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Shire plc’s first quarter 2012 earnings (excluding special items) of $1.48 per American Depositary Share (ADS), were 20% above the year-ago earnings. The year-over-year increase was attributed to higher revenue in the reported quarter. The Zacks Consensus Estimate was $1.56 per share.

Revenues increased 21% to $1.17 billion, above the Zacks Consensus Estimate of $1.15 billion. Revenues were driven by higher product sales.

Quarter in Detail

Product sales went up 24% to $1.11 billion. Products that performed well during the quarter include Vyvanse (up 29% to $260 million), Replagal (up 28% to $134 million), Elaprase (up 21% to $126 million), Vpriv (up 22% to $72 million) and Intuniv (up 63% to $69 million).

Firazyr sales were $20 million, up from $15 million reported in the previous quarter. Dermagraft, which was added to Shire’s portfolio after the Advanced BioHealing Inc. acquisition, generated revenues of $49 million in the quarter.

Adderall XR first quarter sales remained flat year over year as an increase in prescription demand was offset by higher sales deductions. Sales deductions of Adderall XR are expected in the range of 60% – 65% of gross sales of the product in 2012.

Royalties decreased 24% to $56.3 million. The decrease in royalty revenue was primarily due to a 62% fall in 3TC and Zeffix royalties (combined $13.6 million) partially offset by an increase in Adderall XR (up 51% to $25.3 million) and Fosrenol (up 23% to $10.0 million) royalties.

Research & development (R&D) costs climbed 10% to $190.9 million. Selling, general & administrative (SG&A) expenses increased 25% to $440.8 million. The higher SG&A expenses reflected incorporation Advanced BioHealing Inc.’s costs.

Outlook

For 2012, Shire is anticipating revenues in low-teens and earnings growth. Product sales are expected to grow in the mid-teens range in 2012. Royalty income along with other revenue is expected to decline 15% – 25%.

Gross margins are expected to be slightly lower than 2011 due to the Advanced BioHealing Inc. acquisition. Shire expects 2012 combined R&D and SG&A expenses (adjusted) to increase in the range of 12% – 14% (previously guided: 10% – 12%) on a year-over-year basis.

Our Recommendation

The threat of generic competition, which several of Shire’s products are already facing or are likely to face, puts immense pressure on the company’s pipeline.

Shire is seeking to expand its pipeline through acquisitions and collaborations. Shire’s acquisition list includes Pervasis Therapeutics (almost all the assets), FerroKin Biosciences, Inc, Movetis and Advanced BioHealing Inc.

The Ferrokin acquisition along with the collaboration deal with Sangamo BioSciences, Inc. (SGMO - Snapshot Report) significantly strengthens the company’s hematology portfolio. We are encouraged by Shire’s efforts to develop its pipeline but prefer to remain on the sidelines until we get more visibility on the candidates.

We currently have a Neutral recommendation on Shire. The stock carries a Zacks #3 Rank (Neutral rating) in the short run.

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