Shire reports strong earnings growth in Q3 2017; reiterates full year guidance

October 27, 2017

Product sales increased 7%, mainly driven by rapid growth in Immunology franchise

Generated $1.1 billion operating cash flow; remain on-track to achieve our year-end debt target

On track to file a NDA for SHP555 in chronic constipation in Q4 2017 and a BLA for SHP643 in hereditary angioedema by late 2017 or early 2018

Completed manufacturing review and identified more than $100 million in projected additional annual savings beginning in 2019 and expected to increase to $300 million annually by 2023

October 27, 2017 – Shire plc (Shire) (LSE: SHP, NASDAQ: SHPG) announces unaudited results for the three months ended September 30, 2017.

Flemming Ornskov, M.D., M.P.H., Shire Chief Executive Officer, commented:

“We delivered strong growth this quarter with product sales up 7% to $3.5 billion despite a CINRYZE supply shortage and a LIALDA generic entry. The Immunology franchise grew by 32%, and we saw significant contributions across our broad and diverse portfolio, evidencing our continued focus on commercial execution. We delivered strong Non GAAP EPS growth of 20%, and operating cash flow more than doubled to $1.1 billion, which enabled us to further reduce our debt.

“We experienced a product shortage of CINRYZE during the quarter due to a manufacturing interruption at a third-party manufacturer. The issue has been addressed and production of CINRYZE has resumed. Product was shipped to customers in early October. To enhance reliability of supply, we plan to start in-house production of CINRYZE by Q1 2018, subject to FDA approval, as sustainable and unconstrained CINRYZE supply is a top priority.

“We are reiterating our 2017 full year guidance, and I look forward to updating you on the Neuroscience strategic review by year end. I continue to be highly confident in the strength and durability of our business.”

Financial Highlights	Q3 2017⁽¹⁾	Growth⁽¹⁾	Non GAAP CER⁽¹⁾⁽²⁾
Product sales	$3,534 million	+7%	+6%
Total revenues	$3,698 million	+7%	+6%

Operating income from continuing operations	$709 million	N/M
Non GAAP operating income⁽²⁾	$1,498 million	+19%	+18%

Net income margin⁽³⁾⁽⁴⁾	15%	26ppc
Non GAAP EBITDA margin⁽²⁾⁽⁴⁾	44%	5ppc

Net income	$551 million	N/M
Non GAAP net income⁽²⁾	$1,158 million	+20%

Diluted earnings per ADS⁽⁵⁾	$1.81	N/M
Non GAAP diluted earnings per ADS⁽²⁾⁽⁵⁾	$3.81	+20%	+19%

Net cash provided by operating activities	$1,055 million	+101%
Non GAAP free cash flow⁽²⁾	$901 million	+128%

⁽¹⁾ Results include Baxalta Inc. (Baxalta) (acquired on June 3, 2016), unless otherwise noted. Percentages compare to equivalent 2016 period. ⁽²⁾ The Non GAAP financial measures included within this release are explained on pages 27 – 28, and are reconciled to the most directly comparable financial measures prepared in accordance with US GAAP on pages 21 – 23. ⁽³⁾ US GAAP net income as a percentage of total revenues. ⁽⁴⁾ Percentage point change (ppc). ⁽⁵⁾ Diluted weighted average number of ordinary shares of 912 million.

Product sales growth

Delivered product sales growth of 7%, including robust demand for our Immunology franchise, up 32%.
Successful early trajectory of MYDAYIS since U.S. launch on August 28, 2017, with over 3,000 physicians prescribing to over 11,000 patients as of October 17, 2017.
Genetic Diseases was impacted by lower product sales for CINRYZE due to a product shortage resulting from a manufacturing interruption. The manufacturing issue has been addressed and production of CINRYZE resumed. Approximately $100 million of product was shipped to customers in early October.
Increasing demand for XIIDRA; 9% script growth since Q2 2017.

Earnings growth

Generated Non GAAP earnings per ADS of $3.81, underscoring continued focus on commercial excellence and operating efficiency.
Reported Non GAAP EBITDA margin of 44% for the quarter; on-track to achieve at least $700 million in synergies by Year 3 as we continued to progress the Baxalta integration.
Completed manufacturing network review; identified more than $100 million in projected additional annual savings beginning in 2019. Expected to increase to $300 million annually by 2023.

Strong cash flow

Strong operating cash flow enabled $920 million reduction in Non GAAP net debt since June 30, 2017; remain on-track to achieve our year-end debt target.

Product and Pipeline Highlights

Regulatory updates

Submitted an application to the U.S. Food and Drug Administration (FDA) to enable a second source of CINRYZE production at an in-house manufacturing facility to enhance reliability of supply.
Submitted lifitegrast Marketing Authorization Application for treatment of dry eye disease in Europe; Canadian approval anticipated by Q1 2018.
Received FDA Fast Track Designation for SHP607 for the prevention of chronic lung disease in extremely premature infants.
Positive opinion from Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) recommending the marketing authorization for lyophilized ONCASPAR (pegaspargase), as a component of antineoplastic combination therapy in acute lymphoblastic leukemia (ALL) in all ages.
Received FDA Orphan Drug Designation and Investigational New Drug (IND) status for SHP654 for the treatment of hemophilia A.
Granted a label extension for FIRAZYR in Europe by the European Commission (EC), broadening its use to the treatment of acute attacks of HAE in adolescents and children aged 2 years and older.
On track to file a Biologics License Application (BLA) for SHP643 in late 2017 or early 2018.
On track to file a New Drug Application (NDA) for SHP555 in late Q4 2017.

Clinical and business development updates

Strategic review of Neuroscience franchise on track; update planned for year end.
Reported positive topline Phase 3 results for subcutaneous SHP616 Liquid in patients 12 years of age or older with symptomatic Hereditary Angioedema (HAE).
Reported positive topline results for INTUNIV in Japan, evaluated in Phase 3 clinical trial in adults with ADHD.

FINANCIAL SUMMARY - THIRD QUARTER 2017 COMPARED TO THIRD QUARTER 2016

Revenues

Product sales increased 7% to $3,534 million (Q3 2016: $3,315 million), primarily due to strong growth from our Immunology franchise, up 32%, Neuroscience franchise, up 12% and our Hematology franchise, up 4%. Product sales also benefited from a full quarter of Ophthalmics product sales. Growth was held back by the launch of generic competition for LIALDA and a supply constraint related to CINRYZE, which negatively impacted our Internal Medicine and Genetic Diseases franchises, down 24% and 7%, respectively.
Royalties and other revenues increased 20% to $164 million, primarily due to an increase in royalty streams acquired with Dyax and SENSIPAR royalties.

Operating results

Operating income was $709 million (Q3 2016: operating loss of $406 million). The increase was primarily due to lower expense relating to the unwind of inventory fair value adjustments and costs related to licensing arrangements, combined with higher revenues, partially offset by higher amortization of acquired intangible assets.
Non GAAP operating income increased 19% to $1,498 million (Q3 2016: $1,254 million), primarily due to higher revenues and lower expenses as a percentage of total revenues driven by operating efficiencies which were impacted by the realization of Baxalta operating expense synergies.
Non GAAP EBITDA margin as a percentage of total revenues increased to 44% (Q3 2016: 39%), primarily due to higher revenues and lower expenses as a percentage of total revenues, driven by operating efficiencies which were impacted by the realization of Baxalta operating expense synergies.

Earnings per share (EPS)

Diluted earnings per American Depositary Shares (ADS) were $1.81 (Q3 2016: diluted losses per ADS of $1.29). The increase is primarily due to higher operating income from lower expenses relating to the unwind of inventory fair value adjustments and costs related to licensing arrangements, combined with higher revenues.
Non GAAP diluted earnings per ADS increased 20% to $3.81 (Q3 2016: $3.17), due to higher Non GAAP operating income primarily related to higher revenues and higher gross margin.

Cash flows

Net cash provided by operating activities increased 101% to $1,055 million (Q3 2016: $526 million), primarily due to strong cash receipts from higher sales and operating profitability, and lower Baxalta acquisition and integration payments. Also, Q3 2016 net cash provided by operating activities was negatively impacted by a payment associated with the termination of a biosimilar collaboration acquired with Baxalta.
Non GAAP free cash flow increased 128% to $901 million (Q3 2016: $395 million), driven by the growth in net cash provided by operating activities noted above, combined with a decrease in capital expenditures of $46 million.

Debt

Non GAAP net debt at September 30, 2017 decreased $2,063 million since December 31, 2016, to $20,376 million (December 31, 2016: $22,439 million). The decrease was primarily due to a $2,403 million net cash repayment of debt, partially offset by a lower cash balance. Non GAAP net debt represents aggregate long and short term borrowings of $20,236 million, and capital leases of $349 million, partially offset by cash and cash equivalents of $209 million.

OUTLOOK

We are reiterating our guidance from Q2 2017.

The guidance incorporates accelerated synergy capture as well as the impact of LIALDA generic competition. Our depreciation estimate for the year is $450 - $500 million, and we anticipate capital expenditures of $800 - $900 million.

The diluted earnings per ADS forecast assumes a weighted average number of 914 million fully diluted ordinary shares outstanding for 2017.

Full Year 2017	US GAAP Outlook	Non GAAP Outlook⁽¹⁾
Total product sales	$14.3 - $14.6 billion	$14.3 - $14.6 billion
Royalties & other revenues	$600 - $700 million	$600 - $700 million
Gross margin as a percentage of total revenue⁽²⁾	67.5% - 69.5%	74.5% - 76.5%
Combined R&D and SG&A	$5.3 - $5.5 billion	$4.9 - $5.1 billion
Net interest/other	$500 - $600 million	$500 - $600 million
Effective tax rate	~7%	16% - 17%
Diluted earnings per ADS⁽³⁾	$5.65 - $6.05	$14.80 - $15.20

⁽¹⁾ For a list of items excluded from Non GAAP Outlook, refer to pages 27 - 28 of this release.
⁽²⁾ Gross margin as a percentage of total revenues excludes amortization of acquired intangible assets
⁽³⁾ See page 23 for a reconciliation between US GAAP diluted earnings per ADS and Non GAAP diluted earnings per ADS.

RECENT DEVELOPMENTS

Products

FIRAZYR for the treatment of HAE in Europe

On October 26, 2017, Shire announced that the EC has approved a label extension for FIRAZYR, broadening its use to the treatment of acute attacks of HAE in adolescents and children aged 2 years and older.

INTUNIV for the treatment of attention deficit hyperactivity disorder (ADHD) in Japan

On September 20, 2017, Shire and its partner in Japan, Shionogi & Co., Ltd, announced positive topline results for a Phase 3 study evaluating INTUNIV in adult patients with ADHD in Japan.

MYDAYIS for the treatment of ADHD

On August 28, 2017, Shire announced that MYDAYIS was available by prescription in the United States. The FDA approved MYDAYIS on June 20, 2017 for patients 13 years and older with ADHD.

Lifitegrast for the treatment of dry eye disease (DED) in Europe

On August 15, 2017, Shire announced that the Marketing Authorization Application for lifitegrast, submitted on August 7, 2017, was validated by the UK as the Reference Member State involved in the Decentralized Procedure.

Pipeline

SHP654 for the treatment of hemophilia A

On October 25, 2017, Shire announced that the FDA awarded Orphan Drug Designation to SHP654 (also designated as BAX 888), an investigational factor VIII (FVIII) gene therapy for the treatment of hemophilia A. The FDA also granted Shire IND status for SHP654.

SHP674 (ONCASPAR) for the treatment of acute lymphoblastic leukemia

On October 12, 2017, Shire received a positive opinion from the CHMP recommending marketing authorization for Lyophilized ONCASPAR for use as a component of antineoplastic combination therapy in acute lymphoblastic leukemia (ALL) in all ages.

SHP607 for the treatment of complications of prematurity

On September 12, 2017, Shire announced that the FDA has granted Fast Track designation for SHP607 for the prevention of chronic lung disease in extremely premature infants. SHP607 is currently in Phase 2 clinical development.

SHP616 for the treatment of HAE

On September 11, 2017, Shire announced positive topline Phase 3 results for the SAHARA study that evaluated the efficacy and safety of subcutaneously administered C1 esterase inhibitor [human] Liquid for Injection in patients 12 years of age or older with symptomatic HAE.

Board Changes

On August 21, 2017, Shire announced that Jeff Poulton, Chief Financial Officer, will be leaving Shire. The Board has commenced a formal search for a successor and Jeff will continue to serve in his current role as this search progresses. During this transition period, Jeff will remain on the Executive Committee and on the Board of Directors of Shire plc until the end of the year.

In addition, and following the announcement that Dominic Blakemore will be appointed Group Chief Executive of Compass Group PLC on April 1, 2018, the Board has approved the appointment of Sara Mathew as Chair of the Audit Compliance & Risk Committee to take place with immediate effect. Dominic Blakemore will remain a member of the Audit Compliance & Risk Committee.

Download the PDF for the full announcement

For further information please contact:

Investor Relations
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Lisa Adler	[email protected]	+1 617 588 8607
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The quarterly earnings presentation will be available today at 13:00 BST / 8:00 EDT on:

- Shire.com Investors section

- Shire's IR Briefcase in the iTunes Store

NOTES TO EDITORS

Stephen Williams, Deputy Company Secretary, is responsible for arranging the release of this announcement.

Inside Information

This announcement contains inside information.

About Shire

Shire is the global leader in serving patients with rare diseases. We strive to develop best-in-class therapies across a core of rare disease areas including hematology, immunology, genetic diseases, neuroscience, and internal medicine with growing therapeutic areas in ophthalmics and oncology. Our diversified capabilities enable us to reach patients in more than 100 countries who are struggling to live their lives to the fullest.

We feel a strong sense of urgency to address unmet medical needs and work tirelessly to improve people’s lives with medicines that have a meaningful impact on patients and all who support them on their journey.

www.shire.com

THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Statements included herein that are not historical facts, including without limitation statements concerning future strategy, plans, objectives, expectations and intentions, the anticipated timing of clinical trials and approvals for, and the commercial potential of, inline or pipeline products, are forward-looking statements. Such forward-looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, Shire’s results could be materially adversely affected. The risks and uncertainties include, but are not limited to, the following:

Shire’s products may not be a commercial success;
increased pricing pressures and limits on patient access as a result of governmental regulations and market developments may affect Shire’s future revenues, financial condition and results of operations;
Shire conducts its own manufacturing operations for certain of its products and is reliant on third party contract manufacturers to manufacture other products and to provide goods and services. Some of Shire’s products or ingredients are only available from a single approved source for manufacture. Any disruption to the supply chain for any of Shire’s products may result in Shire being unable to continue marketing or developing a product or may result in Shire being unable to do so on a commercially viable basis for some period of time;
the manufacture of Shire’s products is subject to extensive oversight by various regulatory agencies. Regulatory approvals or interventions associated with changes to manufacturing sites, ingredients or manufacturing processes could lead to, among other things, significant delays, an increase in operating costs, lost product sales, an interruption of research activities or the delay of new product launches;
certain of Shire’s therapies involve lengthy and complex processes, which may prevent Shire from timely responding to market forces and effectively managing its production capacity;
Shire has a portfolio of products in various stages of research and development. The successful development of these products is highly uncertain and requires significant expenditures and time, and there is no guarantee that these products will receive regulatory approval;
the actions of certain customers could affect Shire’s ability to sell or market products profitably. Fluctuations in buying or distribution patterns by such customers can adversely affect Shire’s revenues, financial conditions or results of operations;
Shire’s products and product candidates face substantial competition in the product markets in which it operates, including competition from generics;
adverse outcomes in legal matters, tax audits and other disputes, including Shire’s ability to enforce and defend patents and other intellectual property rights required for its business, could have a material adverse effect on the Company’s revenues, financial condition or results of operations;
inability to successfully compete for highly qualified personnel from other companies and organizations;
failure to achieve the strategic objectives, including expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits at the time anticipated or at all with respect to Shire’s acquisitions, including NPS Pharmaceuticals Inc., Dyax Corp. or Baxalta Incorporated may adversely affect Shire’s financial condition and results of operations;
Shire’s growth strategy depends in part upon its ability to expand its product portfolio through external collaborations, which, if unsuccessful, may adversely affect the development and sale of its products;
a slowdown of global economic growth, or economic instability of countries in which Shire does business, as well as changes in foreign currency exchange rates and interest rates, that adversely impact the availability and cost of credit and customer purchasing and payment patterns, including the collectability of customer accounts receivable;
failure of a marketed product to work effectively or if such a product is the cause of adverse side effects could result in damage to Shire’s reputation, the withdrawal of the product and legal action against Shire;
investigations or enforcement action by regulatory authorities or law enforcement agencies relating to Shire’s activities in the highly regulated markets in which it operates may result in significant legal costs and the payment of substantial compensation or fines;
Shire is dependent on information technology and its systems and infrastructure face certain risks, including from service disruptions, the loss of sensitive or confidential information, cyber-attacks and other security breaches or data leakages that could have a material adverse effect on Shire’s revenues, financial condition or results of operations;
Shire incurred substantial additional indebtedness to finance the Baxalta acquisition, which has increased its borrowing costs and may decrease its business flexibility; and

a further list and description of risks, uncertainties and other matters can be found in Shire’s most recent Annual Report on Form 10-K and in Shire’s subsequent Quarterly Reports on Form 10-Q, in each case including those risks outlined in “ITEM 1A: Risk Factors”, and in subsequent reports on Form 8-K and other Securities and Exchange Commission filings, all of which are available on Shire’s website.

All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Except to the extent otherwise required by applicable law, we do not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.