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`Shire Plc (SHPG) Flemming Ornskov on Q3 2015 Results -
`Earnings Call Transcript
`
`Oct. 23, 2015 1:43 PM
`ET
`
`SA Transcripts
`
`bout: Shire PLC (SHPG)
`
`| A
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`Operator
`
`Good morning and good afternoon, ladies and gentlemen, and welcome to the Shire Q3 2015 results call,
`"Progressing our transformation to a leading global biotech." Throughout the call, all participants will be in listen-only
`mode, and afterwards there will be a question and answer session. Just to remind you, this conference call is being
`recorded. Today I'm pleased to present our speaker for today's call. Please go ahead.
`
`Matthew Osborne - Global Head-Investor Relations & Vice President
`
`Thank you. Good morning and good afternoon, everyone. Thank you for joining us to discuss the press release Shire
`issued earlier today announcing our 2015 third quarter results. You should have received our press release and
`should be viewing our presentation via our webcast on Shire.com. If you are unable to access the press release or
`presentation on our website, please contact Souheil Salah on our Investor Relations team at +44-1256-894-160, and
`he will be happy to assist you.
`
`Our speakers today are Chief Executive Officer Dr. Flemming Ornskov and Chief Financial Officer Jeff Poulton. We
`are also joined today by Dr. Phil Vickers. Phil is Shire's Head of Research and Development and will be available to
`answer questions related to our pipeline during the Q&A portion of the call.
`
`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 that if they materialize could materially affect our results.
`
`Following our presentation today, we will also open up the call to your questions. We request that you ask only two
`questions so that everyone has a chance to participate. We will also be available to follow up with you after the call. I
`will now hand the presentation over to Flemming.
`
`Flemming Ornskov - Chief Executive Officer & Director
`
`Thank you, Matt, and hello, everyone. It's good to be with you today to discuss our third quarter results. Over the next
`30 minutes or so, I'll give you a greater understanding of our progress towards becoming a leading global biotech
`company, with a focus on rare diseases and other specialty conditions. I will then hand over the call to Jeff to take you
`through what was a strong Q3 financial performance. I'm sure you're also interested in an update on Baxalta, and I
`will make some comments in regards to the combination we proposed at the conclusion of this call before we go into
`Q&A.
`
`Let's now all turn to slide number 4. As you're aware, we've been on a journey to build a leading global biotech
`company focused on rare diseases and other specialty conditions. Our initial priority was getting the basics right:
`creating one Shire, an organization that was more efficient and more profitable and could support our ambitious future
`growth plans. We achieved that, and we now have a more solid foundation from which to support our growth. As you
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`know, 2015 is a year of further investments that will allow us to continue to drive future growth to meet our 10x20 plan,
`which we are well on our way towards achieving.
`
`Let me now move on to slide 5 and take you through some of the highlights from the third quarter. During the third
`quarter, we delivered 12% year-over-year sales growth at constant exchange rates from our core products when you
`exclude INTUNIV. This was the result of growth from VYVANSE, CINRYZE, and FIRAZYR, as well as GATTEX or
`REVESTIVE and NATPARA as we continue to leverage Shire's rare disease platform.
`
`As you will recall, last quarter we increased our full-year guidance for non-GAAP diluted earnings per ADS to mid to
`high single digit growth, and we are reiterating this guidance today as we continue to invest in our innovative pipeline
`and support the recent launches of VYVANSE in binge-eating disorder in adults, NATPARA and GATTEX or
`REVESTIVE ex-U.S.
`
`We continue to see the benefit of investing in innovation, with progress this quarter in several areas of our pipeline.
`During the quarter, we received European approval for INTUNIV for the treatment of ADHD in children and in
`adolescents for whom stimulants are unsuitable, ineffective, or not tolerated. Patients in Europe can now benefit from
`having an additional choice of treatment.
`
`As we announced last week, the FDA requested additional information in response to our application for lifitegrast as
`a potential new treatment for the signs and for the symptoms of dry-eye disease. We have recently completed another
`Phase 3 study of lifitegrast called OPUS-3, and we expect top line results sometime during the fourth quarter of this
`year. If the data from this study are positive, they are expected to support resubmission to the FDA in the first quarter
`of 2016. I will have more to say on lifitegrast in just a few minutes.
`
`We are ahead of schedule with recruitment for the Phase 3 pediatric study of SHP465, and we also expect to initiate
`multiple Phase 3 studies with other pipeline assets by the end of this year or early next year. And we're truly excited
`by FST-100, which we now call SHP640, which is a potential therapy for the treatment of infectious conjunctivitis,
`which we bought into the company through the acquisition of Foresight Biotherapeutics. I'll come back to this
`acquisition later in this presentation.
`
`But let's now all move to slide number 6. Our core products when you exclude INTUNIV grew 12% at constant
`exchange rates over the third quarter of last year. As expected, INTUNIV sales continue to decline due to the entry of
`generics, but at the same time we're still dealing with foreign exchange headwinds. These factors combined reduced
`reported product sales by 10%, with 6% of that due to the decline in INTUNIV and 4% related to foreign exchange
`headwinds.
`
`I'm pleased to say that we grew our non-GAAP earnings per ADS by 11% on a reported basis and by 15% on a
`constant exchange rate basis, which benefited also in part from a lower tax rate this quarter. We delivered these
`results while we continue to invest in the launches of VYVANSE for binge-eating disorder in adults, the launches of
`GATTEX or REVESTIVE and NATPARA, and in preparation for the potential launch of lifitegrast in the U.S. initially.
`And as noted, I'm very pleased to reiterate our mid to high single digit growth in non-GAAP diluted earnings per ADS
`guidance for the full year, which we gave last quarter.
`
`Let's now all move on to slide number 7. The investments we have made in recent years to bring innovative products
`to patients are now driving the growth of our portfolio and will continue to do so well into the future. Our focus – our
`keen focus, I would even say – on commercial excellence has led to the continuing performance of our newest inline
`products. I'm very pleased with the double-digit growth we saw across several of our products during this quarter, and
`Jeff will go into further detail on what's driving this growth when he presents later today.
`
`One particular highlight worth noting was the VYVANSE IP victory, where the Court of Appeals affirmed the District
`Court's summary judgment ruling that 18 patent claims from four of the FDA Orange Booklets, the patents for
`VYVANSE, are valid and infringed. The ruling prevents the five ANDA defendants from launching generic versions of
`VYVANSE until the expiration of these patents, which is not until 2023. We were extremely pleased with this decision,
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`which further confirms that Shire has strong patents protecting VYVANSE.
`
`Let's look at slide 8 and subsequently slide 9. That deals with our pipeline progress. On slide 9 you will see this
`progress. We continue to advance our pipeline of innovative programs, and we have a very good mix of near- and
`longer-term growth opportunities. Our view is that a deep and innovative pipeline is at the core of becoming a leading
`biotech company. As you can see, we've come a long way in the last two years based on the robustness of our
`pipeline, a majority of which is focused on rare disease programs.
`
`Let's go through some of the key changes over the last quarter. In September, we received European approval for
`INTUNIV, which also triggers 10 years of exclusivity in the EU. SHP640 for infectious conjunctivitis is now ready for
`Phase 3. We discontinued our Phase 3 program for FIRAZYR in the treatment of ACE inhibitor induced angioedema.
`This decision follows recent top line data demonstrating the study did not meet its primary or secondary efficacy
`endpoints. While these results were disappointing, FIRAZYR continues to be an effective treatment option for acute
`hereditary angioedema attacks in adults aged 18 or older.
`
`Now turning to the next few slides, I'll provide an update on a few of our key pipeline assets. Slide 10. Let's first talk
`about lifitegrast. As you're well aware, on October the 16th, the FDA requested an additional clinical study as part of
`the complete response letter to our new drug application for lifitegrast for the signs and symptoms of dry eye disease
`in adults. At the same time, we announced the recent completion of another Phase 3 study of lifitegrast called OPUS-
`3, which we expect to be the basis of Shire's response to the complete response letter from the FDA. We do indeed
`expect top line results of OPUS-3 sometime during the fourth quarter of this year, and, if positive, we plan to provide
`these data as part of a resubmission to the FDA during the first quarter of 2016. During their product quality review,
`the FDA also requested more information related to lifitegrast and its formulation, which Shire is confident it can also
`address as part of its resubmission to the FDA.
`
`I want to emphasize Shire's commitment to working closely with the FDA to provide the evidence required to deliver a
`new prescription treatment option for the 29 million adults in the U.S. living with this chronic and progressive disease.
`This is an area of significant unmet medical need for which there has been no new treatment in over a decade.
`
`Let's turn to slide number 11. Along with lifitegrast, our commitment to building an innovative pipeline in
`ophthalmology continues with SHP640, which we formerly called FST-100, which is a late-stage asset we added to
`the portfolio through our recent acquisition of Foresight Biotherapeutics, which took place in August. 5.9 million cases
`of infectious conjunctivitis – by many also known as pink eye – occur in the U.S. each year, and 5.4 million cases in
`the EU. Unfortunately, existing therapies may not treat the cause of this condition, so many physicians are unable to
`differentiate between the viral and the bacterial form of so-called pink eye. If approved, SHP640 has the potential to
`become the first agent to treat both the viral and the bacterial form of conjunctivitis, addressing a significant unmet
`medical need.
`
`With two Phase 2 studies in adenoviral conjunctivitis already complete, we discussed with the FDA a path forward for
`Phase 3 studies. We are currently in the trial design phase and anticipate the Phase 3 program to include
`investigation for the treatment of bacterial conjunctivitis. Overall, we are excited about the potential of SHP640. It's a
`clear strategic fit with lifitegrast and the overall ophthalmics business unit, treating a serious and highly prevalent eye
`condition. And as a reminder, we now have three unique clinical programs in ophthalmology: lifitegrast for the
`treatment of dry eye disease, SHP607 for the prevention of retinopathy of prematurity, and also now SHP640 for the
`treatment of infective conjunctivitis.
`
`Let's all now move to slide number 12. Starting with INTUNIV, as mentioned, we recently received marketing approval
`in the EU for the treatment of ADHD in children and adolescents for whom stimulants are not suitable, not tolerated, or
`have been shown to be ineffective. When we consider the complexities and different manifestations of ADHD in
`children and adolescents, it is incredibly important that physicians will soon be able to choose a non-stimulant option
`that may best suit the needs of their patients. We are preparing for launches in the EU in 2016 and expect to make
`the product available initially in the UK and in Germany and then to expand to other countries in Europe.
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`In the coming months, we also expect to advance four programs into Phase 3, the first time this has occurred in
`Shire's history. Together, these four products have the potential to generate several hundreds of millions of dollars in
`sales. This includes plans to initiate this month a Phase 3 trial of CINRYZE in adults with antibody-mediated rejection
`in renal transplant recipients, representing a potentially new indication for CINRYZE. Earlier this month, the FDA
`granted fast-track destination for CINRYZE in this important indication. We also hope to initiate a Phase 3 study of the
`subcutaneous formulation of CINRYZE in the near future, having recently submitted an IND to the FDA.
`
`During the first half of next year, we intend to initiate a Phase 3 program of SHP620, also called maribavir, in
`cytomegalovirus infection in transplant patients. Finally, we have been in discussions with the FDA regarding a path
`forward for Phase 3 studies of SHP621, which is our oral budesonide suspension for use in the treatment of
`eosinophilic esophagitis, which came to us through the acquisition of Meritage Pharma, also earlier this year. We
`expect these studies to commence by early 2016.
`
`Well, let me now turn the call over to Jeff Poulton, Shire's CFO, to review third quarter financial results in more detail.
`Jeff?
`
`Jeffrey Poulton - Chief Financial Officer & Director
`
`Thank you, Flemming. Good morning and good afternoon, everyone. As Flemming has highlighted, our core business
`delivered strong results in Q3 as we continued to position the business for longer-term growth.
`
`Today I'd like to focus on four areas of performance. First, I will provide detail on the drivers of the double-digit sales
`growth from our core underlying business. Second, I will cover the delivery of a third quarter non-GAAP EBITDA
`margin of 43%. Third, I will cover our continued strong cash generation. And finally I will reiterate our guidance that
`was upgraded during our second quarter call to mid to high single digit non-GAAP diluted EPS growth for 2015.
`
`Moving to slide 14, you can see the components of our third quarter performance. Product sales were approximately
`$1.6 billion or 6% above the prior year in constant exchange rates. Excluding INTUNIV, product sales were up 12% at
`constant exchange rates, as our underlying business continues to deliver strong growth. Royalties and other
`revenues continue to benefit from the SENSIPAR royalty stream acquired as part of the NPS transaction, with
`royalties increasing approximately $35 million from the same period in the prior year.
`
`We've delivered non-GAAP EBITDA of $758 million in the quarter, representing 43% of product sales. Our margins
`are down slightly from 2014, as we are investing in our future growth drivers, including VYVANSE for binge-eating
`disorder, GATTEX/REVESTIVE, NATPARA and lifitegrast. The 43% delivered in Q3 represents an increase from our
`Q2 operating margin as we move beyond the initial launch phase of the VYVANSE BED indication.
`
`Our third quarter non-GAAP dilutive earnings per ADS increased to $3.24, or up 11% from the prior year. At a
`constant exchange rate, this represents a 15% increase. Our non-GAAP diluted EPS benefited from a low non-GAAP
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