Shire hikes guidance after Baxalta adds to forecast-beating second quarter

Shire has upgraded its full year guidance and upped its interim dividend after it enjoyed a strong performance in the first half of the year and completed the acquisition of Baxalta.

With the Baxalta acquisition incorporated since 3 June and existing drugs generating double digit revenue growth, Shire now expects to increase diluted earnings per American Depositary Share (ADS) to rise to between $12.70 and $13.10 from the $11.68 produced last year, an increase of 8.8-12.2% that is a marked improvement from the 7-10% guidance range issued alongside first-quarter results in April.

The FTSE 100 drug maker said the higher earnings were as a result of higher revenue expectations of at least a 77% rise to $10.8-11bn thanks to the Baxalta impact, though gross margins of 77-79% were down from April's guidance.

Chief executive Flemming Ornskov said the Baxalta integration was progressing "very well" and, with the new operating structure in place, the board's expectations for operating cost synergies had been lifted by 40% to at least $700m by the third year after the closing of the deal.

With almost a full month from Baxalta, Shire generated a 57% jump in total revenues to $2.4bn in the three months ended 30 June compared to the same period a year ago, or a 19% increase for the existing Shire franchises. The consensus forecast was for revenues of $2.28bn.

Vyvanse sales were up 22% year-on-year to $517.7m, above consensus; Adderall XR sales were up 18% to $101.8m to beat consensus; Lialda was up 23% to $193.7m and also a beat; and Cinryze jumped 25% to $173m also a beat. Hemophilia sales were $275.6m versus a forecasted $232m; inhibitor therapy sales were $74m versus $69m estimates; and Immunoglobulin therapeutics sales were the only blot on the copybook as they came in at $138.2m versus expectations of $153m.

Non-GAAP operating income was also up 57% to $0.97bn. At the statutory reporting level income fell 27% and there was a net loss of $162m, though on a non-GAAP basis that excludes amortisation and other asset impairments, net income rose 48% to $0.77bn.

Non-GAAP diluted earnings per ADS rose 28% at constant exchange rates to $3.38, beating the consensus forecast of $3.12.

Shire, which said it expects to settle the civil investigation for roughly $350m plus interest after reaching an agreement with the US Department of Justice regarding its Dermagraft investigation, announced an interim dividend of 4.63 cents per share, translating into 3.51p per share, an increase of 30% on last year thanks in part to the weakening of sterling.

As a result of the acquisition, net debt has leapt from $1.5bn in December to a hefty $23.7bn at the end of June.

Analyst Nicholas Hyett at Hargreaves Lansdown said if all goes to plan Shire and its shareholders should do very well from the Baxalta deal, though cautioned that big deals always come with risks and that the increase in leverage could potentially hinder dividend growth if all does not go smoothly.

"Sales of key products may be rising rapidly but come the early 2020s, Shire is facing a patent cliff. The acquisition of Baxalta significantly strengthens and diversifies Shire's drug pipeline, which should help to take up the slack from future patent expiries," he said.

"The deal also bumps up Shire's exposure to rare diseases, and reduces its dependence on individual treatments, although Vyvanse still accounts for 22% of sales this quarter. The combined group has market leading presence in haemophilia and positions in immunology and cancer, as well as substantially increased global scale, with operations in 100 markets."

Hyett highlighted potential headwinds for Shire such as growing competitive threats from new drugs in the haematology market and question marks over whether the anticipated cost synergies can be delivered.