- Manufacturing synergies stemming from the recent acquisition of Baxalta supported strong bottom lines for Shire in the early months of 2017, but the Irish pharma doesn't anticipate those gains to continue for the rest of the year.
- The specialty drugmaker reported a gross margin of 78% in the first quarter, about 2% to 4% higher than what it projected for 2017. The company cited the "phasing of certain product manufacturing costs, primarily related to legacy Baxalta products," as the main reason for the that margin, but said it expects the percentage to be lower going forward.
- "We believe that these phasing benefits will reverse over the remaining three quarters of the year, and we're sticking with our guidance of 74.5% to 76.5%, which is consistent with the margins that we delivered in the second half of 2016 after the close of the Baxalta transaction," Jeffrey Poulton, Shire's chief financial officer, said during a Tuesday earnings call.
When Shire announced its acquisition of Baxalta in January 2016, it also revealed plans to curb spending by $500 million over the next three years. By the time the deal closed in June, the Dublin-based company had upped that goal to $700 million, of which 50% would be marketing and administrative cuts, 30% would be R&D cuts and 20% would come from eliminating manufacturing redundancies.
"As many of you are aware, a key part of the rationale to acquire Baxalta was our belief in the inherent efficiencies that could be recognized by operating as one company," Poulton said during the call. "The first quarter has been another period of rapid integration, keeping us on target for our overall synergy expectations."
Shire inherited 12 manufacturing facilities through that $32 billion transaction. Since production synergies elevated gross margins, analysts questioned the company's "conservative" guidance. In response, executives said that while production integrations helped in the early months of this year, they also present some challenges.
"We do have a much larger and more complex manufacturing network than we had previously, and this will result in some variability in the gross margin line quarter-to-quarter," Poulton said during the call. "I think we see that with some of our competitors that also have large plasma networks. So we're sticking with the guidance. We think it's at the right level."
In recent months, Shire has reviewed its newly expanded manufacturing operations and is looking for cost-saving measures. Pressed for more information about exactly what form future cuts may take, leadership said it's too early to tell.
So far, there has been some "overhead reduction from the integrated management of these sites like in IT, HR and finance, [but] we have not included any other financial figures for the network study and the outcome and the synergies we could drive there," Shire CEO Flemming Ornskov said.