Shire on the Wire

Feb 01, 2010

Shire began the last decade as a small pharma with a big problem—it was entirely dependent on one drug, the ADHD blockbuster Adderall, and that drug was about to lose its patent. "Frankly, we were a bit of a joke," recalls CEO Angus Russell. "Analysts and the media laughed at our business model. People told me, 'You have no research, and you're selling chalk [Calcichew] and an amphetamine.'"

No one is laughing now. British-born, Irish-domiciled, US-centric Shire begins this decade with the industry's most diverse ADHD franchise and market-leader status. It has also rapidly diversified into the area of orphan diseases, boldly taking on 800-pound gorilla Genzyme, just as it did J&J, Lilly, and other ADHD competitors in the 2000s.

In other words, during Big Pharma's "lost decade," Shire found itself—big time. From 2004 to 2008, the company's revenue nearly doubled ($1.36 billion to $3.02 billion). More importantly, 2009 is over—the long-feared year when Adderall XR, the extended version of Adderall that for years had delivered more than half of the firm's sales, plunged into its own patent cliff. Although the generics onslaught starting last April has wiped out almost 75 percent of the XR's sales, Shire's canny strategy has saved the firm from the battering usually taken by Big Pharmas when their blockbusters fall. When Russell reports 2009 year-end results on February 19, analysts expecting the worst will get an attitude adjustment.

Angus Russell, Shire CEO
"We're going to pleasantly surprise Wall Street with news that we came through this terrible year with just a small decrease in revenue. And we'll return to growth in 2010," Russell says. The company has launched eight product over the past four years. Innovations in ADHD kept its 2009 sales above $1 billion, despite Adderall XR's decline. And the company is taking the entire production global.

Shire has prospered with a defiantly quirky business model. Says Gary Nachman, director of specialty pharma at Leerink Swann: "I love this company. Its orphan drug business differentiates it from other specialty shops, most of which have products with short lives and generics competition. Shire did a great job becoming a biotech. And its people are top-notch and passionate."

Nachman isn't Shire's only fan. Double-digit top-line growth and diversified platforms have also caught Big Pharma's lustful eyes. The prospect of a possible takeover casts the shadow over Angus Russell's bright 18-month tenure as CEO—especially because as CFO he spent the past decade as the modest mastermind behind Shire's unique strategy and success. But Russell has fighting words for any possible suitors: "A lot of us here at Shire originated in Big Pharma. None of us want to go back. So, if nothing else happens, on day one after the sale, you're going to see a huge exodus."

Lessons in Facing Facts

Mike Cola, Shire Specialty Pharma
Russell is a short, trim 53-year-old Brit who looks remarkably fit beneath an open-collared shirt and finely tailored pants. (One of his first changes after becoming CEO was to retire the business dress code.) His office at Shire's US headquarters in Wayne, PA, is laid out less like a private C-suite than a central destination, with walls interrupted by gaps that make him visible to his staff at all times. But this Brit is most definitely not the laid-back type, and his mild manner and precise speech conceal a coiled intensity and confidence.

"I was blessed in seeing an industry that was once very profitable go through its twilight years," says Russell of his early career in strategic planning in Imperial Chemistry Industries' Petrochemicals and Plastics division in the '80s, as cheaper products from the Middle East petroleum states began flooding the global market.

Strategic planning consisted of trying to alert the ICI board to the treat, "The response was, 'Don't bring us the facts,'" Russell recalls. "Somehow, the board had convinced itself that all this new product was miraculously going to stay in the Middle East, so that the world they had known for many years would continue."

By the early '90s, stock prices of traditional commodity chemicals had collapsed, triggering a panic at ICI. "Their response was to break up the company and sell it off almost at the bottom of the cycle," he says. "After 70 years, ICI no longer exists. The company was a dinosaur, and it became extinct."

The application of this lesson—denial followed by panic—to the pharma industry is all too plain. As CFO at Shire, he fashioned a business model that took change—if not disruption—as the norm. "To adapt to a rapidly changing world, you must have a flexibility in your cost base. It just seemed sensible," he says.

Barbara Deptula, Shire Business Development
Shire would avoid the riskiest aspects of the pharmaceutical enterprise by eschewing in-house R&D. The plan was to enter the game in the home stretch, via strategic acquisitions of products in Phase II or III, and then do fast, smart clinical trials. Most importantly, Shire drugs would treat serious, symptomatic diseases, causing a demonstrable improvement in patients and proving their value to payers.

In fact, Shire is run as a kind of holding company, with its leaders essentially managing portfolios. This strategy didn't hatch fully formed in 1999, but took shape in response to market developments, above all, game-changing generics. "We were beset with litigation attacking our patents, and decided that staying in ADHD and specialty was not sustainable," Russell says.

When it came time to diversify, Shire stunned analysts and shareholders alike by making a major acquisition of a biotech with a rare disease–focused platform. In reality, this was just another application of Russell's low-risk, high-margin strategy. Orphan-drug development offers scarce competition, fast FDA approval, extended market exclusivity, intense patient demand, and smooth reimbursement for staggeringly high price tags. It was a perfect fit.

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