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Shire Delivers Strong Q2 2016 Revenue Growth; Upgrades Outlook

Integration on track; operating cost synergy expectations increased

Pipeline progression continues with FDA approval of XIIDRA for dry eye disease

Shire plc ("Shire") (LSE: SHP;NASDAQ: SHPG) announces unaudited results for the three months ended June 30, 2016, inclusive of the Baxalta transaction that closed on June 3, 2016.

   
                                                                                   Non GAAP
    Financial Highlights                                    Q2 2016(1)  Growth(1)  CER(1)(2)

    Product sales                                       $2,322 million       +57%      +58%
    Product sales excluding Baxalta products            $1,763 million       +19%      +20%
    Total revenues                                      $2,429 million       +56%      +57%

    US GAAP operating income from continuing operations    $96 million       (27%)
    Non GAAP operating income(2)                          $972 million       +58%      +57%

    US GAAP net income margin(3)                                   (7%)    (17pps)(4)
    Non GAAP EBITDA margin(2)                                      40%      +1pps

    US GAAP net loss                                    ($162  million)     (202%)
    Non GAAP net income(2)                                $773 million       +48%

    US GAAP diluted losses per ADS                              ($0.71)     (188%)
    Non GAAP diluted earnings per ADS(2)                         $3.38       +29%      +28%

    US GAAP net cash provided by operating activities     $591 million       +31%
    Non GAAP cash generation(2)                           $853 million       +69%
    Non GAAP free cash flow(2)                            $464 million        +7%

(1) Results include Baxalta Inc. ("Baxalta") (acquired on June 3, 2016) and Dyax Corp. ("Dyax") (acquired on January 22, 2016). Percentages compare to equivalent 2015 period.

(2) The Non GAAP financial measures included within this release are explained on pages 27 - 28, and are reconciled to the most directly comparable financial measures prepared in accordance with US GAAP on pages 22 - 23.

(3) US GAAP net income as a percentage of total revenues.

(4) Percentage point change ("pps").

Q2 2016 and Recent Highlights:

  • Strong topline growth delivered across the business; legacy Shire product sales increased 19% in Q2 2016, legacy Baxalta product sales increased 12% on a pro forma basis in Q2 2016.
  • Achieved significant progress on the Baxalta integration with upgraded guidance; operating cost synergy expectations increased by 40% to at least $700 million in year three post close.
  • Obtained FDA approval of Shire's first medicine in ophthalmics, XIIDRA (lifitegrast ophthalmic solution) 5%; U.S. launch expected in Q3 2016.
  • Strong pipeline progress across many late stage product candidates:
    • Received a positive opinion from the Committee for Medicinal Products for Human Use ("CHMP") recommending marketing authorization for ONIVYDE for treatment of adult patients with metastatic adenocarcinoma of the pancreas who have progressed following gemcitabine-based therapy.
    • Completed decentralized procedure to support European approval of CUVITRU, expanding therapeutic options within our Immunology portfolio.
    • Reported encouraging topline efficacy and safety data for SHP465 in adults with ADHD supporting an FDA resubmission planned by the end of 2016.
    • Expanded our gastrointestinal portfolio with in-licensing from Pfizer of late-stage asset, SHP647 (formerly known as PF-00547659), for the potential treatment of moderate-to-severe Inflammatory Bowel Disease ("IBD").

Flemming Ornskov, M.D., M.P.H., Chief Executive Officer, commented:

"The second quarter marked an important milestone in Shire's history, as we completed the combination with Baxalta to create the leading global biotechnology company focused on serving people with rare diseases and other highly specialized conditions. While closing this transformative deal and making significant progress on integration, we have delivered strong double-digit revenue growth from our legacy Shire franchises, and for the first time our results reflect a significant contribution from the legacy Baxalta franchises - allowing us to upgrade our guidance for full year 2016.

"In addition, we have advanced key assets in development and have a robust, innovative clinical pipeline with approximately 40 programs focused on areas of significant unmet medical need. We were pleased to receive approval from the FDA for XIIDRA, the first FDA-approved treatment for the signs and symptoms of dry eye disease and the first product in our developing franchise in ophthalmics. We also received a positive CHMP opinion for ONIVYDE, and completed the decentralized procedure to support European approval of CUVITRU, expanding therapeutic options within our Immunology portfolio. Lastly, we are on track for an FDA resubmission for SHP465 later this year to strengthen our ADHD product offerings.

"Baxalta integration activities continue to progress very well and, with our new operating structure in place, we are raising our operating cost synergy expectations by 40% to at least $700 million in year three post close. This would not have been possible without the commitment of all our employees, who have worked tirelessly in recent months to help drive efficiencies across the business, so that we can continue to deliver best-in-class therapies to patients around the world. We remain resolutely focused on achieving our goals, and I am very confident that Shire will continue to deliver strong growth as we integrate Baxalta and advance our combined portfolio of products."

FINANCIAL SUMMARY

Second Quarter 2016 Unaudited Results

  • Total product sales were up 57% versus Q2 2015 (up 58% on a Non GAAP CER basis) at $2,322 million (Q2 2015: $1,476 million), primarily due to the inclusion of $559 million of legacy Baxalta sales, representing 38 percentage points of the reported product sales growth.
    Excluding Baxalta, product sales increased 19% (20% on a Non GAAP CER basis) with all legacy Shire franchises exhibiting strong growth in Q2 2016 with Neuroscience up 23%, Genetic Diseases up 16% and Internal Medicine up 19% compared to Q2 2015.
  • Royalties and other revenues were up 31% to $107 million, as Q2 2016 benefited from additional revenue streams acquired with Baxalta primarily related to contract manufacturing activities.
  • On a US GAAP basis, operating income was down 27% to $96 million (Q2 2015: $133 million), primarily due to higher integration and acquisition costs, amortization of inventory fair value step up and amortization of acquired intangible assets, partially offset by lower in-process R&D ("IPR&D") impairment charges. Non GAAP operating income increased 58% to $972 million (Q2 2015: $614 million), primarily due to the inclusion of Baxalta operating income and higher revenue from legacy Shire products.
    Non GAAP EBITDA margin (excluding royalties and other revenue, and cost of sales related to contract manufacturing revenues) was up to 40%, due to product sales growing at a higher rate than total Non GAAP operating expenses.
    Research and Development ("R&D") expenses decreased by 62% compared to Q2 2015, primarily due to lower IPR&D impairment charges in Q2 2016, offset by the inclusion of Baxalta and Dyax operating costs. Non GAAP R&D increased by 18%, primarily due to the inclusion of Baxalta and Dyax R&D costs.
    Selling, General and Administrative ("SG&A") expenses increased by 36%, primarily due to the inclusion of Baxalta and Dyax operating costs and XIIDRA launch preparations. Non GAAP SG&A increased by 43% in Q2 2016.
  • On a US GAAP basis, diluted losses per American Depositary Share ("ADS") were $0.71 compared to earnings per ADS of $0.81 in Q2 2015. The Q2 2016 loss was primarily due to lower US GAAP operating income which was reduced by higher integration and acquisition charges, amortization of inventory fair value step up and amortization of acquired intangible assets, all primarily related to the Baxalta transaction. In addition, the Q2 2016 loss included as part of discontinued operations an accrual for a proposed legal settlement related to the divested Dermagraft business.
    Non GAAP diluted earnings per ADS increased 29% to $3.38 (Q2 2015: $2.63), primarily due to higher Non GAAP operating income, partially offset by the impact of a higher number of shares issued as consideration for the Baxalta transaction.
  • On a US GAAP basis, net cash provided by operating activities was up 31% to $591 million (Q2 2015: $452 million), primarily due to strong cash receipts from higher sales and the timing of payments of accounts payable and other accruals, partially offset by higher tax and interest payments.
    Non GAAP cash generation was up 69% to $853 million compared to $505 million in Q2 2015, primarily due to strong cash receipts from higher sales and the timing of payments of accounts payable and other accruals.
    Non GAAP free cash flow was up 7% to $464 million (Q2 2015: $432 million), less than the growth rate of US GAAP net cash provided by operating activities, primarily due to an increase in capital expenditures of $107 million in support of manufacturing operations at both legacy Shire and Baxalta.
  • Non GAAP net debt at June 30, 2016 was $23,678 million (December 31, 2015: $1,459 million) representing long and short term borrowings of $24,027 million, primarily used to fund the acquisitions of Baxalta and Dyax, other debt primarily related to capital leases of $344 million and cash and cash equivalents of $693 million.

OUTLOOK

Following the strong performance in the first half of the year, we are updating our guidance for 2016.

The guidance provided is for full year 2016 incorporating the legacy Baxalta business as of June 3, 2016. The guidance incorporates expected operating cost synergy savings for 2016 based on our updated target of at least $700 million in year three post close.

The diluted earnings per ADS forecast assumes a weighted average number of 778 million fully diluted ordinary shares outstanding for 2016 following the equity issuance for the Baxalta transaction.

   
    Full Year 2016                     US GAAP Outlook      Non GAAP Outlook(1)
    Total product sales              $10.8 - $11 billion    $10.8 - $11 billion
    Royalties & other revenues       $490 - $530 million    $490 - $530 million
    Gross margin                          58% - 60%              77% - 79%
    Combined R&D and SG&A            $4.2 - $4.5 billion    $4.1 - $4.4 billion
    Net interest/other               $500 - $550 million    $400 - $450 million
    Effective tax rate                  246% - 462%(2)            16% - 18%
    Diluted earnings per ADS(3)        ($0.40) - $0.00        $12.70 - $13.10

(1) For a list of items excluded from Non GAAP Outlook, refer to pages 27-28 of this release.

(2) For 2016, we expect our effective tax benefit rate on GAAP pre-tax profits from operations to be in the range of 246% - 462%. The GAAP effective tax for 2016 is highly sensitive to the relative quantum of profit before tax, leading to the wide range of the expected GAAP effective tax rate.

(3) See page 24 for a reconciliation between US GAAP diluted earnings per ADS and Non GAAP diluted earnings per ADS.

RECENT DEVELOPMENTS

Business Developments

Combination with Baxalta

  • On June 3, 2016, Shire announced that it completed its combination with Baxalta, creating the leading global biotechnology company focused on serving people with rare diseases and other highly specialized conditions.

Shire to License SHP647 (formerly known as PF-00547659)

  • On June 14, 2016, Shire announced it agreed to license global rights to all indications for SHP647 from Pfizer Inc. The transaction closed on July 1, 2016. SHP647 is an investigational biologic being evaluated for the treatment of moderate-to-severe IBD. SHP647 has been evaluated in more than 700 patients in Phase 1 and 2 trials, and Phase 3 trials are expected to begin after consultation with global regulatory authorities.

Products

ONIVYDE for the treatment of metastatic pancreatic cancer

  • On July 25, 2016, Shire announced that the CHMP adopted a positive opinion recommending the marketing authorization for the use of ONIVYDE (irinotecan pegylated liposomal formulation) also known as nal-IRI or MM-398, for the treatment of metastatic adenocarcinoma of the pancreas, in combination with 5-fluorouracil and leucovorin, in adult patients who have progressed following gemcitabine-based therapy.
  • The positive opinion from CHMP will be submitted to the European Commission ("EC"), which is responsible for granting marketing authorizations for medicines in the European Union ("EU"). We anticipate a final decision later this year.

HYQVIA for the treatment of primary and certain secondary immunodeficiencies

  • On July 21, 2016, Shire announced it is launching a pediatric indication for HYQVIA (human normal immunoglobulin (10%), recombinant human hyaluronidase) across the EU. This follows the recent marketing authorization granted by the EC to Baxalta in June 2016.

XIIDRA for the treatment of Dry Eye Disease

  • On July 11, 2016, Shire announced that the United States Food and Drug Administration ("FDA") approved XIIDRA (lifitegrast ophthalmic solution) 5%, a twice-daily eye drop solution indicated for the treatment of the signs and symptoms of dry eye disease in adult patients. XIIDRA is the only prescription eye drop indicated for the treatment of both signs and symptoms of this condition. Shire expects to launch XIIDRA in the United States in Q3 2016.

REVESTIVE for the treatment of Short Bowel Syndrome ("SBS")

GLASSIA for the treatment of emphysema due to severe alpha-1 antitrypsin ("AAT") deficiency

  • On June 15, 2016, Shire and Kamada Ltd. announced that the FDA approved an expanded label for GLASSIA, marking the first treatment for adult patients with emphysema due to severe AAT deficiency that can be self-infused at home.

Pipeline

SHP626 for the treatment of Nonalcoholic Steatohepatitis ("NASH") with liver fibrosis

  • On July 29, 2016, Shire was notified that the FDA granted Fast Track Designation for SHP626 (volixibat) for the treatment of NASH with liver fibrosis. NASH with liver fibrosis is a serious condition with no approved therapies.

SHP607 for the prevention of certain complications of prematurity

  • On June 30, 2016, Shire announced that top-line SHP607 study results in premature infants showed no impact on the primary endpoint of reducing the severity of retinopathy of prematurity.
  • However, top-line analysis of secondary endpoints showed clinically relevant effects on severe complications related to lung and brain damage. These data support further development of SHP607 in preterm infants; Shire plans to meet with regulatory authorities to discuss the clinical path forward for the program focusing on several complications of prematurity.

SHP465 for the treatment of Attention Deficit Hyperactivity Disorder ("ADHD")

  • On June 29, 2016, Shire announced positive topline results of the SHP465 efficacy and safety study in adults with ADHD. This puts Shire on track to file a Class 2 Resubmission of the New Drug Application ("NDA") for SHP465 with the FDA by the end of 2016.

SHP625 for the treatment of cholestatic liver disease

  • On June 13, 2016, Shire announced that the FDA has granted Breakthrough Therapy Designation for SHP625 (maralixibat) for progressive familial intrahepatic cholestasis type 2.

SHP621 for the treatment of eosinophilic esophagitis ("EoE")

CUVITRU for the treatment of primary immunodeficiency disorders

  • On June 10, 2016, Shire announced the successful completion of a decentralized procedure to support approval by 17 authorities in Europe for CUVITRU (IG 20mg/ml solution for subcutaneous injection), a treatment for pediatric and adult patients with primary and certain secondary immunodeficiency disorders, in which part of the body's immune system is missing or does not function properly.

Legal Proceedings

Investigation related to DERMAGRAFT

  • The Department of Justice ("DOJ"), including the U.S. Attorney's Office for the Middle District of Florida, Tampa Division and the U.S. Attorney's Office for Washington, DC, is conducting civil and criminal investigations into the sales and marketing practices of Advanced BioHealing Inc. ("ABH") relating to Dermagraft in June 2011. Following the disposal of the Dermagraft business in January 2014, Shire retained certain legacy liabilities including any liability that may arise from this investigation.
  • Over the last several years, Shire has been cooperating fully with these investigations. As part of its efforts to cooperate, Shire has engaged in discussions with the DOJ about a possible resolution. As part of those discussions, Shire has reached an agreement on a proposal for a civil settlement in the amount of $350 million plus interest, subject to negotiating a final settlement agreement and obtaining final approvals. Assuming the agreement is finalized, it will resolve the civil investigations conducted by the DOJ, including multiple U.S. Attorney's Offices and relevant federal and state agencies. The tentative settlement proposal would settle the federal government's claims under the federal False Claims Act and the Dermagraft Medicaid-related claims for states that opt into the settlement. Some states with Dermagraft Medicaid-related claims might elect to opt out of any final settlement, and those states' claims would remain unresolved. Material issues remain open and subject to further negotiation and approval by Shire, the DOJ and other relevant federal and state agencies before the tentative settlement can be finalized.

Board Changes

On June 3, 2016, Shire announced that the appointment of Gail D. Fosler and Albert P.L. Stroucken to the Shire Board of Directors, as previously announced on April 18, 2016, is effective.

Dividend

In respect of the six months ended June 30, 2016, the Board resolved to pay an interim dividend of 4.63 U.S. cents per Ordinary Share (2015: 4.21 U.S. cents per Ordinary Share).

Dividend payments will be made in Pounds Sterling to holders of Ordinary Shares and in U.S. Dollars to holders of ADSs. A dividend of 3.51(1) pence per Ordinary Share (an increase of 30% compared to 2015: 2.69 pence) and 13.89 U.S. cents per ADS (an increase of 10% compared to 2015: 12.63 U.S. cents) will be paid on October 7, 2016 to shareholders on the register as at the close of business on September 9, 2016.

(1) Translated using a GBP:USD exchange rate of 1.3202.

ADDITIONAL INFORMATION

The following additional information is included in this press release:

   
                                                                Page
     Overview of Second Quarter 2016 Financial Results            9
     Financial Information                                       14
     Non GAAP Reconciliation                                     22
     Notes to Editors                                            24
     Forward-Looking Statements                                  25
     Non GAAP Measures                                           27
     Trademarks                                                  28

Dial in details for the live conference call for investors at 14:00 BST / 09:00 EDT on August 2, 2016:

UK dial in: 0808-237-0030 or 020-3139-4830
US dial in: 1-866-928-7517 or 1-718-873-9077
International Access Numbers: Click here
Password/Conf ID: 78225871#
Live Webcast: Click here

The quarterly earnings presentation will be available today at 13:00 BST / 08:00 EDT on:

OVERVIEW OF SECOND QUARTER 2016 FINANCIAL RESULTS

1. Product sales

For the three months ended Q2 2016, product sales were up 57% to $2,322 million (Q2 2015: $1,476 million), primarily due to the inclusion of product sales acquired with Baxalta. Excluding Baxalta, product sales were up 19% (up 20% on a Non GAAP CER basis).

    
                                                                        Total Sales
    (in millions)                                                   Year on year growth
                            U.S.     International       Total                 Non GAAP
    Product sales          Sales             Sales       Sales    Reported       CER

    CINRYZE             $  163.5       $       9.5    $  173.0       +25%         +25%
    ELAPRASE                38.2             115.8       154.0        +5%          +8%
    FIRAZYR                119.5              17.2       136.7       +31%         +31%
    REPLAGAL                   -             118.4       118.4        +1%          +1%
    VPRIV                   38.5              49.5        88.0        +4%          +4%
    KALBITOR                17.7                 -        17.7        N/A          N/A
    Genetic Diseases
    total                  377.4             310.4       687.8       +16%         +17%

    VYVANSE                467.4              50.3       517.7       +22%         +22%
    ADDERALL XR             96.1               5.7       101.8       +18%         +18%
    Other
    Neuroscience            14.3              21.4        35.7       +63%         +64%
    Neuroscience
    total                  577.8              77.4       655.2       +23%         +23%

    LIALDA/MEZAVANT        174.5              19.2       193.7       +23%         +23%
    PENTASA                 72.9                 -        72.9       +10%         +10%
    GATTEX/REVESTIVE        36.9               7.6        44.5       +19%         +19%
    NATPARA                 19.9                 -        19.9      +237%        +237%
    Other Internal
    Medicine                35.0              53.7        88.7        +4%          +4%
    Internal
    Medicine total         339.2              80.5       419.7       +19%         +19%

    HEMOPHILIA             127.2             148.4       275.6        N/A          N/A
    INHIBITOR
    THERAPIES               28.9              45.1        74.0        N/A          N/A
    Hematology total       156.1             193.5       349.6        N/A          N/A

    IMMUNOGLOBULIN
    THERAPIES              104.1              34.1       138.2        N/A          N/A
    BIO THERAPEUTICS        22.7              28.6        51.3        N/A          N/A
    Immunology total       126.8              62.7       189.5        N/A          N/A

    Oncology total          16.2               4.1        20.3        N/A          N/A

    Total product
    sales              $ 1,593.5       $     728.6   $ 2,322.1       +57%         +58%

Genetic Diseases

Genetic Diseases product sales in Q2 2016 increased 16% (up 17% on a Non GAAP CER basis) compared to Q2 2015.

The increase was...


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