Pharmaceutical company Shire uses strategy of harvesting drugs from rivals

The Basingstoke-based pharmaceutical company, which specialises in treatments for rare diseases and symptomatic illnesses, has spearheaded a "search and development" strategy where, rather than developing drugs from scratch, the company snaps up promising drugs from other companies which they then refine in-house.

This model of niche research and trawling other companies for potential drugs might have first provoked hilarity; but it is a strategy about which Shire's pharmaceutical peers are becoming increasingly serious as they consider how to shore up their pipelines in the face of a wave of top-earning drugs coming off patent. Shire itself has recently experienced what those in pharma circles call the "patent cliff".

Last April, the company came under threat when a generic competitor to its attention deficit hyperactivity disorder (ADHD) drug, Adderall XR, entered the market.

Mr Russell said that ahead of the drug facing generic competition, "people were very anxious – Adderall XR had been driving growth for many years".

"It would have been very easy to batten down the hatches and constrain the business," he added. But instead the company made two acquisitions worth a combined $4bn (£2.6bn).

One of those acquisitions was biotech company New River Pharma, bought for $2.6bn in February 2007, which ended up providing Shire with Vyvanse, a new drug to treat ADHD, that has helped break Shire's fall over the patent cliff-edge.

Last week, it was revealed that during the last quarter, revenues from Vyvanse rose 41pc to $145m, helping offset falling revenues from Adderall XR, which now only makes up around 10pc of the company's product sales compared with 40pc of sales in 2008.

Promoting a "search and development" strategy as Mr Russell calls it, as well as focusing its attentions on treatments for rare diseases, has helped Shire build a portfolio of eight key drugs, that will, he says, provide a "tremendous platform" for going forward.

Some analysts were, however, more circumspect about Shire's fourth-quarter figures.

Jack Scannell, analyst at Bernstein, said the results had been flattered by the way Medicaid rebates in the US on Adderall XR had been calculated, adding that the figures were not "quite as stellar" as they first looked. But overall, he was positive about the results, adding that they were above consensus.

But Morgan Stanley, which described Shire's fourth-quarter results as "very strong", has been pushing its "Pharma 2.0" model of purchasing experimental drugs from smaller rivals as a means of lessening the risks of developing drugs.

Pharmaceutical companies are increasingly embracing this move towards cutting back their own early-stage research activities and focusing on niche markets.

GlaxoSmithKline (GSK) has already endured a number of drugs coming off patent, losing $4.5bn in revenues to generic competition over the last three years, but has added $5bn of new sales across the organisation.

That is down to changes in its research and development strategy as well as shifting its attention to emerging markets and bringing in revenues from its consumer products, such as Sensodyne toothpaste.

But Britain's biggest drug company has unveiled plans to further overhaul its research and development work. It is set to strip away high-risk, high-cost areas of research such as depression to increasingly focus – like Shire – on rare diseases.

"We are making sure that we are spending money where we have the best chance of returns," said Andrew Witty, GSK chief executive, at the time.

At Shire, Mr Russell said that working in rare diseases allowed them to focus on a specific group of patients and develop strong relationships with clinicians.

Savvas Neophytou, an analyst at Panmure Gordon, said Shire was in a "very good position" because of choosing to work in this field, adding that it was interesting to see GlaxoSmithKline "making a foray into this market".

AstraZeneca, which is set to lose exclusivity on several drugs, including Arimidex, a breast cancer drug with sales of $1.9bn in 2009, is taking steps to scour biotech companies for early-stage drugs rather than developing medicines from scratch.
Just last week, it paid $100m to Rigel Pharmaceuticals for the rights to its next-generation rheumatoid arthritis drug. Rigel has already carried out the Phase I and Phase II early and mid-stage trials, but AstraZeneca will design the final Phase III trial.

Gary Waanders, an analyst at Nomura Code, said that outsourcing the earlier stages of research made sense, leaving the big pharmas free to focus their efforts on getting drugs to market: "Pharma companies are generally very good at this bit of development because of their extensive clinical networks and logistic resources and also their financial resources."

But where does the shift to externalising early-stage research leave the biotech companies trying to track down those promising chemical compounds?

Mr Waanders warned that the proliferation of biotech companies gave big pharmas lots to choose from when looking for in-licensing deals, leaving pharmaceutical companies "holding most of the cards in licensing negotiations".

Andrew Heath, who sits on the board of the BioIndustry Association, warned that licensing deals could risk biotech companies becoming one-trick ponies.

"The risk is that you become dominated by a big partner and it becomes hard to do deals with other companies," he said.

However, he added that the advantages do outweigh the risks, adding that support from a major pharmaceutical company was the only way many cash-strapped biotech companies would have the opportunity to take their drugs to the marketplace.

Paul Cuddon, an analyst at KBC Peel Hunt, said that in-licensing played to the strengths of both big pharma and biotech.

"Big pharma is good at late- stage development, whereas biotech is good at discovery and quick decisions on whether a drug is good or not. The combination of the two is an excellent strategic fit," said Mr Cuddon.

He said that fit makes financial, as well as strategic sense.

"The cost of developing a drug is now estimated to be at $1bn - and the drug companies don't necessarily get anything out of their investment," he said. "So the drug companies are saying 'why don't we do a deal with a biotech company where we pay out $1bn but we get an approved drug at the end of it?'."

And as drug makers move to bolster their pipelines, that's a question to which – for many companies – the answer is looking increasingly obvious.