Shire plc : Final Results

Shire reports 8% pro forma product sales and strong earnings growth resulting in record operating cash flow for full year 2017

Strong growth driven by Immunology, recently launched products, and global expansion

Improved operating margin and operating cash flow of $4.3 billion enabled achievement of debt target

Significantly advanced innovative pipeline with 15 programs in late-stage development

February 14, 2018 - Shire plc (Shire) (LSE: SHP, NASDAQ: SHPG) announces unaudited results for the twelve months ended December 31, 2017.

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

"Shire delivered 8% pro forma product sales growth to $14.4 billion in 2017, an increase of over $1 billion. Of particular note are the strong performance of our Immunology franchise and the significant contribution from recently launched products, as well as growth in international markets. We increased Non GAAP diluted earnings per ADS by 16%, realizing cost synergies ahead of plan.

"2018 is a year of continued focus on commercial execution and targeted investment in our manufacturing infrastructure, new product launches, and pipeline to drive future growth. We expect to deliver mid-single digit product sales growth in 2018 after absorbing the anticipated impact of generics.

"The mid-term outlook for growth is positive driven by our Immunology franchise, multiple near-term launches, and international markets. We are committed to achieving our projected revenue target of $17 - $18 billion in 2020.

"Based on current assumptions, we expect Non GAAP diluted earnings per ADS growth to be lower than top line growth in 2018, mainly due to costs incurred from the start-up of our new U.S. plasma manufacturing site, intensifying genericization, and lower royalties. With the already disclosed manufacturing and SG&A cost reduction initiatives, we are on track to achieve mid-forties Non GAAP EBITDA margin by 2020."

Product and Pipeline Highlights

Regulatory updates

Accelerated international expansion and growth, including 126 product approvals globally and 50 product launches at the country level.
Received two FDA Fast Track Designations, two Orphan Drug Designations, and one Breakthrough Therapy Designation.
Filed for FDA approval of a new plasma manufacturing facility near Covington, Georgia to support our growing Immunology franchise, and received FDA approval for the technology transfer of the CINRYZE drug product manufacturing process to Vienna, Austria.

Clinical and business development updates

Advanced pipeline including nine Phase 3 studies completed in 2017 with several key readouts expected in 2018.
Entered into agreements with Novimmune, MicroHealth and Rani Therapeutics focused on advancing innovation for patients suffering from hemophilia. Parion Sciences focused on Dry Eye Disease and with AB Biosciences focused on autoimmune disorders.

Financial Highlights

	Full Year 2017⁽¹⁾	Growth⁽¹⁾	Non GAAP CER⁽¹⁾⁽²⁾
Product sales⁽³⁾	$14,449 million	+33%	+33%
Product sales excluding legacy Baxalta	$7,461 million	+7%	+6%
Total revenues	$15,161 million	+33%
Non GAAP total revenues⁽⁴⁾	$15,086 million	+32%	+32%

Operating income from continuing operations	$2,455 million	+155%
Non GAAP operating income⁽²⁾	$5,997 million	+36%	+36%

Net income margin⁽⁵⁾⁽⁶⁾	28%	25ppc
Non GAAP EBITDA margin⁽²⁾⁽⁶⁾	43%	2ppc

Net income	$4,272 million	+1,205%
Non GAAP net income⁽²⁾	$4,604 million	+36%

Diluted earnings per ADS⁽⁷⁾	$14.05	+1,006%
Non GAAP diluted earnings per ADS⁽²⁾⁽⁷⁾	$15.15	+16%	+16%

Net cash provided by operating activities	$4,257 million	+60%
Non GAAP free cash flow⁽²⁾	$3,431 million	+63%

⁽¹⁾Results include Baxalta Inc. (Baxalta) (acquired on June 3, 2016) and Dyax Corp. (Dyax) (acquired on January 22, 2016), unless otherwise noted. Percentages compare to equivalent 2016 period.
⁽²⁾The Non GAAP financial measures included within this release are explained on pages 29 - 30, and are reconciled to the most directly comparable financial measures prepared in accordance with U.S. GAAP on pages 22 - 25.
⁽³⁾For 2017 reporting (including comparative information), HAE sales have been reclassified to the Immunology franchise from Genetic Diseases.
⁽⁴⁾Non GAAP total revenues excludes the receipt of an upfront license fee.
⁽⁵⁾U.S. GAAP net income as a percentage of total revenues.
⁽⁶⁾Percentage point change (ppc).
⁽⁷⁾Diluted weighted average number of ordinary shares of 912 million.

Product sales growth

Delivered reported product sales growth of 33%, with the inclusion of a full year of legacy Baxalta sales.
Achieved combined pro forma product sales growth of 8%; legacy Shire product sales growth of 7% and legacy Baxalta pro forma product sales growth of 9%.
Strong demand for our Immunology products delivered 14% pro forma product sales growth; significant contribution from our subcutaneous immunoglobulin portfolio; CINRYZE supply stabilized in Q4 2017.
Continued product sales growth for GATTEX and NATPARA; strong contribution from XIIDRA with script growth of 12% since Q3 2017; successful launch of MYDAYIS.

Earnings growth

Generated Non GAAP diluted earnings per ADS of $15.15, up 16%, underscoring continued focus on commercial excellence and operating efficiency.
Reported Non GAAP EBITDA margin of 43%, driven by realization of operating expense synergies.

Strong cash flow

Achieved year-end debt target through record operating cash flow, which enabled a $3,370 million reduction in Non GAAP net debt since December 31, 2016.

FINANCIAL SUMMARY - FULL YEAR 2017 COMPARED TO FULL YEAR 2016

Revenues

Product sales increased 33% to $14,449 million (2016: $10,886 million), primarily driven by the inclusion of a full year of legacy Baxalta product sales of $6,988 million, with strong sales from our immunoglobulin therapies and bio therapeutics.
Product sales, excluding legacy Baxalta, increased 7% as growth from our hereditary angioedema (HAE) therapies and Neuroscience franchise, up 9% and 7%, respectively, was partially offset by the launch of generic competition for LIALDA, which negatively impacted our Internal Medicine franchise, with product sales down 5%. Our Ophthalmics franchise generated sales of $259 million in 2017 (2016: $54 million).
Royalties and other revenues increased 39% to $712 million, primarily due to the receipt of an upfront license fee and a full year of contract manufacturing revenue acquired with Baxalta.
Non GAAP total revenues of $15,086 million, up 32%, excludes the receipt of an upfront license fee.

Operating results

Operating income increased 155% to $2,455 million (2016: $963 million), primarily due to the inclusion of a full year of legacy Baxalta operating income and lower expense relating to the unwind of inventory fair value adjustments, partially offset by higher amortization of acquired intangible assets.
Non GAAP operating income increased 36% to $5,997 million (2016: $4,417 million), primarily due to the inclusion of a full year of legacy Baxalta Non GAAP operating income and higher revenues from legacy Shire products.
Non GAAP EBITDA margin as a percentage of Non GAAP total revenues increased to 43% (2016: 41%), primarily due to higher Non GAAP total revenues and lower Non GAAP research and development (R&D) and selling, general and administrative (SG&A) expenditures as a percentage of Non GAAP total revenues, partially offset by a lower Non GAAP gross margin, driven by the inclusion of a full year of lower margin products acquired with Baxalta.

Earnings per share (EPS)

Diluted earnings per American Depositary Share (ADS) increased to $14.05 (2016: $1.27). The increase is primarily due to a higher tax benefit in 2017 driven by U.S. tax reform, higher operating income as noted above, combined with lower discontinued operations losses relating to the divested DERMAGRAFT business.
Non GAAP diluted earnings per ADS increased 16% to $15.15 (2016: $13.10), primarily due to the inclusion of a full year of legacy Baxalta net income and the realization of operating expense synergies relating to Baxalta, partially offset by a higher average number of shares for full year 2017.

Cash flows

Net cash provided by operating activities increased 60% to $4,257 million (2016: $2,659 million), primarily due to the inclusion of a full year of legacy Baxalta operating cash flows and strong cash receipts from higher legacy Shire sales and operating profitability, partially offset by a payment associated with the settlement of the DERMAGRAFT litigation and higher interest payments. Also, 2016 net cash provided by operating activities was negatively impacted by a payment associated with the termination of a biosimilar collaboration acquired with Baxalta.
Non GAAP free cash flow increased 63% to $3,431 million (2016: $2,103 million), driven by the growth in net cash provided by operating activities, partially offset by an increase in capital expenditures of $152 million.

Debt

Non GAAP net debt as of December 31, 2017 decreased $3,370 million since December 31, 2016, to $19,069 million (December 31, 2016: $22,439 million). The decrease was primarily due to a $3,445 million net cash repayment of debt utilizing Shire's Non GAAP free cash flow, partially offset by a lower cash balance. Non GAAP net debt represents aggregate long and short term borrowings of $19,192 million, and capital leases of $349 million, partially offset by cash and cash equivalents of $472 million.

OUTLOOK

2018 is a year of continued focus on commercial execution and targeted investment in our manufacturing infrastructure, new product launches, and pipeline to drive future growth. We expect to deliver mid-single digit product sales growth in 2018 after absorbing the anticipated impact of generics.

The mid-term outlook for growth is positive driven by our Immunology franchise, multiple near-term launches, and international markets. We are committed to achieving our projected revenue target of $17 - $18 billion in 2020.

Based on current assumptions, we expect Non GAAP diluted earnings per ADS growth to be lower than top line growth in 2018, mainly due to costs incurred from the start-up of our new US plasma manufacturing site, intensifying genericization, and lower royalties. With the already disclosed manufacturing and SG&A cost reduction initiatives, we are on track to achieve mid-forties Non GAAP EBITDA margin by 2020.

Following the update to the strategic review on January 8, 2018, Shire is well underway in creating two divisions, one focused on rare diseases, the other on neuroscience. Alongside this, we are already active in optimizing our portfolio within each division, and we anticipate that this may lead to some opportunities for disposals.

While recognizing our commitment to continue delevering as previously announced, any surplus capital released from such disposals would be evaluated by the Board for return to shareholders. Assessing Shire's overall capital structure and appropriate mid / long term debt level will be a key initial assignment for the new CFO, who is expected to join on March 19, 2018.

In addition to the detailed guidance in the table below, we are providing depreciation and capital expenditures guidance. We expect depreciation to be between $575 - $625 million and capital expenditure to be between $800 - $900 million, as we continue to invest in a larger footprint to support our growth aspirations.

The Non GAAP diluted earnings per ADS forecast assumes a weighted average number of 915 million fully diluted ordinary shares outstanding in 2018.

Our US GAAP diluted earnings per ADS outlook reflects anticipated amortization and integration costs.

Full Year 2018	U.S. GAAP Outlook	Non GAAP Outlook⁽¹⁾
Total product sales	$14.9 - $15.3 billion	$14.9 - $15.3 billion
Royalties & other revenues	$500 - $600 million	$500 - $600 million
Gross margin as a percentage of total revenue⁽²⁾	71.0% - 73.0%	73.5% - 75.5%
Combined R&D and SG&A	$5.2 - $5.4 billion	$4.9 - $5.1 billion
Net interest/other	$450 - $550 million	$450 - $550 million
Effective tax rate	15% - 17%	16% - 18%
Diluted earnings per ADS⁽³⁾	$7.30 - $7.90	$14.90 - $15.50

⁽¹⁾ For a list of items excluded from Non GAAP Outlook, refer to pages 29 - 30 of this release.
⁽²⁾ Gross margin as a percentage of total revenues excludes amortization of acquired intangible assets.
⁽³⁾ See page 25 for a reconciliation between U.S. GAAP diluted earnings per ADS and Non GAAP diluted earnings per ADS.

FINANCIAL SUMMARY - FOURTH QUARTER 2017 COMPARED TO FOURTH QUARTER 2016

Financial Highlights	Q4 2017	Growth	Non GAAP CER
Product sales⁽¹⁾	$3,911 million	+8%	+7%
Total revenues	$4,145 million	+9%
Non GAAP total revenues	$4,070 million	+7%	+6%

Operating income from continuing operations	$850 million	+17%
Non GAAP operating income	$1,553 million	+11%	+10%

Net income margin	75%	63ppc
Non GAAP EBITDA margin	41%	1ppc

Net income	$3,105 million	+579%
Non GAAP net income	$1,209 million	+18%

Diluted earnings per ADS	$10.22	+577%
Non GAAP diluted earnings per ADS	$3.98	+18%	+17%

Net cash provided by operating activities	$1,520 million	+32%
Non GAAP free cash flow	$1,219 million	+35%

⁽¹⁾For 2017 reporting (including comparative information), HAE sales have been reclassified to the Immunology franchise from Genetic Diseases.

Revenues

Product sales increased 8% to $3,911 million (Q4 2016: $3,621 million), primarily due to strong growth from our Immunology franchise, up 15%, and our Neuroscience franchise, up 16%. Our Ophthalmics and Oncology franchises reported sales of $86 million and $72 million, respectively. Growth was impacted by generic competition for LIALDA, which impacted our Internal Medicine franchise.
Royalties and other revenues increased 26% to $234 million (Q4 2016: $185 million), primarily due to the receipt of a $75 million upfront license fee.
Non GAAP total revenues of $4,070 million, up 7%, excludes the impact of a receipt of an upfront license fee.

Operating results

Operating income increased 17% to $850 million (Q4 2016: $729 million), primarily due to higher revenues and the realization of Baxalta operating expense synergies, partially offset by higher acquisition and integration costs.
Non GAAP operating income increased 11% to $1,553 million (Q4 2016: $1,395 million), primarily due to higher Non GAAP total revenues and lower expenses as a percentage of Non GAAP total revenues, driven by operating efficiencies and synergies.
Non GAAP EBITDA margin increased to 41% (Q4 2016: 40%), primarily due to higher Non GAAP total revenues and lower Non GAAP R&D and SG&A expenditures as a percentage of Non GAAP total revenues, driven by realized operating synergies from the acquisition of Baxalta, partially offset by a lower Non GAAP gross margin.

Earnings per share (EPS)

Diluted earnings per ADS increased 577% to $10.22 (Q4 2016: $1.51), primarily due to a tax benefit in 2017 driven by U.S. tax reform, higher total revenues and the realization of operating synergies, partially offset by the impact of higher acquisition and integration costs.
Non GAAP diluted earnings per ADS increased 18% to $3.98 (Q4 2016: $3.37), primarily due to higher Non GAAP operating income related to higher Non GAAP total revenues and the realization of SG&A expense synergies from the acquisition of Baxalta, partially offset by a lower Non GAAP gross margin.

Cash flows

Net cash provided by operating activities increased 32% to $1,520 million (Q4 2016: $1,153 million), primarily due to strong cash receipts from higher total revenues, increased operating profitability and a net cash receipt of license fees.
Non GAAP free cash flow, increased 35% to $1,219 million (Q4 2016: $906 million), primarily due to the increase in net cash provided by operating activities, excluding the net cash impact of licensing fees as noted above, and a decrease in capital expenditures of $14 million.

RECENT DEVELOPMENTS

Corporate Strategy

On January 8, 2018, Shire announced that it completed the first stage of its strategic review of its Neuroscience business. The Board concluded that the Neuroscience business warrants additional focus and investment and that there is a strong business rationale for creating two distinct business divisions within Shire: a Rare Disease division and a Neuroscience division.

Shire expects to report the operational performance metrics of each division separately beginning with the first quarter of 2018. The second stage of the review will continue to evaluate all strategic alternatives, including the merits of an independent listing for each of the two divisions.

Business Development

License agreement with AB Biosciences

On January 30, 2018, Shire entered into a licensing agreement with AB Biosciences. The license grants Shire exclusive worldwide rights to develop and commercialize a recombinant immunoglobulin product candidate.

Collaboration with Rani Therapeutics

On December 5, 2017, Shire and Rani Therapeutics announced a collaboration to conduct research on the use of the RANI PILL technology for oral delivery of Factor VIII therapy for patients with hemophilia A.

Products

ADYNOVI for the treatment of hemophilia A

On January 15, 2018, Shire announced that the European Commission (EC) granted Marketing Authorization for ADYNOVI, an extended half-life recombinant Factor VIII treatment, for on-demand and prophylactic use in patients 12 years and older living with hemophilia A.

XIIDRA for the treatment of dry eye disease (DED)

On January 3, 2018, Shire announced XIIDRA had been approved in Canada, marking the first approval for the treatment outside of the U.S. XIIDRA will be available for patients in Canada in early 2018.

myPKFiT software for ADVATE

On December 19, 2017, Shire announced that the FDA granted 510(k) marketing clearance to myPKFiT for ADVATE, a free web-based software for hemophilia A patients 16 years and older weighing at least 45 kilograms treated with ADVATE.

ONCASPAR for the treatment of acute lymphoblastic leukemia (ALL)

On December 13, 2017, Shire announced that the EC granted marketing authorization for lyophilized ONCASPAR as a component of antineoplastic combination therapy in ALL for all ages. Shire expects lyophilized ONCASPAR to be available in European markets beginning in the first half of 2018.

Pipeline

SHP620 for the treatment of cytomegalovirus (CMV) infection in transplant patients

On January 4, 2018, Shire announced that the FDA granted breakthrough therapy designation for SHP620, a Phase 3 investigational treatment for CMV infection and disease in transplant patients resistant or refractory to prior therapy.

SHP609 for the treatment of Hunter syndrome

On December 19, 2017, Shire announced that the Phase 2/3 clinical trial, evaluating SHP609 for the potential treatment of pediatric patients with Hunter syndrome and cognitive impairment, did not meet its primary nor key secondary endpoints.

SHP647 for the treatment of ulcerative colitis (UC)

On November 30, 2017, Shire announced that the FDA granted Orphan Drug Designation to Shire's investigational anti-MAdCAM-1 antibody, SHP647, for the treatment of pediatric patients with moderately to severely active UC.

Facilities

On January 24, 2018, Shire announced that the FDA has granted approval for the technology transfer of CINRYZE drug product manufacturing process to its Vienna, Austria manufacturing site. Shire will begin commercial manufacturing of CINRYZE drug product in Vienna in the first quarter of 2018.
On December 27, 2017, Shire announced that it had filed its first submission to the FDA for a new plasma manufacturing facility near Covington, Georgia. The facility is expected to add approximately 30% capacity to Shire's internal network once fully operational. Commercial production is expected to begin in 2018.

Board and Senior Management Changes

On November 20, 2017, Shire announced that Thomas Dittrich will join Shire as Chief Financial Officer, and will become a member of the Executive Committee and an Executive member of the Board of Directors. Mr. Dittrich is expected to assume his roles at Shire on March 19, 2018.

Effective December 31, 2017, Jeff Poulton stepped down from the Board of Directors and resigned as Shire's Chief Financial Officer.

On January 1, 2018, John Miller, Shire's Senior Vice President of Finance, was appointed Interim Chief Financial Officer. Mr. Miller will hold this position until Mr. Dittrich commences his employment with Shire.

On January 1, 2018, Andreas Busch, PhD, joined Shire as Head of Research and Development and Chief Scientific Officer, and became a member of Shire's Executive Committee.

On August 3, 2017, Shire announced that David Ginsburg, Chairman of the Science & Technology Committee, would retire following the 2018 Annual General Meeting (AGM). Subsequently, the Board resolved that David would continue for the near term as a Non-Executive Director and Chairman of the Science and Technology Committee. Today, the Board announces that Dominic Blakemore, having been appointed Group Chief Executive Officer of Compass Group PLC on January 1, 2018, decided to step down as a Non-Executive Director of Shire immediately following the 2018 AGM. The Board has begun a search for two new non-executive director appointees who can provide the knowledge, insight, and experience that both David and Dominic currently bring to Shire. The Board also announces today that, following the departure of William Burns from the Board of Directors after the 2018 AGM, Olivier Bohuon will be appointed Senior Independent Director of the Board.

Dividend

For the six months ended December 31, 2017, the Board resolved to pay an interim dividend of 29.79 U.S. cents per Ordinary Share (2016: 25.70 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 21.46⁽¹⁾ pence per Ordinary Share (2016: 20.64 pence) and 89.37 U.S. cents per ADS (2016: 77.10 U.S. cents) will be paid on April 24, 2018 to shareholders on the register as at the close of business on March 9, 2018.

Together with the first interim payment of 5.09 U.S. cents per Ordinary Share (2016: 4.63 U.S. cents per Ordinary Share), this represents total dividends for 2017 of 34.88 U.S. cents per Ordinary Share (2016: 30.33 U.S. cents per Ordinary Share), an increase of 15% in U.S. Dollar terms.

Holders of Ordinary Shares are notified that, in order to receive UK sourced dividends via Shire's Income Access Share arrangements (IAS Arrangements), they need to submit a valid IAS Arrangements election form to Shire's Registrar, Equiniti, no later than 5pm (GMT) on March 23, 2018. Holders of Ordinary Shares are advised that:

any previous elections made using versions of the IAS Arrangements election form in use prior to February 16, 2016, and any elections deemed to have been made prior to April 28, 2016, are no longer valid; and
if they do not elect, or have not elected using the newly formatted IAS Arrangements election forms published on or after February 16, 2016, to receive UK sourced dividends via Shire's IAS Arrangements, their dividends will be Irish sourced and therefore incur Irish dividend withholding tax, subject to applicable exemptions.

Internet links to the newly formatted IAS Arrangements election forms can be found at:
http://investors.shire.com/shareholder-resources/shareholder-forms.aspx

⁽¹⁾ Translated using a GBP:USD exchange rate of 1.3881.

ADDITIONAL INFORMATION

The following additional information is included in this press release:

	Page

Overview of Full Year 2017 Financial Results	9

Financial Information	14

Non GAAP Reconciliations	22

Notes to Editors	26

Forward-Looking Statements	27

Non GAAP Measures	29

Trademarks	30

For further information please contact:

Investor Relations
	Christoph Brackmann	christoph.brackmann@shire.com	+41 795 432 359
	Sun Kim	sun.kim@shire.com	+1 617 588 8175
	Robert Coates	rcoates@shire.com	+44 203 549 0874

Media
	Lisa Adler	lisa.adler@shire.com	+1 617 588 8607
	Katie Joyce	kjoyce@shire.com	+1 781 482 2779

Dial in details for the live conference call for investors at 14:00 GMT / 9:00 EST on February 14, 2018:

UK dial in:	0800 358 9473 or +44 333 300 0804
US dial in:	1 855 857 0686 or 1 631 913 1422
International Access Numbers:	Click here
Password/Conf ID:	76960651#
Live Webcast:	Click here

The quarterly earnings presentation will be available today at 13:00 GMT / 8:00 EST on:

- Shire.com Investors section

- Shire's IR Briefcase in the iTunes Store

OVERVIEW OF FULL YEAR 2017 FINANCIAL RESULTS COMPARED TO FULL YEAR 2016

Product sales

Product sales increased 33% to $14,449 million (2016: $10,886 million), primarily due to the inclusion of a full year of legacy Baxalta sales in 2017. Excluding legacy Baxalta, product sales increased 7%. For 2017 reporting (including comparative information), HAE sales have been reclassified to the Immunology franchise from Genetic Diseases.

(in millions)

Total Sales
Year on year growth

Product sales by franchise

U.S. Sales

International Sales

Total Sales

Reported

Non GAAP CER

IMMUNOGLOBULIN THERAPIES

1,788.9

447.7

2,236.6

N/M

HEREDITARY ANGIOEDEMA

1,305.2

124.4

1,429.6

BIO THERAPEUTICS

315.9

388.2

704.1

N/M

Immunology

3,410.0

960.3

4,370.3

N/M

HEMOPHILIA

1,477.9

1,479.4

2,957.3

N/M

INHIBITOR THERAPIES

279.4

548.9

828.3

N/M

Hematology

1,757.3

2,028.3

3,785.6

N/M

VYVANSE

1,917.3

243.8

2,161.1

By: Nasdaq / GlobeNewswire - 14 Feb 2018

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Shire plc : Final Results