Forget $500M in postmerger cost cuts. Shire now sees far more savings, and beats on Q2 besides

Editor's note: This story has been updated to include information and CEO comments from Shire's Q2 earnings presentation.

That $500 million in cost savings from swallowing Baxalta? Scratch it. New owner Shire ($SHPG) now says it can up that figure by 40%.

The Dublin drugmaker now expects at least $700 million in cost cuts within three years after the deal’s June close, it said Tuesday.  And that’s an increase CEO Flemming Ornskov attributed to the company’s new operating structure.

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“This would not have been possible without the commitment of all our employees, who have worked tirelessly in recent months to help drive efficiencies across the business,” he said in a statement, adding on the earnings conference call that Shire has made "extensive efforts ... to identify and develop specific plans to streamline our combined operations."

As for where all the newly bulked-up savings will come from, Shire expects to see about 50% come out of SG&A as it streamlines functions and reduces overheads, Ornskov said. 30% is set to come out of R&D, and 20% will come from manufacturing as the company eliminates redundancies and finds ways to leverage the drugmakers' combined scale of operations.

And that $500 million mark Shire initially promised? It was a lowball target. As Ornskov said in January at the J.P. Morgan Healthcare Conference, his style is to underpromise and overdeliver, and Shire’s internal synergy goals were “much higher.”

The forecast gave some analysts pause, though--especially considering former Baxalta CEO Ludwig Hantson's warning last August that combining Baxalta’s plasma specialty with other biopharma businesses wouldn’t make for easy cost cuts.

"In some respects, the nature of Shire's interest in Baxalta is puzzling. Is it trying to opportunistically acquire our attractive hemophilia, immunology and growing oncology platforms without true synergies?" Hantson said to investors on a call at the time. "An acquirer like Shire isn't just going to find easy savings from a combination with dissimilar assets."

Now, though, those worries are in the rearview mirror--at least for the time being--and Shire has a successful quarterly performance to celebrate, too. The company convincingly thumped forecasts for both revenue and earnings, bringing in a $2.43 billion top-line haul and non-GAAP EPS per American depository share of $3.38.

Those marks surpassed Wall Street expectations of $2.23 billion and $3.12, respectively, and spurred the company to raise its guidance: Shire now expects sales to tally between $10.8 billion and $11 billion for the year, with earnings per ADS expanding to between $12.70 and $13.10. 

- read Shire's release (PDF)

Related Articles:
With Baxalta in hand, Shire's not looking to buy. But sell? Maybe
Shire CEO thinks he can beat $500M in postmerger cost savings
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