Shire plc (SHPGY) posted earnings of $1.03 per American Depositary Share (ADS) during the second quarter of 2010, beating the Zacks Consensus Estimate of 88 cents and the year-ago earnings of 60 cents per ADS. Improved revenues accounted for the increased earnings.
Revenues
Quarterly revenues increased 35% year over year to $849 million, well above the Zacks Consensus Estimate of $807.5 million. Increased product sales and higher royalties helped boost revenues.
Product sales went up 37% to $764 million, while royalties increased 24% to $85 million. Royalty revenue mainly comprises income earned on the sale of the authorized generic version of Adderall XR.
Product sales include sales of Vyvanse (up 30% to $148 million), Elaprase (up 17% to $100 million), Replagal (up 84% to $82 million), Lialda (up 27% to 70 million) and Adderall XR (up 19% to $80 million). Recently launched Intuniv and Vpriv delivered sales of $51 million and $29 million, respectively.
Other Details
During the quarter, research and development (R&D) expenses increased 21.6% to $143.5 million. The increase resulted from continued investment in the R&D pipeline.
Selling, general and administrative (SG&A) expenses amounted to $304.0 million, up 6.9%. The costs that Shire incurred to market the recently launched products led to an increase in SG&A expenses.
Shire will pay a dividend of 6.75 cents per ADS on October 7 to shareholders of record as of September 10. The current dividend reflects an increase of 5% compared with the previous-year dividend of 6.44 cents per ADS.
Outlook
For fiscal 2010, Shire expects earnings of about $4.00 per ADS, representing an increase of 15% year over year. The guidance includes the financial effect of the company’s proposed acquisition of Movetis NV, announced on August 3.
Shire reiterated its average sales growth rate guidance of mid-teens from 2009 through 2015.
Further, Adderall XR sales as well as royalty income are expected to be lower in the second half of 2010, as compared with the first half.
Shire expects gross margin for fiscal 2010 to be in line with the fiscal 2009 margin of about 86%. Both R&D and SG&A expenses are expected to grow, coming in towards the higher end of the 5-10% guided range.
Movetis Acquisition
On August 3, 2010, Shire announced its intention to buy Belgium-based Movetis NV for €428 million ($566.2 million) in cash. Movetis is a specialty gastrointestinal company. We believe the acquisition will not only broaden Shire’s portfolio with the addition of Resolor (marketed in the EU), it will also expand its ex-US business overall. Shire said that the deal will start contributing to its revenues immediately after completion of the acquisition, and will be accretive to earnings after 2012. Shire plans to initiate the tender offer to Movetis’ shareholders in early September 2010.
Our View
We currently have a Neutral recommendation on Shire, which is supported by a Zacks #3 Rank (Hold). We note that Shire’s attention deficit hyperactivity disorder (ADHD) franchise is transforming from Adderall XR to Vyvanse, with Vyvanse second quarter sales up 30%. Additionally, the latest ADHD drug, Intuniv, could position the company well with an incremental commercial opportunity in the children and adolescent segment.
Moreover, manufacturing issues for Shire’s major competitor, Genzyme Corp. (GENZ) has created an opportunity for Shire’s gaucher drug Vpriv and Fabry drug Replagal. Genzyme’s Cerezyme and Fabrazyme compete directly with Vpriv and Replagal, respectively. A shortage in the supply of Genzyme’s drugs should allow Shire’s drugs to take market share.
However, longer term, 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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