Shire Delivers 7% Product Sales Growth and Robust Pipeline Progress in Q1 2018

April 26, 2018

Growth driven by Immunology, recently-launched products, and international expansion

Innovative pipeline progresses with 15 programs in Phase 3 and 7 programs in registration including lanadelumab

Delivers Non GAAP diluted earnings per ADS of $3.86, up 6% year-on-year; GAAP diluted earnings per ADS were $1.81, up 47%

$1.0 billion in net operating cash flow enabled continued debt pay down

April 26, 2018 – Shire plc (Shire) (LSE: SHP, NASDAQ: SHPG), the leading global biotech company focused on rare diseases, announces unaudited results for the three months ended March 31, 2018.

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

“Shire is off to a good start in 2018 delivering on our key priorities of commercial execution, pipeline progression, debt pay down, and portfolio optimization. We generated product sales growth of 7% in the first quarter reaching $3.6 billion with important contributions from our Immunology franchise, recently-launched products, and international markets. We delivered $1.0 billion in net operating cash flow allowing us to remain on track towards our debt pay down target.

“We continue to advance our innovative pipeline with seven programs in registration including lanadelumab, the first monoclonal antibody being evaluated to prevent hereditary angioedema attacks, with the potential to change the treatment paradigm for this serious and sometimes life threatening rare disease.

“As part of the ongoing review of our portfolio, we recently announced an agreement for the sale of our Oncology franchise for $2.4 billion allowing us to unlock embedded value and sharpen our focus."

Product and Pipeline Highlights

Regulatory updates

Advanced lanadelumab with accelerated approval pathways underway in the U.S. (PDUFA date of August 26, 2018), Europe, and Canada.
Gained FDA acceptance for additional key filings: CINRYZE sBLA for pediatric use, including Priority Review; prucalopride NDA; and Calaspargase Pegol BLA.
Achieved marketing approval of XIIDRA (lifitegrast ophthalmic solution 5%) in Canada and ADYNOVI in E.U.
Obtained Breakthrough Therapy Designation for maribavir for cytomegalovirus (CMV) infection in transplant patients from FDA.

Clinical and business development updates

Agreed to divest Oncology franchise to Servier S.A.S. for $2.4 billion.
Formed pre-clinical research collaboration to evaluate a potential enzyme replacement therapy using NanoMedSyn’s proprietary synthetic derivatives.

Note: Growth rates are on a reported basis unless mentioned otherwise.

Financial Highlights	Q1 2018	Reported Growth	Non GAAP CER⁽¹⁾
Product sales Rare Disease⁽²⁾	$2,719 million	+10%	+6%
Product sales Neuroscience⁽²⁾	$918 million	-2%	-4%
Total product sales	$3,637 million	+7%	+3%
Total revenues	$3,766 million	+5%	+2%

Rare Disease contribution margin⁽²⁾	$1,367 million	+2%
Neuroscience contribution margin⁽²⁾	$770 million	-3%

Operating income from continuing operations	$694 million	+40%
Non GAAP operating income⁽¹⁾	$1,467 million	+1%	-3%

Net income	$551 million	+47%
Non GAAP net income⁽¹⁾	$1,173 million	+6%

Diluted earnings per ADS⁽³⁾	$1.81	+47%
Non GAAP diluted earnings per ADS⁽¹⁾⁽³⁾	$3.86	+6%	+2%

Net cash provided by operating activities	$1,010 million	+120%
Non GAAP free cash flow⁽¹⁾	$918 million	+272%

Key ratios

Rare Disease contribution margin percentage⁽²⁾⁽⁴⁾	48%	-3ppc
Neuroscience contribution margin percentage⁽²⁾⁽⁴⁾	82%	+0ppc

Net income margin⁽⁴⁾⁽⁵⁾	15%	+5ppc
Non GAAP EBITDA margin^(1)(4)(5)	43%	-1ppc

⁽¹⁾ The Non GAAP financial measures included within this release are explained on pages 26 – 27, and are reconciled to the most directly comparable financial measures prepared in accordance with U.S. GAAP on pages 20 – 22.
⁽²⁾ In 2018, Shire created two business segments: a Rare Disease division and a Neuroscience division. As a result, Shire now reports its financial results based on these new segments. Segment contribution margin represents total revenue less cost of sales, direct R&D, and direct selling and marketing expenses. Segment contribution margin percentage represents segment contribution margin as a percentage of segment revenue. For further information, refer to Note 3: Segment reporting on page 19.
⁽³⁾ Diluted weighted average number of ordinary shares of 912.1 million.
⁽⁴⁾ Percentage point change (ppc).
⁽⁵⁾ Calculated as a percentage of total revenues.

Product sales growth

Achieved product sales growth of 10% in our Rare Disease division, with increases across all franchises on a reported basis, driven by Immunology, Hematology, Internal Medicine, and Ophthalmics.
Delivered growth of recently launched products of 77%, primarily due to ADYNOVATE, CUVITRU, and GATTEX, as well as XIIDRA with script growth of 27% since Q1 2017.
Experienced decline of 2% in product sales in our Neuroscience division due to the genericization of LIALDA in the second half of 2017. Excluding the impact of LIALDA, Neuroscience grew 12%, primarily driven by VYVANSE.

Operating performance

Generated Non GAAP diluted earnings per ADS of $3.86, an increase of 6%, as Q1 2018 benefited from higher product sales and a lower tax rate, which were partially offset by lower gross margins due to Q1 2017 favorability from the timing of changes in the costs to manufacture certain products.
Reported Non GAAP EBITDA margin of 43%, a slight decline from Q1 2017, with continued benefit from operating efficiencies in SG&A offset by lower gross margins as discussed above.
Rare Disease reported contribution margin of $1,367 million, or 48%, and Neuroscience reported contribution margin of $770 million, or 82%.

Strong cash flow

Strong free cash flow enabled an $866 million reduction in Non GAAP net debt during the quarter.

FINANCIAL SUMMARY - FIRST QUARTER 2018 COMPARED TO FIRST QUARTER 2017

Revenues

Delivered total revenues of $3,766 million representing growth of 5%.
Rare Disease product sales increased 10% to $2,719 million (Q1 2017: $2,472 million), with growth across all franchises on a reported basis and growth from recently launched products. Rare Disease product sales also benefited from favorable foreign currency exchange in our international markets.
Neuroscience product sales decreased 2% to $918 million (Q1 2017: $940 million), due to the launch of generic competition for LIALDA in the second half of 2017. Excluding the impact from LIALDA, Neuroscience product sales grew 12%.
Royalties and other revenues decreased 20% to $129 million (Q1 2017: $160 million), primarily due to the reclassification of ADDERALL XR from royalty revenue to product sales and other accounting changes as required under the new revenue accounting standard as well as lower SENSIPAR royalties.

Operating results

Rare Disease contribution margin percentage was approximately 48% (Q1 2017: 51%), a slight decline from the prior year due to lower gross margins on sales, partially offset by lower selling and marketing costs.
Neuroscience contribution margin percentage was flat at 82% (Q1 2017: 82%), as the decline in sales due to LIALDA was offset by lower costs.
Operating income increased 40% to $694 million (Q1 2017: $497 million), primarily due to lower expense related to the unwind of inventory fair value adjustments, partially offset by higher amortization of acquired intangible assets and integration and acquisition costs.
Non GAAP operating income increased 1% to $1,467 million (Q1 2017: $1,454 million), with the benefit of our on-going cost reduction initiatives and operating synergies offset by lower gross margins as Q1 2017 reflected favorability from the timing of changes in the costs to manufacture certain products.
Non GAAP EBITDA margin was slightly down to 43% (Q1 2017: 44%), primarily due to the lower gross margin referred to above offset by ongoing cost reduction initiatives and operating expense synergies.

Earnings per share (EPS)

Diluted earnings per American Depository Share (ADS) increased 47% to $1.81 (Q1 2017: 1.23). The increase was primarily driven by operating income as noted above, combined with lower expense related to the unwind of inventory fair value adjustments.
Non GAAP diluted earnings per ADS increased 6% to $3.86 (Q1 2017: 3.63) as Q1 2018 benefited from higher product sales and a lower tax rate partially offset by a lower gross margin.

Cash flows

Net cash provided by operating activities increased 120% to $1,010 million (Q1 2017: $459 million), driven by improvements in working capital, higher operating profitability, and a favorable comparison period as the Q1 2017 period included a payment of $346 million associated with the settlement of the DERMAGRAFT litigation.
Non GAAP free cash flow increased 272% to $918 million (Q1 2017: $247 million), primarily due to the growth in net cash provided by operating activities noted above and a decrease in capital expenditures.

Debt

Non GAAP net debt as of March 31, 2018 decreased $866 million since December 31, 2017, to $18,203 million (December 31, 2017: $19,069 million). A combination of Shire’s Non GAAP free cash flow and existing cash balances were utilized to repay debt during the quarter. Non GAAP net debt represents aggregate long and short term borrowings of $18,172 million, and capital leases of $350 million, partially offset by cash and cash equivalents of $318 million.

OUTLOOK

Our 2018 guidance, which continues to include our Oncology franchise, remains unchanged. It will be updated to remove the Oncology franchise upon the close of this pending sale later this year. Similarly, our 2020 guidance remains unchanged and will be updated to remove the Oncology franchise upon the close of this pending sale later this year.

The Non GAAP diluted earnings per ADS forecast assumes a weighted average number of 915 million fully diluted ordinary shares outstanding for 2018.

Our U.S. GAAP diluted earnings per ADS outlook reflects anticipated amortization, integration, and reorganization costs.

Risks associated with this outlook include the potential uncertainty resulting from the announcement by Takeda Pharmaceutical Company Limited that it is considering making a possible offer for Shire.

Full Year 2018	U.S. GAAP Outlook	Non GAAP Outlook⁽¹⁾
Total revenue⁽²⁾	$15.4 - $15.9 billion	$15.4 - $15.9 billion
Gross margin as a percentage of total revenue⁽³⁾	71.0% - 73.0%	73.5% - 75.5%
Combined R&D and SG&A	$5.2 - $5.4 billion	$4.9 - $5.1 billion
Net interest/other	$450 - $550 million	$450 - $550 million
Effective tax rate	15% - 17%	16% - 18%
Diluted earnings per ADS⁽⁴⁾	$7.30 - $7.90	$14.90 - $15.50

⁽¹⁾For a list of items excluded from Non GAAP Outlook, refer to pages 26 - 27 of this release.
⁽²⁾Management is providing guidance for total revenue. Total revenue is comprised of total product sales and royalties & other revenues. Pursuant to a change in U.S. GAAP related to accounting for revenue, certain revenue formerly classified as royalties are now recorded as product sales.
⁽³⁾ Gross margin as a percentage of total revenues excludes amortization of acquired intangible assets.
⁽⁴⁾ See page 22 for a reconciliation between U.S. GAAP diluted earnings per ADS and Non GAAP diluted earnings per ADS.

Download the PDF for the full announcement

For further information please contact:

Investor Relations
Christoph Brackmann	[email protected]	+41 795 432 359
Sun Kim	[email protected]	+1 617 588 8175
Robert Coates	[email protected]	+44 203 549 0874

Media
Katie Joyce	[email protected]	+1 781 482 2779

Dial in details for the live conference call for investors at 14:00 BST / 9:00 EDT on April 26, 2018:

U.K. dial in:	0800 358 9473 or +44 333 300 0804
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International Access Numbers:	Click here
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Live Webcast:	Click here

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 biotechnology leader serving patients with rare diseases and specialized conditions. We seek to push boundaries through discovering and delivering new possibilities for patient communities who often have few or no other champions. Relentlessly on the edge of what’s next, we are serial innovators with a diverse pipeline offering fresh thinking and new hope. Serving patients and partnering with healthcare communities in over 100 countries, we strive to be part of the entire patient journey to enable earlier diagnosis, raise standards of care, accelerate access to treatment, and support patients. Our Rare Disease and Neuroscience divisions support our diverse portfolio of therapeutic areas, including Immunology, Hematology, Genetic Diseases, Internal Medicine, Ophthalmics, Oncology, and neuropsychiatry disorders.

Championing patients is our call to action - it brings the opportunity - and responsibility - to change people’s lives.

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, projected revenues, 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 depends on third parties to supply certain inputs and services critical to its operations including certain inputs, services and ingredients critical to its manufacturing processes. 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;
the nature of producing plasma-based therapies 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;
failure to comply with laws and regulations governing the sales and marketing of its products could materially impact Shire’s revenues and profitability;
Shire’s products and product candidates face substantial competition in the product markets in which it operates, including competition from generics;
Shire’s patented products are subject to significant 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 Shire’s revenues, financial condition or results of operations;
Shire may fail to obtain, maintain, enforce or defend the intellectual property rights required to conduct its business;
Shire faces intense competition for highly qualified personnel from other companies and organizations;
failure to successfully execute or attain strategic objectives from Shire’s acquisitions and growth strategy 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, could have negative consequences for Shire’s business and increase the risk of non-payment by Shire’s customers;
changes in foreign currency exchange rates and interest rates could have a material adverse effect on Shire’s operating results and liquidity;
Shire is subject to evolving and complex tax laws, which may result in additional liabilities that may adversely affect Shire’s financial condition or results of operations;
if a marketed product fails to work effectively or causes adverse side effects, this could result in damage to Shire’s reputation, the withdrawal of the product and legal action against Shire;
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 faces risks relating to the expected exit of the United Kingdom from the European Union;
Shire incurred substantial additional indebtedness to finance the Baxalta acquisition, which has increased its borrowing costs and may decrease its business flexibility;
Shire's ongoing strategic review of its Neuroscience franchise may distract management and employees and may not lead to improved operating performance or financial results; there can be no guarantee that, once completed, Shire's strategic review will result in any additional strategic changes beyond those that have already been announced;
the potential uncertainty resulting from the announcement by Takeda Pharmaceutical Company Limited that it is considering making a possible offer for Shire; 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.

PROFIT FORECASTS

In its FY 2017 results announcement on February 14, 2018 (FY 2017 Announcement), Shire published its full year 2018 outlook for total revenue⁽¹⁾of $15.4-$15.9 billion, GAAP diluted EPS of $7.30-$7.90, and non-GAAP diluted EPS of $14.90-$15.50 (Full Year 2018 Outlook). Shire also announced “We are committed to achieving our projected revenue target of $17-$18 billion in 2020” and “With the already disclosed manufacturing and SG&A cost reduction initiatives, we are on track to achieve mid-forties Non-GAAP EBITDA margin by 2020” (Mid-Term Outlook).

Certain of the statements on pages 4 and 22 of this announcement include a “profit forecast” for the purposes of Rule 28 of the City Code on Takeovers and Mergers (the “Code”) which was first contained in the FY 2017 Announcement.

In accordance with Rule 28.1(c) of the Code, the directors of Shire confirm that: (i) each of the Full Year 2018 Outlook and the Mid-Term Outlook remains valid and has been properly compiled on the basis of the assumptions stated in the FY 2017 Announcement; and (ii) the basis of accounting used for each of the Full Year 2018 Outlook and the Mid-Term Outlook is consistent with Shire’s accounting policies.

The Full Year 2018 Outlook and the Mid-Term Outlook do not take into account, and exclude the impact of, the completion of the sale of the Oncology franchise to Servier S.A.S. (as announced by Shire on April 16, 2018).

⁽¹⁾ Management is providing guidance for total revenue. Total revenue is comprised of total product sales and royalties & other revenues. Pursuant to a change in U.S. GAAP related to accounting for revenue, certain revenue formerly classified as royalties are now recorded as product sales.