FRX Forest Road Acquisition Corp

Shire (SHPG) reported third quarter 2013 earnings (excluding special items and amortization) of $1.77 per American Depositary Share (ADS), up from $1.36 per ADS in the year-ago quarter.

The Zacks Consensus Estimate was $1.64. Excluding special items but including amortization expense, earnings were $1.61 per ADS.

Quarterly revenues increased 12% to $1.2 billion, in line with the Zacks Consensus Estimate driven by a robust growth in product sales.

Quarter in Detail

Product sales went up 13% to $1.2 billion. The growth was driven by attention deficit hyperactivity disorder (ADHD) drugs Vyvanse (up 21% to $299 million) and Intuniv (up 17% to $80.8 million), Hunter Syndrome drug Elaprase (up 17% to $129.1 million), ulcerative colitis drugs Lialda (up 36% to $141.9 million) and Pentasa (up 5% to $70.6 million), and hereditary angioedema drug Firazyr (up 106% to $62.6 million).

However, Dermagraft (indicated for diabetic foot ulcers) sales were down 29% to $23.9 million primarily due to the ongoing restructuring of the Regenerative Medicine sales and marketing organization. Moreover, sales of Fabry disease drug Replagal (down 10% to $108.5 million) were impacted by increased competition from the return of Sanofi’s (SNY) Fabrazyme. Adderall XR, indicated for ADHD, also decreased 20% to $81.4 million, due to generic competition.

Royalties declined 10% to $37.6 million in the third quarter primarily due to lower Adderall XR royalties.

Adjusted research & development (R&D) costs climbed 2% to $222.8 million in the reported quarter. Increased investments in R&D programs contributed to the rise. Selling, general & administrative (SG&A) expenses increased 1% to $371.7 million.

In the fourth quarter of 2012, Shire initiated a share repurchase program of up to $500 million. As of Oct 22, 2013, Shire had repurchased 9.8 million shares for $299 million.

Earnings Outlook Upgraded

Shire now expects to achieve mid-to-high teens earnings growth in 2013 as compared to the earlier estimate of double-digits earnings growth. Shire is currently focusing on simplifying its business structure under one head which is driving cost benefits, resulting in a second consecutive increase in guidance. The Zacks Consensus Estimate currently stands at $6.87.

For 2013, Shire continues to expect product sales growth in the mid-to-high single digits while sales growth in the fourth quarter is expected to be at a similar level as in the third quarter. Royalties and other revenues are expected to decline by 35% – 40% in 2013 from 2012 levels.

Shire now expects combined R&D and SG&A expenses to be 1%-3% lower than 2012 as compared to the previous expectation of being marginally higher versus 2012.

Pipeline Update

Shire had discontinued the development of Dermagraft for the additional indication of epidermolysis bullosa.

The acquisition of Premacure in Mar 2013 has added a potential protein replacement therapy, SHP607, for the prevention of retinopathy of prematurity (ROP) to Shire’s pipeline. A phase II multicenter trial is ongoing in Sweden and Shire expects headline data from this trial in the first half of 2015.

Our Take

We are impressed by strong third quarter results and consecutive increase in earnings guidance. Shire is well placed in the ADHD market driven by key drug Vyvanse, which is now being developed for additional indications as well.

Meanwhile, Shire’s efforts to realign its business structure to drive growth and innovation are noteworthy. The realignment is expected to drive improved operating leverage in 2014 and 2015.

Investors reacted positively to the results as shares gained 11.71% in regular trading.

Shire currently carries a Zacks Rank #3 (Hold). Right now, ViroPharma (VPHM) and Forest Laboratories (FRX) look attractive. While ViroPharma carries a Zacks Rank #1 (Strong Buy), Forest Labs is a Zacks Rank #2 (Buy) stock.

 
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