Shire plc (SHPG - Snapshot Report) posted second-quarter 2012 earnings (excluding special items) of $1.68 per American Depositary Share (ADS), beating the Zacks Consensus Estimate of $1.52 per ADS. The reported quarter’s earnings were up 26% from the year-ago figure due to higher revenues.

Revenues increased 14% to $1.21 billion, above the Zacks Consensus Estimate of $1.19 billion driven by higher product sales.

Quarter in Detail

Product sales went up 16% to $1.15 billion. Products that performed well during the quarter include Vyvanse (up 43% to $266.2 million), Replagal (up 3% to $123.2 million), Vpriv (up 31% to $82.7 million) and Intuniv (up 16% to $69.1 million).

Firazyr sales were $31.7 million, up 58.5% from the previous quarter. Dermagraft, which was added to Shire’s portfolio following the Advanced BioHealing Inc. acquisition, generated revenues of $52.4 million in the quarter.

Adderall XR’s second-quarter sales decreased 9% to $133.9 million due to lower prescription demand and destocking of the drug. We note that in June 2012, the US Food and Drug Administration (FDA) approved the abbreviated new drug application (ANDA) filed by Actavis for its generic version of Adderall XR. Actavis is in the process of being acquired by Watson Pharmaceuticals Inc. ().

The company has two authorized generic partners – Teva Pharmaceuticals (TEVA - Analyst Report) and Impax Laboratories (IPXL - Snapshot Report). We believe that the entry of additional generic versions of Adderall XR will impact Adderall XR revenues unfavorably.

Royalties decreased 11% to $56.3 million. The decrease in royalty revenue was primarily due to a fall in 3TC and Zeffix royalties (down 6% to $10.6 million) and Adderall XR (down 5% to $25.7 million).

Research & development (R&D) costs climbed 20% to $205.2 million. The increase was attributable to the company’s efforts to develop its pipeline. Selling, general & administrative (SG&A) expenses increased 5% to $409.6 million. The higher SG&A expenses were due to inclusion of Advanced BioHealing Inc.’s costs.

Outlook

For 2012, Shire expects revenues and earnings to exhibit double-digit growth. Product sales are expected to grow in the low-teens in 2012 (previous guidance: mid-teen range). Foreign exchange movements and generic competition for Adderall XR are expected to hamper product sales.

Royalty income, along with other revenue, is expected to decline 25% – 35% (previous guidance: 15% – 25%) due to lower royalties from Impax Lab. Post the approval of Actavis’ generic version of Adderall XR, Impax Lab is liable to pay significantly less royalties to Shire.

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

Our Recommendation

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

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 boost its pipeline through acquisitions and collaborations. Even though encouraged by Shire’s efforts to develop its pipeline, we prefer to remain on the sidelines until we get more visibility its development.