Shire plc’s (SHPGY) fourth quarter 2010 earnings (excluding special items) of $1.03 per ADS, though in line with the Zacks Consensus Estimate were 7% below the year-ago earnings. The year-over-year decline was attributable to higher operating expenses which more than offset the increase in revenues during the reported quarter.
Quarter in Detail
Quarterly revenues increased 4.2% to $931.2 million, well above the Zacks Consensus Estimate of $894 million. Increased product sales helped boost revenues. The rise in product sales more than offset the decline in royalties during the final quarter of 2010.
Product sales went up 10% to $851 million. Product sales were pushed by strong performances of Vyvanse (up 25% to $181 million), Replagal (up 80% to $109 million), and Lialda (up 27% to $84 million). Recently launched Intuniv and Vpriv also performed well, registering sales of $43 million and $59 million, respectively.
However, royalties declined 35.8% to $73.6 million. Royalty revenue mainly comprises income earned on the sale of the authorized generic version of Adderall XR, 3TC and Zeffix. During the fourth quarter, Shire received royalties from Impax Laboratories Inc. (IPXL) for Adderall XR (down 73%) and GlaxoSmithKline (GSK) for 3TC and Zeffix (down 11.4%).
During the fourth quarter of 2010, reported operating expenses climbed 17.5% to $735.2 million. Higher research and development (R&D) expenses (up 27.3% to $185.6 million) and selling, general and administrative (SG&A) expenses (up 13.8% to $419.7 million) fueled the rise in operating costs during the quarter.
The inclusion of the operating expenses of Movetis, acquired late last year, also led to the rise. While continued investment in the pipeline led to the rise in R&D expenses, the costs incurred by Shire to market newly launched products increased SG&A expenses.
Annual Results
For full year 2010, Shire earned $4.23 per share on an adjusted basis, in line with the Zacks Consensus Estimate but 21% above the year ago earnings. Earnings were boosted by higher revenues which climbed 15% to $3.5 billion. 2010 revenues surpassed the Zacks Consensus Estimate of $3.4 billion. Higher product sales (up 16% to $3.1 billion) and royalties (up 12.2% to $328.1 million) contributed to the rise in revenues.
Outlook
In addition to disclosing financial results, Shire also provided an outlook for 2011. For 2011, Shire is anticipating impressive revenue and earnings growth. Product sales are expected to register growth in line with that witnessed in 2010. The company expects the 2011 combined R&D and SG&A expenses (adjusted) to increase in the range of 10% – 13% on a year-over-year basis.
Our Recommendation
We currently have a Neutral recommendation on Shire, which is supported by a Zacks #3 Rank (short-term Hold rating). We believe Shire needs to expand its pipeline in order to maintain growth beyond 2015, as there are very few projects to be launched thereafter.
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