No Longer Small Time, Pharmaceutical Company Reaps a Golden Inheritance From Orphan Drugs
By STEN STOVALL
July 29, 2012, 6:48 p.m. ET
While once-high-flying big pharmaceutical companies are buffeted by widespread structural change, one medicine-maker is thriving: specialty drug producer Shire PLC. SHPG -1.48%
Its success is largely the result of the business model built by Angus Russell, Shire's chief executive officer. His approach has taken the U.K.-born, Ireland-domiciled, U.S.-focused company from being a small, "one-trick pony" drug maker at the end of the 1990s, dependent on one product—Adderall, the blockbuster treatment for attention deficit hyperactivity disorder, or ADHD—to being a diversified, multi-platform group focused on drugs for rare diseases. In the process, it has become Britain's third-largest medicines maker by market capitalization and sales.
Enlarge Image
Bloomberg Shire CEO Angus Russell created the business model that has seen his company grow.
Angus Russell
Age: 56
Nationality: British
Position: chief executive, Shire PLC
Based: Philadelphia
Time in job: Since June 2008
Previous positions: December 1999-June 2008: chief financial officer, Shire PLC; Between 1980 and 1999: various positions at ICI, Zeneca and AstraZeneca PLC.
Shire's business model takes change and the need to be nimble as a commercial fact of life.
"When I joined in December 1999 we were very small, with only around 400 people, and I was always hearing what a crazy business model we had—and we were leaders in nothing," Mr. Russell says.
"Today, we're a leader in ADHD, number two in gastrointestinal medicine and heading towards co-leadership of [gene-based] enzyme-replacement therapy, so we've become leader in all the major areas that we are participating in," he says.
That transformation has come from well-timed, targeted acquisitions and from focusing on so-called orphan drugs—medicines ignored by big pharmaceutical companies because they are considered relatively unprofitable to develop and market. These drugs are aimed at small patient populations and tend to get quick regulatory approval and extended market exclusivity, which limits competition and ensures high margins.
Shire's acquisition-oriented strategy is designed to avoid risk while maintaining a flexible cost base, keeping research spending to a minimum while buying in promising medicines for development that are already in mid- and late-stage clinical testing.
Buying late-stage drugs in specialized areas has, in turn, reduced Shire's reliance on its ADHD treatment, and minimized the impact from blockbuster drugs losing exclusivity when protective patents expire, as well as from the downward pricing pressures from world governments that have hit its big pharmaceutical rivals.
The company, which reports its second-quarter results on Wednesday, has thus become a darling of investors. Analysts expect it to again report double-digit quarterly growth in sales and earnings per share, a feat it performs regularly as sales of medicines for rare diseases and ADHD continue to climb.
Mr. Russell has overseen Shire's transformation, becoming chief executive in 2008, after nine years as its chief financial officer and a career that started in the chemicals industry at British-based ICI.
A youthful-looking 56 years old, he likens the crisis in the world drug industry now to the problems besetting the global chemicals industry back in the 1980s and 1990s.
"The problem then was making that cultural and mind-shift change from bulk chemicals that you just shovelled down with almost no customer interaction to a really market-driven, customer-driven need," Mr. Russell says.
"I see similar things with Big Pharma, where I see very little new thinking coming in, very little new hiring in at the higher level of the industry from outside our industry," he says. "It's starting to happen here and there, but generally I'd say it's limited and that bothers me a lot because, like anything in life, if you have a pure breed or a pedigree of anything it becomes feeble."
Putting that belief into action, he found his successor as Shire's chief financial officer in the drinks sector, tapping Graham Hetherington who had held that position at Bacardi and, before that, at Allied Domecq.
"I was keen to bring somebody in from the outside… and was looking for someone from a fast-moving consumer kind of industry, and the liquor industry is very much like that," he says.
Mr. Russell says the need for such a radical approach stems from the fact that the global drugs industry and the provision of health care are changing for good.
Drug makers can no longer decide unilaterally what medicines the world needs, and at what price. They will need to be much more in contact with patients, their doctors, policy makers and purchasing bodies if they are to sell their products successfully, he says.
"Most of the industry relied previously on the physician to tell us everything about the patient," he explains.
"We're only just starting with a concept that's derived from the fast-moving-consumer-goods sector, where they actually live a customer's life, sending teams into customers' homes. We now need to connect much more directly with the patients themselves to find out what they need."
Mr. Russell also applies that personal, direct approach within Shire, which now has 5,451 employees and 29 offices globally but five main ones, located in Philadelphia, Lexington, MA; Basingstoke, England; Dublin and Nyon, Switzerland.
"I tend to have a desk in the hallway and I have my computer on top and that's all I have, really, and a phone," he says. "That lets me engage with employees. That way they can come and tell me whether they think we're doing a good thing or that we're doing a bad thing; that's what I want to hear from them."
These days, Shire's success makes Mr. Russell the golden boy of the pharmaceutical sector. But this hasn't always been the case. He was heavily criticized for betting all of Shire's cash seven years ago to acquire Boston-based biotechnology company Transkaryotic Therapies, or TKT, for $1.6 billion. With this buy, he built the company's expanding Human Genetic Therapies unit and made it the main competitor to Sanofi's Genzyme in the area of enzyme-replacement therapy—used for treating rare diseases such as Gaucher and Fabry. Rare-disease treatments are complex to make and sell for many thousands of dollars per patient per year.
"People thought I was crazy," he says. "They had one product and about $77 million in revenue. That business this year will be in excess of $1.5 billion in sales and has four marketed products and a number of very exciting things in the pipeline, and they're working on new technology ideas."
The Human Genetic Therapies unit is, he says, "the business which is most international of all our group, selling products into something like 50 countries and we have offices for the company in around 30 countries. So no one thinks it's a crazy idea anymore."
Mr. Russell now hopes to repeat that success story in the area of regenerative medicine, which involves replacing or regenerating human cells, tissues or organs to restore or establish normal function.
In April, Shire bought privately held, U.S.-based Pervasis Therapeutics. The plan is to combine its abilities with Advanced BioHealing, which Shire bought in 2011 for $750 million, giving the company the skin-substitute Dermagraft, used for diabetic foot ulcers. The product generated U.S. sales of $146 million in 2011 and $49 million in this year's first quarter.
"We'd love to push that business too, bring in more treatments and see that business in the next five to 10 years become a multi-billion dollar business in regenerative medicine," says Mr. Russell.
He adds that Shire is moving strongly into the area of gene therapy and the development of medicines that can cure genetic disorders by substituting a defective gene with a working duplicate.
"Everybody knows that that could be the next major technology change in our industry and we want to be very much involved.
"It's very much geared to the patient as well. The whole thing about genetics is understanding more about the patient. So, for me, it's logical for the company to be much more actively involved in that very early-stage gene therapy of genetics, and so we're building a lot of collaborations and interest around genetics—in particular, gene therapy."
As the pharmaceutical industry evolves, Mr. Russell sees a place for providers of both mass-market and more specialized drugs.
"What we're going to see in the next decade is drug makers focusing on their specific areas where they think they can best bring value," he says. "Generics will be the low-cost producers, branded producers will be in the middle, but they're all going to have to get more efficient and offer products at a price that society thinks is valuable." And then, he says, "there will be the niche players, and they will innovate around customer needs, and that's where I see Shire evolving."
(20min delay)