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Shire (SHPG - Analyst Report) reported fourth quarter 2013 earnings (excluding special items and amortization) of $2.26 per American Depositary Share (ADS), up from $1.66 per ADS in the year-ago quarter and beating the Zacks Consensus Estimate of $2.03.

Quarterly revenues increased 12% to $1.3 billion, in line with the Zacks Consensus Estimate. The increase in revenues was driven by a robust growth in product sales.

Quarter in Detail

Product sales went up 19% to $1.3 billion. The growth was driven by attention deficit hyperactivity disorder (ADHD) drug Vyvanse (up 29% to $330 million) ulcerative colitis drug Lialda (up 34% to $149 million) and Vpriv (up 17% to $91 million), and hereditary angioedema (HAE) drug Firazyr (up 134% to $81 million). Sales of Fabry disease drug Replagal (up 11% to $131.3 million).

However, sales of thrombocythemia drug Xagrid (down 5% to $25.3 million) and ulcerative colitis drug Pentasa (down 5% to $65.4 million) declined. Royalties declined 53% to $41.3 million in the fourth quarter primarily due to lower Adderall XR royalties.

Adjusted research & development (R&D) costs declined 3.7% to $222.0 million in the reported quarter. Selling, general & administrative (SG&A) expenses edged up 0.7% to $387.7 million.

Full Year 2013 Details

Shire reported full year 2013 revenues of $4.9 million, up 9% from a year ago and in line with the Zacks Consensus Estimate. Earnings per share came in at $7.66, up 23% from the year ago and easily beating the Zacks Consensus Estimate of $7.27. 

2014 Outlook

We remind investors that Shire acquired all of the outstanding shares of erstwhile ViroPharma for $50 per share in cash or approximately $4.23 billion. 

Shire expects to achieve mid-to-high teens product sales growth in 2014 driven by addition of ViroPharma business. Royalties and other revenues are expected to decline by 10% – 15% in 2014 from 2013 levels. Shire expects earnings in 2014 to grow at a similar growth rate as in 2013 (roughly 23.0%). 

Pipeline Update

Shire is looking to expand Firazyr’s label into ACE inhibitor-induced angioedema. Following the review and discussion of the data from a small investigator sponsored trial with the EU agencies, Shire expects to withdraw its supplemental Marketing Authorization Application (MAA) which was submitted earlier in 2012. 

Shire will now resubmit its MAA with the data from the ongoing phase III trial which was initiated in the fourth quarter of 2013. This trial will now support both EU and U.S. registrations.

Meanwhile, Shire was evaluating the efficacy and safety of Vyvanse as an adjunctive treatment for major depressive disorder (MDD) in adults who did not adequately respond to antidepressants. However, Vyvanse did not meet the primary efficacy endpoint in the phase III trials and Shire has decided to discontinue the clinical development program.

Nevertheless, Shire is evaluating Vyvanse for the indication of binge eating disorder (BED) and expects to submit a Supplemental New Drug Application (sNDA) to the U.S. Food and Drug Administration (FDA) later in the year.

Shire is also evaluating lifitegrast for the treatment of dry eye disease. However, lifitegrast did not meet its prespecified co-primary endpoint in a phase III study. Hence, Shire intends to investigate the full data from the study and plans to further discuss with the FDA in the first half of 2014 on the future development program.

Other Developments

Shire announced that the chief financial officer (CFO), Graham Hetherington, has resigned and will step down effective Mar 2014.

Our Take

We are impressed by strong fourth quarter results. Shire is well placed in the ADHD market driven by key drug Vyvanse and is working on a label expansion of the drug. The acquisition of ViroPharma is expected to boost the bottom line by 7% in 2014 as compared to the earlier projected range of 5%.

The addition of ViroPharma’s lead drug, Cinryze, will enable it to build a rare disease business (estimated at $2 billion). ViroPharma's lead drug Cinryze is approved in the U.S. for routine prophylaxis against angioedema attacks in adolescent and adults with hereditary HAE.

Cinryze complements Shire's Firazyr which is indicated for the on-demand treatment of acute HAE attacks.  We are positive on Shire’s acquisition of ViroPharma which will strengthen its HAE franchise as Cinryze and Firazyr are two complementary therapies for the treatment of HAE.

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.

Shire currently carries a Zacks Rank #2 (Buy). Other pharma stocks that look attractive at current levels include Endocyte Inc. (ECYT - Snapshot Report), Forest Laboratories (FRX - Analyst Report) and Auxilium Pharmaceuticals Ltd. (AUXL - Analyst Report). All the three stocks carry a Zacks Rank #1 (Strong Buy).

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