -- back in 2010 have diabetes. And we know that, that's a bigger population today, given the incidents in growth and prevalence of diabetes on a worldwide basis.

So diabetics, the chance of getting a diabetic foothold is something like 1 in 4, about 25% lifetime risk of developing an ulcer. We estimate about 50% to 75% of the DFU market is available for treatment with DERMAGRAFT indications, and that's shown on the right-hand side where you see a total population estimated at about 900,000 and the green box shows you the potential market opportunity for DERMAGRAFT somewhere in the range of 450,000 to 675,000.

If we look at specifically in the first half of this year, 14,000 patients have already been treated with DERMAGRAFT in this year to date. Given that platform and range of opportunities, it's strengthened our conviction to invest further in the business. We've done that in a number of ways. Next bullet point talks to the fact that we've decided to invest in a new Regenerative Medicine campus. That's in the San Diego area, and that will include a new manufacturing facility, which will help us support the long-term growth potential, as I outlined a moment ago. It’s our intention to continue to build on the platform of DERMAGRAFT and position Shire's Regenerative Medicine business as really the partner of choice for late-stage developments and commercial opportunities in cell-based therapies for Regenerative Medicine.

With that in mind, just to remind you that first quarter of this year saw the first of those acquisitions, with bringing in a product called VASCUGEL from Pervasis Therapeutics. And we hope to continue to add to that portfolio and studying again the range of opportunities in that respect.

So with that summary, let me now hand over to Graham to give you some more information and detail around the financial results and the outlook going forward.

Graham Hetherington

Thank you, Angus, and good morning, good afternoon, everyone. You've seen today that we've delivered another excellent set of second quarter results. And I'm going to be focusing on, first, some detail behind our strong results this quarter. Second, I'll talk about the continued revenue growth we're seeing across our broad-based portfolio and how that's driving strong earnings and also supporting our investments in future growth over the longer term. And finally, I'll talk through our updated guidance for the full year and some of the dynamics shaping our current expectations for 2013.

Turning to Slide 17. Angus has highlighted the strong top line and earnings growth we've achieved this quarter, even against the strong quarter we delivered this time last year. It's also worth noting that these results have been achieved despite tougher foreign exchange headwinds as the dollar has strengthened against other currencies, in particular, the euro.

Reported product sales are up 16% and up 18% after taking account the effects of the foreign exchange. While our reported growth this quarter was aided by the addition of DERMAGRAFT, accounting for 5 percentage points of our product sales growth, the rest of the portfolio still posted an 11% year-on-year growth, 13% up at constant exchange rates. Overall, we've seen a strong performance across our business, demonstrating the robust performance of our products in their markets.

Total revenues at $1.2 billion were up 14%, lower than the reported growth in product sales as we expected due to low royalties from products impacted by increased generic competition. Our underlying operating margin on product sales increased by almost 3.5 percentage points, with EBITDA as a percentage of product sales at 34% in the quarter. This quarter, we've had the benefit of a tax rate of 20% at the lower end of our previous guidance range of 20% to 22%. I'll talk more about this shortly. But combined with the excellent operating results, it's helped us deliver earnings per ADS of $1.68, an increase of 26% compared to last year. These strong results, combined with some working capital improvements, have enabled us to generate over $0.5 billion of cash in the quarter.

Turning now to Slide 18 on revenues. And I should say further analysis is also included in Slides 26 and 27 for this presentation. You can see the growth of many of our key products this quarter increasing our total revenue by $145 million. Our ADHD franchise continues to deliver growth. The U.S. ADHD market grew 8% in the quarter. As Angus said, the market has grown 9% year-to-date. And our products continue to extend their share of this market, which is now worth over $7 billion at the gross level.

VYVANSE has continued its strong start to the year, with U.S. prescriptions in the quarter up 19% in volume terms. And coupled with lower sales deductions in the quarter following a small change in our pipeline accrual estimate, net product sales increased by 43%.

INTUNIV also continues to perform strongly, with U.S. prescriptions increasing by 39%. Net product sales were held back by approximately $4 million of de-stocking this quarter compared to last year's second quarter, which saw stocking of approximately $8 million. Discounts from rebates also increased due to the higher Medicaid utilization.

ADDERALL XR's combined products sales and royalty and revenues fell by 8% in the quarter, largely on the reduced market share and some de-stocking in the quarter this year compared to stocking in the second quarter of 2011.

In our GI franchise, LIALDA continues to gain market share in the U.S., up over 1 percentage point to 21.5%. These gains were offset by an approximate $22 million of de-stocking compared to last year but also the adverse effects of foreign exchange rates and some lower-priced imports in some European markets. As a result, global sales of the product fell in the quarter by $5 million compared to last year.

Let's turn to our HGT business, and it's worth remembering that approximately 70% of our product sales are made outside of the U.S., which means that reported product sales are influenced by changes in exchange rates. And this quarter was particularly affected by the weaker euro.

REPLAGAL has continued to benefit from the addition of naive patients and new patients switching from Fabrazyme. Product sales are up 11% at constant exchange rates but just 3% on a reported basis. Also, REPLAGAL's product sales in the first quarter this year benefited from the timing of large shipments to some markets, which is why you see a slight reduction in the sales between the first quarter and this quarter.

VPRIV sales increased by 35% on a constant exchange rate basis. And on a reported basis, sales grew by 31%.

ELAPRASE's reported sales were down 4%. This decline was in part due to foreign exchange but also the timing of large shipments to some markets, which benefited both the first quarter of this year and the second quarter of 2011, which we're comparing against.

And finally, FIRAZYR, which has seen another encouraging quarter following its successful launch in the U.S., posting a fivefold increase in sales to $32 million.

Our recently acquired Regenerative Medicine product, DERMAGRAFT, contributed $52 million of sales in the quarter. Product sales were up 7% compared to the first quarter this year, and you can see the rate of growth has been tempered by the work we're doing to restructure and reset the sales and marketing on our organization in preparation for DERMAGRAFT's next phase of growth.

Turning now to Slide 19. As you can see on this chart, R&D and SG&A have increased by 15% in the first half, supporting the future growth of the business. I mentioned last quarter that we expected the rate of growth in SG&A costs, in particular, to slow down as the year progressed in part due to comparatives last year, which include ABH in the second half of last year. In the second quarter, we've seen the expected slowdown as SG&A costs only grew by 5%.

I'd like to take this opportunity to highlight our introduction of a new non-GAAP adjustment category, which you can see in the detail of the press release, to cover litigation settlements and related legal costs that we incur outside the normal course of business. The core for [ph] the adjustment for these costs will normally be low, but in the quarter totaled $36 million, including the cost of one-off litigation settled in the period. Overall, as you can see, EBITDA as a percentage of product sales has increased by 3 percentage points to 32% for the first 6 months of 2012.

Let's look at our cash flow now on Slide 20. We generated $520 million worth of cash in the quarter, growth of 18% compared to last year and our strongest ever quarter of cash generation. This strong performance was helped by some significant receipts in Spain, offset by higher sales deduction payments in the U.S.

Free cash flow of $433 million was also well up due to the high cash generation and low cash tax payments. This year, we're on track to generate over $1 billion of free cash flow, which, I believe, is a testament to the health of the business.

We finished the quarter with cash of $1.1 billion, just slightly more than our debt, leaving us with net cash of $18 million at the end of June. We continue to have a strong and flexible funding position, supported by our 5-year $1.2 billion bank facility, which remains undrawn.

Let's now look at our full year outlook for 2012 on Slide 21. As you can see, we expect product sales to continue to grow strongly. The rate of growth, however, will moderate slightly over the course of the year as a result of tougher comparatives , which include sales of DERMAGRAFT in the second half of 2011.

For the full year also, we now expect -- we do expect product sales growth in the low teens range, reflecting our assumption that the euro remains at its current weak level for the balance of the year and also that there will be some erosion of branded ADDERALL XR sales. There are clearly many variables, which will impact ADDERALL XR's revenue and royalties in the short and medium term. At this point, we can't be precisely -- we can't precisely estimate the overall impact of the entry of a generic competitor. However, we plan to remain competitive with ADDERALL XR, particularly in the managed care and Medicaid segments.

The approval of the Actavis generic will mean that the royalty rate that we receive from Impax will be lower than we've earned to date, although this will be partially offset by a smaller royalty from Actavis. As a result, we now expect full year total royalties and other revenues to be 25% to 35% lower than last year compared to our previous guidance of between 15% and 25% lower. Taking these together, we expect that total revenues will still show double-digit growth in the full year of 2012.

We will continue to advance our promising pipeline of early and late stage R&D programs, including the exciting recent additions from the FerroKin and Pervasis business development transactions. At the same time, we'll be increasing our focus on reviewing and prioritizing these investments and taking a very disciplined approach to our operational spending during this period of reducing ADDERALL XR revenues as we did in 2009. As a result, we now expect combined full year non-GAAP R&D and SG&A spending to increase by between 10% and 12% compared to our previous guidance of between 12% and 14%.

Based on changes to the profit mix within the business and our active management of our tax rates over the last few years, we now expect the tax rate for the full year to be in the range of 18% to 20%. We also believe that this lower range now represents a good planning assumption for our core effective tax rate through until at least the end of 2014. Taking these dynamics, together with the strong start we've made to the year, we're on track to deliver another year of double-digit earnings growth in 2012.

Looking forward to 2013, while it's still early days, we're trying to give as much clarity as we credibly can. We'll be assessing the many variables that will influence our revenues in 2013 and beyond, including the continuing competitive position of ADDERALL XR. We’re in the healthy position of benefiting from the growth of our young and diversified product portfolio. As I've also said, we will proactively manage our cost base. We will also balance our commitment to invest in programs which will bring value to patients and investors in the future, with the objective of delivering sound earnings growth in 2013.

And with that, back to Angus.

Angus C. Russell

Thanks very much, Graham, and if we now just turn to the wrap-up slide. So another good quarter. And looking forward, as I indicated at the start of my presentation, we believe there are multiple drivers for ongoing growth in the future.

Let's just take a look at those, and the schematic here really breaks those into 3 distinct areas, starting on the left-hand side. Continued growth in existing markets, the U.S. ADHD market I reviewed in some detail today, and we believe it still has potential to show very good growth for some years to come. Below that, we're looking to treat new patients, and the adult market obviously is the strongest segment of that market at the moment and continues to exhibit very good growth characteristics. And so far, it really has still reasonably low levels of diagnosis and treatment.

In terms of moving across the chart now and looking the potential for ADHD. Obviously, in the not-too-distant future, looking around the turn of the year, we very much hope to be able to share with you more information about our registration in European markets and again reviewed with you the potential that exists now in international markets in general, more than $1 billion. And as I said, whilst it's still early, in the future, we can look forward hopefully to entering the Asia-Pacific region and particularly in collaboration with Shionogi in Japan. And then longer term, moving across to the right again, the new uses program, and I hope later this year we'll be able to share with you further updates on particularly binge eating disorder and negative symptoms following our discussions with regulators.

We look now at the next line down in terms of HGT. As I said, this quarter again exhibited across all our products growth from ongoing new patient demand, and we expect that to continue into the future. In terms of again moving to the right, new geographies, I said some of the products are relatively new, still into those new territories. And we're seeing more diagnosis of these rare genetic diseases, and that will lead, obviously, to more opportunities for growth on an international basis. And then longer term, as I remind you, we are working on our new platform of intrathecal delivery for the more extreme CNS symptoms of these kind of diseases. And we're looking, as you know, at 3 target programs. And I hope around the end of the year or early next year, we can talk about our early findings in some of those studies.

And then finally in Regenerative Medicine, the green box at the bottom, I talked a lot about the opportunity from the increasing -- unfortunate but increasing rapid growth in prevalence of diabetes on a worldwide basis. I said that's underpinned our confidence to invest in a new campus site in the La Jolla area of San Diego. We believe DERMAGRAFT has potential for new opportunities in new geographies. And again, I hope later this year that we can talk a bit more about that.

And then looking forward, obviously, VASCUGEL, exciting new opportunity, although early stage, again, has the potential to add another product on top of DERMAGRAFT. And then DERMAGRAFT itself, we believe, has other applications. And again, following what are ongoing discussions with regulators at this time, I would hope later this year, Kevin and I can share with you some further updates on what our ideas are around new uses of DERMAGRAFT.

So all of that really leads to the conclusions on the right-hand side. We believe we begin -- we continue to meet patient needs with good valuable products, those which are creating value not just for patients but also importantly in today's world, payers as well and, of course, physicians. And from that, we believe that underpins our ability to continue to sustain our sales and earnings growth into the future.

So with those comments, I'll now hand back to the operator and ask them to supervise the Q&A session.

Question-and-Answer Session


[Operator Instructions] Our first question is from Ken Cacciatore of Cowen and Company Research.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Angus, just was hoping to get from you a review of the ADDERALL XR dynamics now with Actavis. And I know you touched upon it on the call but maybe looking a little bit more out to the future with your authorized products eventually exiting. And also just wanted to know if you could give an update, it seems as if there might be a stay of litigation in your Watson ANDA case. So I was wondering if you could discuss what is happening there and then maybe I'll have a follow-up.

Angus C. Russell

Yes, thanks for the questions, Ken. Well, as ever, Ken, you're kind of well-informed, certainly in regards to the last item on Watson, which is fairly recent news over the last few days. So let me deal with them in the order you said and talking about Actavis. As Graham highlighted and I spoke to a little bit, but Graham mentioned a little bit in his presentation, it's early days. Obviously, we've only just seen the approval of Actavis against what are these tougher new guidelines on bioequivalence from the FDA. Some of the elements that we will be reviewing obviously is we've been in very active contact with our key managed care accounts, and we're, I would say, confident at this stage that many of them will continue to do business with them, and that underpins our statement about ADDERALL XR remaining competitive in the managed care segment. And as Graham said, in Medicaid, we believe also we'll try and stay competitive there, too. One issue that makes this market quite different is -- just to remind everybody, as I know you're awake, Ken, is the existence of the DEA, the department of Drug Enforcement Agency here in the U.S., DEA quotas for manufacturing. So I'll remind you that to date, the authorized generics -- and that's why they are authorized generics, they have no approved ANDAs of their own to date, and therefore, we supply them with products, and they operate under our DEA quotas. We're the sole manufacturer. Now Actavis, if you like, joins the party as an independent manufacturer, but that means they have to seek a DEA quota. We believe, and I know from talking to other people in the investment community, you guys have dug around and got the same information, and that's what we'd expect that the DEA will be quite cautious in giving quota to Actavis in terms of launching into the market. Their agreement is obviously to restrict the amounts of these active controlled substances in the market. So clearly, Actavis had some quota to enable them to both get the product approved and then launch it. But they, like us, will have to reapply. That's part and parcel of these markets. We don't know precisely what their quota allocation was. But one would expect, as I say, if you make informed judgments that it was a relatively small quota since DEA bases their quotas on actual demand. And until Actavis start to build a track record of demand, then there will be restrictions placed upon them. So that's something we'll have to say, watch the dynamic of that unfold. We believe, just to reiterate that the initial quota will have been small and that they'll have to reapply. That process usually takes some months. Probably at best, it takes 2 or 3 months to be allocated a new quota. Sometimes, it can take longer than that if the DEA want to go through the information in a lot of detail. So that's something that we'll keep a watchful eye on. In terms of pricing, Actavis again have launched at a price that we would expect. In other words, it's within the range of existing competitive prices in the market. As I said, these are different depending on the key accounts. Clearly, the generics compete a lot in the retail pharmacy chains, and we tend not to really put our business there. Today, our residual business is almost exclusively in the big managed care accounts and within Medicaid and the government programs. So 2 or 3 dynamics there that will unfold over the next few months as we see Actavis move into the market. Early signs to date, as I said, are, I would say, mildly encouraging in terms of number of key corporate accounts deciding to stay with us. Some of those will review their position opposite their rules on generics and whether they have to take generic products, and that will again inform us over the next few months, which is why we're, as Graham is saying, being as helpful as we can with our guidance both this year. And it's quite early in the year for us to give '13, but we understand investors need to get some comfort. And in that sense, as Graham said, we've underpinned the position with next year as saying we believe going forward, even with these dynamics, ADDERALL XR will remain competitive and we will see earnings growth next year. It's obviously early in also our budget cycle, and we have a lot of plans to work through. And we have a lot of nice investment opportunities that I reviewed with you in this presentation. In terms of other authorized generics, I mean, in their position, early days yet. As you know, their contracts do have a fixed term. That's common knowledge today. Teva's contract expires in April 2014 and Impax in October 2014. And given now the entry of a new generic, we will obviously be putting that into the mix. I've said that in discussions with you guys all along that our decisions around 2014, our willingness to renew contracts will be very much based on how many approved ANDAs there are by that time in the market and exactly how we see the competitive landscape. But the point is there is no right to continue to distribute beyond those dates at the moment. In regards to the latest information, Watson, so just to review again for everybody, bring everybody to speed, remember that Watson was one of the original filers against ADDERALL XR years ago. And then they decided to pull that original ANDA and file a new ANDA. And they did that ahead of these new more stringent guidelines coming out from FDA. The importance of them pulling their original ANDA was that the original settlement we reached them is off the table, and that's why we initiated new litigation against Watson. And we were granted a new 30-month stay to defend our 2 patents against that new ANDA. Obviously, time has moved on, and we've actually now had time to assess Watson's new filing. And with respect to that filing, we believe that it fails to meet FDA's new, more stringent bioequivalence standards. And thus, we conclude it will not gain approval. In that regard, we actually filed with the court. I'm sure that's what you're referring to, Ken. You would have seen in the last few days or beginning of this week, we filed a docket with the court where the litigation is scheduled to be heard. And we've asked for a stay of those proceedings on the basis of what I just said, on the basis of our review and our belief that, that product will not gain approval under the new bioequivalence standards. So that's all I can say at this stage. It is subject to litigation. But I just reiterate, we are of the strong opinion that, that does not meet the new standards, that product. And we'll keep you informed, and no doubt you'll see whatever unfolds in terms of court decisions around that going forward.


Our next question comes from the line of Peter Verdult at Morgan Stanley.

Peter Verdult - Morgan Stanley, Research Division

Peter Verdult here from Morgan Stanley. Angus or Graham, just on the cash generation, the balance sheet, you made it clear your focus remains business development rather than increasing shareholder returns on buybacks and divis. We’ve heard different comments from CEOs in pharma over the last couple of weeks about the value that they're seeing in the business development environment. So I would love to hear your perspective on that. And also, with respect to the cash, is there anything to update in terms of timing or visibility as to where we are in terms of your discussions with FTC, DOJ with the ongoing investigation or request for information?

Angus C. Russell

Yes, okay, Peter. So let me just sort of give a general answer to the BD question. As I said, we continue to look for opportunities. As everybody knows, it's a fundamental piece of Shire’s strategy and has been part of our performance in recent years to seek out good, well-differentiated products. I'm not sure what my peers are saying in the industry. But generally speaking, we're often looking for different things given our different strategies. And I don’t believe that we're always looking for the same things that certainly some of the bigger pharma companies are looking for given their need, the size of products they need and the kind of areas they’re in. In some areas, they do overlap, and I understand people's concerns about some of them are moving into our spaces. But we see a range of good opportunities still, and I think you've see it in the year to date. You've seen us bring in 2 more assets, the FerroKin Bioscience chelating agent and the Pervasis therapeutics VASCUGEL product. We can say that -- we continue to see opportunities like that. And it's my hope that we can add to that, and we can add further, I hope, research collaborations that we’ve also we struck. We don't intend to talk about those as actively, but I’d remind you, things like Sangamo in genetics and other early-stage collaborations. So across the waterfront really, we are seeing a range of opportunities and what we believe continue to add value to our portfolio. Moving on to your other question. I mean, the FTC request, there's nothing really to update. It's sort of very, very early stage request for information. As ever, we’ve had these in the past, FTC inquiries. To remind you, we had that with the settlements with ADDERALL XR years ago. And we provided information and there was never any follow-up. So we are very willing and always compliant in remitting the government's request and so nothing really to say. It's in an incredibly early stage. In regards to the DOJ investigations, our discussions with the government are ongoing again. At this stage, I really have nothing more to update you with. And as soon as we're in a position to disclose, we obviously will. But we are in active discussion with the government, and that's about as much as I can say.


Our next question comes from the line of Bill Tanner at Lazard Capital Markets.

William Tanner - Lazard Capital Markets LLC, Research Division

First one, maybe, Angus, for you. I know there's a pediatric Adcom on September 11, a safety review, and I know VYVANSE is on the schedule. Any thoughts on anything that might come out of that? And then secondly, a question maybe for Sylvie on the intrathecal platform, just curious how broadly applicable you view that. And I guess, specifically, I'm thinking about geography in terms of the kinds of countries that you might actually see that kind of intrathecal system actually used.

Angus C. Russell

Yes, okay. So in regards to the pediatric Advisory Committee, it's a general meeting that's upcoming in September, and it covers a wide range of products. But as you say, VYVANSE is listed, so it's not something specific to VYVANSE. It's a general meeting that includes a range of products. It's a fairly standard procedure that the FDA invokes on a periodic basis, particularly in the pediatric space. We wouldn't anticipate any impact, and as ever, we'll work with the FDA. I mean, they know our product extremely well. We're in regular dialogue. You've seen this, particularly in terms of all our new uses program. We're obviously very active. I would suggest to you, if the FDA had significant concerns that, that would have been expressed in meetings, particularly when you're considering expanding a whole range of new indications. So at this stage, I wouldn't expect anything. But we'll obviously work with the FDA in what I say is a pretty standard regular meeting, and it's not one that's uniquely focused on our products. It's -- when you look at that docket, it's a very long list of products that they're going to be reviewing, and it's just on a periodic basis that happens. In regard to IT platforms, Sylvie, I wonder if you could address those questions.

Sylvie L. Gregoire

Yes, good morning, and good afternoon, everybody. Yes, it's an interesting question regarding the intrathecal platform. But I think we can relate somewhat to the ELAPRASE penetrating in the far-flung geographies and how it went there. We also anticipated there a certain amount of difficulty in acceptance of therapy because, first of all, it's often hard to find the patients and bring them to the centers where they are treated. But we anticipate that if you think about the way the intrathecal platform will be used or the intrathecal therapies will be used, to be not that different from the -- once the patients have been found and come to these Centers of Excellence because of the manner in which the therapy is utilized. You insert the port once, and a neurosurgeon does that, and it's something that is done not that infrequently by neurosurgeons around the world. And once the port is in, it can stay there for potentially several years. And then in terms of therapy, these therapies will be administered either biweekly or monthly, not that differently from intravenous therapies that we see with our other protein therapies or ERTs. And so the patient will present, and the only difference is that the therapy will be administered through the port rather than through a vein. And so one can be, I think, quite hopeful about the adoption of these therapies, especially when you think about the fact that for Sanfilippo and MLD, there are absolutely -- and Hunter, the CNS part of Hunters disease as well obviously. There's just no other alternate therapies available. And so we have experienced and others, too, that the worldwide geographies generally accept those therapies. For Hunter, it's obviously a little bit easier to find the patients because these are patients that would already be treated with ELAPRASE around the world. I hope that helps answer the question.


Next question comes from the line of Brian Bourdot at Barclays.

Brian Bourdot - Barclays Capital, Research Division

A couple of areas to cover, please. Firstly, on litigation, I think you have some upcoming court dates for some of your products in the U.S. I was just wondering if you could reiterate what those are and whether there's been any change, for example, in INTUNIV and LIALDA. Were there any other firm dates that we should be aware of? Secondly, on DERMAGRAFT, you've highlighted a restructuring of the sales force or commission organization. Could you please give us a little bit more color on why you felt this needed to be done and what you'll be doing differently in the future compared with what you had been doing to help us understand how you're going to better access the opportunity?

Angus C. Russell

Yes. So in terms of, as you said, Brian, the upcoming schedule on some of the key product litigations. INTUNIV, I guess, is the one that I see commented on the most, and that's, I guess, because it's the nearest range date. It's scheduled for September this year. There is no change there. It might be an opportunity just to again review where that whole litigation or the whole regulatory process is in regard to INTUNIV and the filers against INTUNIV. So what I think everybody is aware of is the fact that INTUNIV, Actavis were originally the first filer. The important event that happened during this quarter was that the FDA confirmed and Actavis confirmed that they have now been officially granted that first-to-file status. That's important in regard to, obviously, they now retain their 180-day exclusivity in regard to that filing and their ANDA. And so a supplementary approval was important. Effectively, now we look forward to the litigation. And our position is that we believe we have a good case against Actavis and that we are happy to defend that against them in court in September. At the same time, I often get questions about potential for settlement, and my response is always the same, that we are always open to any settlement that takes account of the existence of our patents, which are still valid and enforceable. And we're always happy to talk to people if they recognize the existence of those patents and they make sensible proposals. But at the moment, our situation is that we would go forward and be happy to defend our position strongly in September. In regard to LIALDA, at the moment, there's no real further update. Probably, the latest was again, one of the earliest filers was Zydus. And at the moment, we have no rescheduled date. The original date was postponed. And at the moment, there is no new court date for the Zydus litigation. There are some filers behind that. But again, those dates are off in the future, and I don't think there's any further update at this stage that's worth giving.

Brian Bourdot - Barclays Capital, Research Division


Angus C. Russell

Yes, DERMAGRAFT. So in terms of realizing the opportunities going forward, the sort of things I talked about, expanding our opportunity. And you probably just want to give an update, Kevin, on where we are on that.

Kevin L. Rakin

Sure. So thanks for the question. I think just to bear in context, we're one year into the acquisition. I think we've gone through most of our transition work. And what we really looked at in the sales side and the commercial side is really leveraging all the Shire expertise in building brands, both in the U.S. and globally. So really what we're looking to do is kind of reengineer the whole kind of commercial process, leveraging of the Shire expertise to kind of go off the numbers Angus talked about. We were at a single digit early adopter market to how we position this for the longer term kind of broader acceptance. And I look at this as part of a whole. As I say, one year into the acquisition, we were investing in a new facility and across the board, investing in new areas like VASCUGEL, so across the board, kind of retooling the business for the next phase of growth. But I should say we probably will see a couple of quarters where we kind of see DERMAGRAFT's growth slow down, but then we'll see a pickup again as we see the impact of these changes.


Our next question is from the line of Jo Walton at Crédit Suisse.

Jo Walton - Crédit Suisse AG, Research Division

Just a couple of questions on products, just to understand things and a broader one. Looking at VYVANSE, your growth rate of 43% in sales against your 19% in prescriptions, could you just tell us what was the one-off? I think you talked about a release of provisions something. What's one-off and what is a sustainable price premium over the prescription growth so that we can model VYVANSE? And the same with FIRAZYR. Is that new 32% quarterly run -- is that a decent quarterly run rate? Or did that -- were there some onetime big orders there? Because it's a much bigger step-up in sales than it appears to be a step-up in number of patients. So maybe patients, I don't know, were they stocking up on this stuff or are they actually using it? And my broader question was to look at your investment opportunities that were coming next year. You've got -- at least one of your ADHD programs is likely to have an approval in Europe by next year. Just wondering what sort of level of investment you might be putting behind that and whether we should actually note of it, whether it would be big enough to make a dent in your SG&A.

Angus C. Russell

Okay, Jo, so let me kind of kick off. I'll hand it to Graham for perhaps some of the more detailed elements, and maybe Sylvie will make a comment about the business on FIRAZYR in terms of repeat business. And I know the answer is going to be there is repeat business, but I'll let Sylvie comment in a bit more detail on some of the early launch dynamics of FIRAZYR in the past few months. So in regard to -- let me take the investment opportunities and where we are. It's obviously early as we said. That's one of the issues about giving firm guidance for next year. We’re just entering really what is our long-range planning and leads into our detailed budget plans for next year. And obviously, I point to the fact and you've seen the evolution of our pipeline and the fact we are building some nice late-stage programs in late Phase II or early Phase III programs. Now we need to review all of those. And some of those are still, as well at this moment, subject to regulatory input on protocol design, and that will color our timings and, again, our investment proposals. So I think we'll get more granular detail on that as we sort of get towards the end of this year that we can update you with. In regard to VYVANSE in the EU, I mean, we're already effectively building that launch program. So the point is the cost increments that you've seen this year already reflect the elements of EU, and that's in regard mostly to some SG&A buildup. And that really reflects conferences, medical forum in terms of detailing the information that we filed with the regulators for clinical approval. It's about increasing KOL awareness in the first wave markets that we're focusing on. And again, we've always said this is a phased launch. We're going for about 8 countries in our first wave. It's mostly the Northern European territories, things like Scandinavia, U.K., Germany. But basically, what we're doing is we're going to put that launch platform in place in those countries, and then other countries will come down the road. So I'm not looking at a huge bolus, Jo, of expenditure. As I said, some of it is already baked in the current year because one works on this usually a year in advance of expected launch date. So by definition, we're already there. We're also reviewing the fact that in Europe, we have a number of more mature products. And it's obviously a situation where you can start harvesting costs. And in my mind and my belief and the teams here know that, that I'm expecting that at this time of the cycle on some of those mature products, like FOSRENOL or like MEZAVANT, we can start to harvest those products and redirect resources to the launch platform for ADHD into the future. So there’ll be a bit of, to use a phrase, begging, borrowing and stealing from kind of other areas of the business that now are much more mature, recycling those costs into the launch platform and the fact we've already added, as I say, cost in the current year to that launch. As regards to R&D investment, that's something that Graham and I will be looking at very carefully with the teams in the second half of the year and backing our best opportunities on a global basis, and we'll update the guidance my guess is towards the end of the year when we finalize those discussions. So with that, let me hand back to Graham in terms of trying to reconcile a bit more the issues on VYVANSE. What I would say just about pricing, in general, is we have announced in the past, usually annual price increase on VYVANSE on the order of 7% gross, and then you have to remember that there’s a substantial amount of rebating off that sort of gross price level to get your sales number. But other than that, let me pass over to Graham and let him reconcile that. And maybe, Graham, something on FIRAZYR but then maybe pass to Sylvie to make a commentary about the dynamics in the market.

Graham Hetherington

So walking through from the U.S. script dates that you -- talking about the U.S. script growth, the major stepping stones are, firstly, as Angus described, benefits -- year-on-year benefits of the price increase that we implemented in January at the gross level of 7%. We've also benefited in the quarter a little bit from some net sales mix benefit. But the really big one is on gross to net. So in the second quarter of 2011, the gross to net deductions were actually particularly high at 44%. And in the second quarter this year, they're actually at the lower end of our range at 35%. And that gives you a significant part of the driver of scripts to net sales increase that we've reported. Now in relation to the lower level of 35%, that was a one-off catch-up accounting adjustment recognizing the amount of stop [ph] that we can see in the retail trade based on a 6-month fee sample that we do testing the retail levels. So that has held down the gross to net in the second quarter. As we move forward into the second half, that 35% in Q2, I would expect to be in the range of 35% to probably nearer 40% going through into the second half. So that is the key reconciling item. Then there is a small additional item, which is outside of the U.S., and that is the sales of products in Canada and Brazil, which totaled $11 million in the second quarter of 2012, and we'd expect to continue to grow modestly as we go forward. So I hope that helps fill in some of the blanks in the model.

Angus C. Russell

Sylvie, I wondered if you wanted to say anything about FIRAZYR and the issue about is it just we're loading up the shelves with products or are people really using this and reusing it?

Sylvie L. Gregoire

Yes, certainly. Jo, your question has to do -- good afternoon -- about the reliability basically of the numbers we've seen in the quarter relative to FIRAZYR and whether there were some one-offs or -- and these are really truly new patients and repeat prescriptions. And it's the latter. Based on what we've seen from FIRAZYR, the majority of this growth comes from the U.S. And it's not that there's no growth in Europe, the well-established markets grow a lot, but there is no shipment volume impacted by geographies as much in this product as there are in other products that we've established. And the reality is that they're both new patients and patients that are repeat usage that represent this growth. So you can't, as you know, equate in this therapy the number of patients with -- it’s not a chronic form of therapy, so some patients might have few attacks per month, and some might have very many attacks per month. Our market research seems to indicate that the patients who have adopted FIRAZYR are the patients that have a high frequency of attacks. So indeed, in the distributor, wholesaler, the pharmacy level and as well as in our OnePath system where the orders come from, we see a very high reorder rate, which would indicate -- as well as new patients, so both are important in the number that you've seen this quarter. And we expect that to continue based on really satisfaction that is also reported through these channels based on the differentiated profile of the product. It's the -- one of the few products that can be available on-demand because it can be carried at room temperature. And indeed, there is a recently published consensus report on hereditary angioedema international working group that recommends that all patients should have access to at least one proven on-demand acute therapy. So again, the guidelines for treatment of HAE bode well for the continued growth of the FIRAZYR, and we're quite confident in that continued growth.


Our next question is from the line of Frank Pinkerton at SunTrust Robinson Humphrey.

Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division

I've got 2, and I'll go ahead and ask them both upfront. First, can you speak to the INTUNIV kind of near-term prescription trends? Is this a product that maybe does have some seasonality similar to the rest of the ADH products even though it's not a stimulant? And then secondarily, Angus, could you just speak to the GI franchise, not particularly for this quarter, but is this a franchise Shire needs to be in? What's kind of the 5-year plan? And does some business development or new products need to come in to make sure that growth is steady for the next 5 years?

Angus C. Russell

Okay, Frank, good questions. So INTUNIV, in regards to that, there is, it seems, some seasonality. I would say it's more muted than the stimulant products for obvious reasons, that it's not a stimulant. But I think there's a situation that any form of medication, patients like to take a break from, if that's possible. And a long summer vacation in the pediatric area, and I'll remind you the difference was we see a mix of adult, obviously, and peds in regard to the controlled substances in VYVANSE as indicated. And I said it's about a 50-50 market this year. We have INTUNIV exclusively for pediatric use. So in a pediatric market, I think you're always going to see a notion where parents will say, "Why don't you take a break from treatment during the out-of-school period?” when, perhaps, they don't need that degree of focus and concentration. And so you're always going to see us say some seasonality although it may be moderately less than the controlled substances. On the GI franchise, we continue to see good growth in LIALDA in the U.S. market. MEZAVANT, in the international markets, I mean, as you know, we've been selective in how we launched that product. Because as a reformulated a product, it doesn't play all that well in some of the international markets. And therefore, the bigger opportunity has always been the North American market. My comments earlier in regard to saying that we're looking at more mature markets and harvesting them, the GI space is one where we're looking to do that. These products have been in the market a long time. It's the case that you don't need the kind of resources 4 or 5 years after launch that you need in the first 1, 2, 3 years of launch. So that's an obvious area we start looking for. We continue to look for opportunities, obviously, in the GI space. We're very niched, as you know, in the area of ulcerative colitis and Crohn's disease. We've tried a few things moving out of that in the past. And unfortunately, they weren't successful. What I would point to and what you know is we did do the Movetis acquisition. And I'll remind you, as part of that, as a subsequent action, we actually secured the rights to RESOLOR in the U.S. for chronic constipation. And we've had some early discussion with FDA. Again, I would hope by the end of this year, we'd be able to give you some update on what our ideas are and what the FDA’s view is of our potential to launch RESOLOR in the U.S. market. And then behind that, another product that really came out of the Movetis acquisition, I'll remind you, is now in Phase II in a study there, which is SPD 557, and that's for refractory GERD. And again, I would hope that sometime maybe early next year, we'll be able to review the results of that work and proof of concept in refractory GERD and see where that takes us next. So we do have pipeline potential. As I say, I think near term, the update on that most likely is in RESOLOR in regards to the U.S. And I hope we can do that before the end of the year, and we continue to look for opportunities.


Our next question is from the line of David Buck of Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

Just a couple of quick ones for Angus. Can you talk a little bit about the INTUNIV Carrierwave development program and when we might get an update there and know what the chances of that program proceeding are? Secondly, what have you learned about the LIALDA ANDA and, potentially, the ability to get through the FDA from the litigation so far? And then just for Graham, can you talk a little bit about whether we should be expecting a sharp reduction in the tax rate in the second half of this year just to get to the new range?

Angus C. Russell

Okay. Okay, David, INTUNIV Carrierwave, yes, I mean, we're ongoing with our Phase I proof of concept study. And what I would say is that the ADHD study is ongoing, but the program will wrap up around the end of the year. What I would say is we're looking at broader indications as well. I think Jeff Jonas, I had him update everybody in the last quarter. He talked about looking at pediatric anxiety in autism. And I think that's a very interesting program. And so we'll review all these results at the end of the year. And I'm kind of interested myself to obviously see those new broader range of indications because I think that could open up new potential areas for growth in INTUNIV for us going forward. But it's too early really to give any more update because those studies, as I say, and that whole Phase I evaluation program is ongoing. But we will look at all those range of opportunities and review them around the turn of the year or early next year when the studies finish at the end of the year. In regard to the LIALDA ANDA, as I said earlier, not a lot more really to say in regards to the litigations I gave out, the information around the Zydus dates being effectively postponed, the original dates, and we have no new information. That area is still -- obviously is one where since the FDA issued its new guidelines, I guess, well over a year ago, probably nearer 2 years, my memory fades, time flies. But they brought out the new issues around multiple dissolution studies at varying ranges of PH. There's been no further clarification on that in regards to the numbers of studies or the range of PH that they're expecting. And to date, we've heard no more commentary on that. So really, nothing more to say. And again, we'll update you when there is any more information that's relevant to those kind of cases. Graham, in regard to tax rate and in terms of evolution of the remaining parts?

Graham Hetherington

It's certainly going to reduce in the second half. Year-to-date, we are around 20%, so after an effective tax rate of 19.7% in Q1, 20% in Q2. Therefore, to get into the 18% to 20% range, it's sort of likely that we will see some reduction but not dramatic, David.


Our final question is from the line of David Amsellem of Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

Just a quick couple of questions. First, on DERMAGRAFT, can you provide some color on what the reimbursement landscape is looking like? And do you think that's been a barrier to wider adoption? And also, any color on possibly getting that filed and approved over in Europe? And then a second question on FIRAZYR, this is also along the lines of reimbursement in the U.S. What has the landscape been like on that front? And any reason to expect that the reimbursement landscape over time could improve in Europe for FIRAZYR?

Angus C. Russell

I'll ask Graham -- sorry, Kevin and Sylvie to focus. So I think I've already dealt with the new uses of DERMAGRAFT and the potential for other geographies. We said we wouldn't say anything until later this year when we will conclude various discussions with regulators. But the reimbursement climate?

Kevin L. Rakin

So the reimbursement climate that DERMAGRAFT enjoys is very favorable. As you may know, there's only a handful, 3 FDA-approved products with 2 randomized clinical trial data sets, so we have favorable reimbursement. And I expect that to continue and especially with CNS because this is a big Medicaid population. Rather, I would say that -- I think the crux of your question is the adoption issues. I'd rather say the challenge is more, this is an early adopter market, and what we trying to establish is a new standard of care using randomized clinical trial data sets, using advanced therapies like a DERMAGRAFT to living cell therapy. And that's where we're building on these strategies to move from the early adopter market to more broader acceptance.

Angus C. Russell

Okay. And then Sylvie talking about FIRAZYR, it’s kind of interesting about some of the things that reimbursement in Europe is going to get much better for products. I’ll let you comment on FIRAZYR, particularly, but just as one overriding statement, I'm not sure any of us are expecting that Europe is going to get a lot more favorable in regard to approvals or reimbursements. It's very tough, and I'm sure you're hearing that, all of you, from companies reporting. So our products, particularly in the HGT space, despite that, hold up extremely really well. So Sylvie, any other commentary on FIRAZYR particularly?

Sylvie L. Gregoire

Sure. And just to go back to what you've just said about Europe, it is true that the reimbursement environment for most products is becoming more or less [ph] clear, I would say. But for the rare disease products in most member states or countries, there's been some amount of protection of those products, understanding of the necessity for those products to be able to maintain favorable reimbursement in order to have -- for patients to have access. And as you know, they're not the majority of the burden that are carried in terms of health care costs for most of these countries because they contribute so little to the total. Nevertheless, one has to keep in mind that continued demonstration of value is what will be today important and continue to be important for all of the products in Europe. And of course, the therapies for rare diseases generally are life-changing, and so we need to continue to demonstrate that they do that. Now for FIRAZYR, in particular, I will say, like Kevin, that for DERMAGRAFT, that's for FIRAZYR in the U.S., we enjoy also a very, very favorable reimbursement. And it's really not a barrier to usage or to prescription in the U.S. And in Europe, in the majority of countries as well, it's not really reimbursement that is an issue for adoption. It has more to do really with sort of the medical practice and how one treats HAE in Europe, as well as the fact that if you recall, there had been some much more long-term well entrenched products in Europe when we arrived with FIRAZYR. And therefore, from a competitive perspective, patients who feel fragile tend to stay on the therapies that they know well, and we know that from our other sectors as well. And now we hope, in fact, that patients on our drugs will also feel the same, that the therapies work well for them. And so I would say it's a question of adoption more than a question of reimbursement, although there are some countries in Europe where reimbursement for that product seem more monitored, I will say, than not.

Angus C. Russell

Okay. Thanks, Sylvie. So with that, I'm going to draw a line. We're coming up on 1.5 hours. Thank you all for your attendance on the call today, for your questions. Once again, I'll just conclude by saying, really pleased with what again is another very strong quarter. Obviously, a few dynamics going forward that we hope to update you with later this year. Just again signposting that I hope before the end of the year, we'll be able to share some further updates in regard to our late-stage development programs and opportunities. And then on the back of that, at the end of the year, obviously, when we formulated those investment plans around those ideas, we'll be able to give you a little bit more granularity around our guidance going forward. So again, thank you all for attending. For those of you in London, I hope you're enjoying the Olympics. And we'll speak to you again very soon. Thanks. Bye.


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

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