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Shire (SHPG - Analyst Report) reported second quarter 2013 earnings (excluding special items and amortization) of $1.79 per American Depositary Share (ADS), up from $1.68 per ADS in the year-ago quarter. The Zacks Consensus Estimate was $1.66.

Excluding special items but including amortization expense, earnings per ADS were $1.53.

Quarterly revenues increased 6% to $1.3 billion, in line with the Zacks Consensus Estimate, driven by a robust growth in product sales.

Quarter in Detail

Product sales went up 7% to $1.2 billion. The growth was driven by attention deficit hyperactivity disorder (ADHD) drugs Vyvanse (up 13% to $300 million) and Intuniv (up 31% to $90 million), Hunter Syndrome drug Elaprase (up 22% to $149 million), ulcerative colitis drugs Lialda (up 46% to $137.5 million) and Pentasa (up 15% to $74 million) and hereditary angioedema drug Firazyr (up 56% to $50 million).

However, Dermagraft (indicated for diabetic foot ulcers) was down 57% to $22 million, primarily due to the ongoing restructuring of the Regenerative Medicine sales and marketing organization.

Moreover, sales of Fabry disease drug Replagal (down 7% to $114 million) were impacted by increased competition from the return of Sanofi’s (SNY - Analyst Report) Fabrazyme.

Adderall XR, indicated for ADHD, also decreased 16% to $112.3 million, due to generic competition.

Royalties decreased 36% to $36.3 million primarily due to lower Adderall XR royalties received from Impax Laboratories (IPXL - Snapshot Report) as a result of lower volumes and a lower royalty rate payable since the launch of a new generic product in 2012.

Adjusted research & development (R&D) costs increased 15% to $235.9 million in the reported quarter. Selling, general & administrative (SG&A) expenses decreased 5% to $390.4 million.

In the fourth quarter of 2012, Shire initiated a share repurchase program of up to $500 million. As of Jul 24, 2013, Shire repurchased 9.6 million shares at a cost of $289.9 million.

Outlook Upgraded

Shire now expects to achieve double digit earnings growth in 2013. The Zacks Consensus Estimate currently stands at $6.72.

For 2013, Shire expects product sales growth in the mid-to-high single digits on the back of improved performance in the second half of 2013.

Royalties and other revenues are now expected to decline by 35% – 40% in 2013 from 2012 levels, compared to the previous guidance of a decline of 30%-40%.

Shire now projects combined R&D and SG&A expenses to be marginally higher in 2013 versus 2012 as compared to the previous estimate of a low single digit growth.

Pipeline Update

Shire’s acquisition of SARcode added a phase III candidate, lifitegrast, to its pipeline, which is being developed for the signs and symptoms of dry eye disease. The phase III studies are fully enrolled and Shire expects data from the same in the first quarter of 2014.

Meanwhile, Shire continues to evaluate Vyvanse for binge eating and major depressive disorders. Phase III studies on binge eating disorders are fully enrolled and data is expected in 2014.

We are impressed by strong second quarter results and pipeline progress. Shire is well placed in the ADHD market driven by key drug Vyvanse which is now being developed for additional indications as well. We are also encouraged by Shire’s recent acquisitions with an aim to develop a new business unit in ophthalmology.

Shire currently carries a Zacks Rank #3 (Hold). Right now, Jazz Pharmaceuticals (JAZZ - Analyst Report) looks attractive with a Zacks Rank #1 (Strong Buy).

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