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Shire Misses on All Fronts

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Shire’s (SHPG - Free Report) third quarter 2012 earnings (excluding special items) of $1.36 per American Depositary Share (ADS) fell short of the Zacks Consensus Estimate of $1.44 per ADS. The earnings miss was primarily attributable to lower-than-expected revenues. However, the reported quarter’s adjusted earnings increased 6% from the year-ago period due to higher product sales.

Quarter in Detail

Quarterly revenues increased 1.3% to $1,100 million. The Zacks Consensus Estimate came in at $1,163 million.

Product sales went up 4% to $1,055 million. Product sales were boosted by strong performances of Vyvanse (up 24% to $247.1 million), Lialda (up 16% to $104.4 million), Vpriv (up 16% to $74.9 million) and Intuniv (up 23% to $69 million). Foreign exchange movements impacted product sales negatively by $28 million during the third quarter of 2012.

Adderall XR performed disappointingly in the third quarter of 2012. Sales of the drug decreased 32% to $133.9 million, hurt by generic competition. 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. .

Royalties declined 33% to $41.8 million. Royalty revenue mainly comprises income earned from the sale of the authorized generic version of Adderall XR, 3TC and Zeffix. During third quarter 2012, royalties from Impax Laboratories Inc. for Adderall XR declined 51% to $11.2 million, due to generic competition. Royalties on 3TC and Zeffix declined 39% to $10.6 million.

Adjusted research & development (R&D) costs climbed 22% to $219.2 million in the reported quarter. Increased investments in R&D programs contributed to the rise. Selling, general & administrative (SG&A) expenses decreased 5% to $368.7 million. The decline was primarily attributable to the cost-cutting measures at Shire.


For 2012, Shire expects earnings to exhibit double-digit growth. Product sales are expected to grow by 12% in 2012. Royalty income, along with other revenue, is expected to decline 15% – 20% (previous guidance: decline of 25% – 35%).

Gross margins are expected to be slightly lower than 2011. Shire expects year-over-year growth in 2012 combined R&D and SG&A expenses (adjusted), at the lower end of the previously forecasted range of 10% – 12%. Management at Shire also stated that it was confident of delivering impressive earnings growth in 2013 as well.

Our Recommendation

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

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