Shire reports 8% pro forma product sales and strong earnings growth resulting in record operating cash flow for full year 2017

February 14, 2018

Strong growth driven by Immunology, recently launched products, and global expansion

Improved operating margin and operating cash flow of $4.3 billion enabled achievement of debt target

Significantly advanced innovative pipeline with 15 programs in late-stage development

February 14, 2018 – Shire plc (Shire) (LSE: SHP, NASDAQ: SHPG) announces unaudited results for the twelve months ended December 31, 2017.

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

“Shire delivered 8% pro forma product sales growth to $14.4 billion in 2017, an increase of over $1 billion. Of particular note are the strong performance of our Immunology franchise and the significant contribution from recently launched products, as well as growth in international markets. We increased Non GAAP diluted earnings per ADS by 16%, realizing cost synergies ahead of plan.

“2018 is a year of continued focus on commercial execution and targeted investment in our manufacturing infrastructure, new product launches, and pipeline to drive future growth. We expect to deliver mid-single digit product sales growth in 2018 after absorbing the anticipated impact of generics.

“The mid-term outlook for growth is positive driven by our Immunology franchise, multiple near-term launches, and international markets. We are committed to achieving our projected revenue target of $17 - $18 billion in 2020.

“Based on current assumptions, we expect Non GAAP diluted earnings per ADS growth to be lower than top line growth in 2018, mainly due to costs incurred from the start-up of our new U.S. plasma manufacturing site, intensifying genericization, and lower royalties. 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.”

Product and Pipeline Highlights

Regulatory updates

Accelerated international expansion and growth, including 126 product approvals globally and 50 product launches at the country level.
Received two FDA Fast Track Designations, two Orphan Drug Designations, and one Breakthrough Therapy Designation.
Filed for FDA approval of a new plasma manufacturing facility near Covington, Georgia to support our growing Immunology franchise, and received FDA approval for the technology transfer of the CINRYZE drug product manufacturing process to Vienna, Austria.

Clinical and business development updates

Advanced pipeline including nine Phase 3 studies completed in 2017 with several key readouts expected in 2018.
Entered into agreements with Novimmune, MicroHealth and Rani Therapeutics focused on advancing innovation for patients suffering from hemophilia. Parion Sciences focused on Dry Eye Disease and with AB Biosciences focused on autoimmune disorders.

Financial Highlights

	Full Year 2017⁽¹⁾	Growth⁽¹⁾	Non GAAP CER⁽¹⁾⁽²⁾
Product sales⁽³⁾	$14,449 million	+33%	+33%
Product sales excluding legacy Baxalta	$7,461 million	+7%	+6%
Total revenues	$15,161 million	+33%
Non GAAP total revenues⁽⁴⁾	$15,086 million	+32%	+32%
Operating income from continuing operations	$2,455 million	+155%
Non GAAP operating income⁽²⁾	$5,997 million	+36%	+36%
Net income margin⁽⁵⁾⁽⁶⁾	28%	25ppc
Non GAAP EBITDA margin⁽²⁾⁽⁶⁾	43%	2ppc
Net income	$4,272 million	+1,205%
Non GAAP net income⁽²⁾	$4,604 million	+36%
Diluted earnings per ADS⁽⁷⁾	$14.05	+1,006%
Non GAAP diluted earnings per ADS⁽²⁾⁽⁷⁾	$15.15	+16%	+16%
Net cash provided by operating activities	$4,257 million	+60%
Non GAAP free cash flow⁽²⁾	$3,431 million	+63%

⁽¹⁾ Results include Baxalta Inc. (Baxalta) (acquired on June 3, 2016) and Dyax Corp. (Dyax) (acquired on January 22, 2016), unless otherwise noted. Percentages compare to equivalent 2016 period.
⁽²⁾ The Non GAAP financial measures included within this release are explained on pages 29 – 30, and are reconciled to the most directly comparable financial measures prepared in accordance with U.S. GAAP on pages 22 – 25.
⁽³⁾ For 2017 reporting (including comparative information), HAE sales have been reclassified to the Immunology franchise from Genetic Diseases.
⁽⁴⁾ Non GAAP total revenues excludes the receipt of an upfront license fee.
⁽⁵⁾ U.S. GAAP net income as a percentage of total revenues.
⁽⁶⁾ Percentage point change (ppc).
⁽⁷⁾ Diluted weighted average number of ordinary shares of 912 million.

Product sales growth

Delivered reported product sales growth of 33%, with the inclusion of a full year of legacy Baxalta sales.
Achieved combined pro forma product sales growth of 8%; legacy Shire product sales growth of 7% and legacy Baxalta pro forma product sales growth of 9%.
Strong demand for our Immunology products delivered 14% pro forma product sales growth; significant contribution from our subcutaneous immunoglobulin portfolio; CINRYZE supply stabilized in Q4 2017.
Continued product sales growth for GATTEX and NATPARA; strong contribution from XIIDRA with script growth of 12% since Q3 2017; successful launch of MYDAYIS.

Earnings growth

Generated Non GAAP diluted earnings per ADS of $15.15, up 16%, underscoring continued focus on commercial excellence and operating efficiency.
Reported Non GAAP EBITDA margin of 43%, driven by realization of operating expense synergies.

Strong cash flow

Achieved year-end debt target through record operating cash flow, which enabled a $3,370 million reduction in Non GAAP net debt since December 31, 2016.

FINANCIAL SUMMARY - FULL YEAR 2017 COMPARED TO FULL YEAR 2016

Revenues

Product sales increased 33% to $14,449 million (2016: $10,886 million), primarily driven by the inclusion of a full year of legacy Baxalta product sales of $6,988 million, with strong sales from our immunoglobulin therapies and bio therapeutics.
Product sales, excluding legacy Baxalta, increased 7% as growth from our hereditary angioedema (HAE) therapies and Neuroscience franchise, up 9% and 7%, respectively, was partially offset by the launch of generic competition for LIALDA, which negatively impacted our Internal Medicine franchise, with product sales down 5%. Our Ophthalmics franchise generated sales of $259 million in 2017 (2016: $54 million).
Royalties and other revenues increased 39% to $712 million, primarily due to the receipt of an upfront license fee and a full year of contract manufacturing revenue acquired with Baxalta.
Non GAAP total revenues of $15,086 million, up 32%, excludes the receipt of an upfront license fee.

Operating results

Operating income increased 155% to $2,455 million (2016: $963 million), primarily due to the inclusion of a full year of legacy Baxalta operating income and lower expense relating to the unwind of inventory fair value adjustments, partially offset by higher amortization of acquired intangible assets.
Non GAAP operating income increased 36% to $5,997 million (2016: $4,417 million), primarily due to the inclusion of a full year of legacy Baxalta Non GAAP operating income and higher revenues from legacy Shire products.
Non GAAP EBITDA margin as a percentage of Non GAAP total revenues increased to 43% (2016: 41%), primarily due to higher Non GAAP total revenues and lower Non GAAP research and development (R&D) and selling, general and administrative (SG&A) expenditures as a percentage of Non GAAP total revenues, partially offset by a lower Non GAAP gross margin, driven by the inclusion of a full year of lower margin products acquired with Baxalta.

Earnings per share (EPS)

Diluted earnings per American Depositary Share (ADS) increased to $14.05 (2016: $1.27). The increase is primarily due to a higher tax benefit in 2017 driven by U.S. tax reform, higher operating income as noted above, combined with lower discontinued operations losses relating to the divested DERMAGRAFT business.
Non GAAP diluted earnings per ADS increased 16% to $15.15 (2016: $13.10), primarily due to the inclusion of a full year of legacy Baxalta net income and the realization of operating expense synergies relating to Baxalta, partially offset by a higher average number of shares for full year 2017.

Cash flows

Net cash provided by operating activities increased 60% to $4,257 million (2016: $2,659 million), primarily due to the inclusion of a full year of legacy Baxalta operating cash flows and strong cash receipts from higher legacy Shire sales and operating profitability, partially offset by a payment associated with the settlement of the DERMAGRAFT litigation and higher interest payments. Also, 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 63% to $3,431 million (2016: $2,103 million), driven by the growth in net cash provided by operating activities, partially offset by an increase in capital expenditures of $152 million.

Debt

Non GAAP net debt as of December 31, 2017 decreased $3,370 million since December 31, 2016, to $19,069 million (December 31, 2016: $22,439 million). The decrease was primarily due to a $3,445 million net cash repayment of debt utilizing Shire's Non GAAP free cash flow, partially offset by a lower cash balance. Non GAAP net debt represents aggregate long and short term borrowings of $19,192 million, and capital leases of $349 million, partially offset by cash and cash equivalents of $472 million.

OUTLOOK

2018 is a year of continued focus on commercial execution and targeted investment in our manufacturing infrastructure, new product launches, and pipeline to drive future growth. We expect to deliver mid-single digit product sales growth in 2018 after absorbing the anticipated impact of generics.

The mid-term outlook for growth is positive driven by our Immunology franchise, multiple near-term launches, and international markets. We are committed to achieving our projected revenue target of $17 - $18 billion in 2020.

Based on current assumptions, we expect Non GAAP diluted earnings per ADS growth to be lower than top line growth in 2018, mainly due to costs incurred from the start-up of our new US plasma manufacturing site, intensifying genericization, and lower royalties. 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.

Following the update to the strategic review on January 8, 2018, Shire is well underway in creating two divisions, one focused on rare diseases, the other on neuroscience. Alongside this, we are already active in optimizing our portfolio within each division, and we anticipate that this may lead to some opportunities for disposals.

While recognizing our commitment to continue delevering as previously announced, any surplus capital released from such disposals would be evaluated by the Board for return to shareholders. Assessing Shire’s overall capital structure and appropriate mid / long term debt level will be a key initial assignment for the new CFO, who is expected to join on March 19, 2018.

In addition to the detailed guidance in the table below, we are providing depreciation and capital expenditures guidance. We expect depreciation to be between $575 - $625 million and capital expenditure to be between $800 - $900 million, as we continue to invest in a larger footprint to support our growth aspirations.

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

Our US GAAP diluted earnings per ADS outlook reflects anticipated amortization and integration costs.

Full Year 2018	U.S. GAAP Outlook	Non GAAP Outlook⁽¹⁾
Total product sales	$14.9 - $15.3 billion	$14.9 - $15.3 billion
Royalties & other revenues	$500 - $600 million	$500 - $600 million
Gross margin as a percentage of total revenue⁽²⁾	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⁽³⁾	$7.30 - $7.90	$14.90 - $15.50

⁽¹⁾ For a list of items excluded from Non GAAP Outlook, refer to pages 29 - 30 of this release.
⁽²⁾ Gross margin as a percentage of total revenues excludes amortization of acquired intangible assets.
⁽³⁾ See page 25 for a reconciliation between U.S. GAAP diluted earnings per ADS and Non GAAP diluted earnings per ADS.

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The quarterly earnings presentation will be available today at 13:00 GMT / 8:00 EST 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, 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 the 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 the 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 the 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; 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.