In 2005, Shire faced a scenario now familiar to most of the world’s drugmakers. Its best-selling pill, an attention-deficit treatment called Adderall XR, was about to lose patent protection, jeopardizing half its revenue. Shire’s response was to pay $1.6 billion for Transkaryotic Therapies, an unprofitable company with more debt than sales, and a handful of drugs for rare genetic diseases that afflict as few as 2,000 people globally.
Shire’s stock fell 11 percent in two days as investors questioned the wisdom of the deal. Since then, however, shares have more than tripled, making Shire the second-best stock performer among the world’s 30 biggest drugmakers. The medicines it got from Transkaryotic, some of which cost more than $300,000 a year per patient, are among the world’s most expensive. The products have raked in almost $3 billion in sales and are growing more than 10 percent a year. “It’s been a fantastic acquisition for Shire,” says Adrian Howd, a Berenberg Bank analyst who was cool to the deal when it was announced. “At the time it looked like quite a bold step away from their area of expertise. I don’t think anyone saw the full potential upside initially.”
Now bigger rivals want a piece of the action. Pfizer and GlaxoSmithKline, also facing the loss of billions in revenue over the next few years as their high-revenue drugs face competition from cheaper copycat pills, have both set up rare-disease units in the past two years and made acquisitions to feed them. In April, Sanofi completed its $20.1 billion buyout of Genzyme, the world’s biggest maker of drugs for rare diseases.
Drugmakers are drawn to rare diseases by so-called orphan drug laws in the U.S. and Europe, which offer tax breaks and market exclusivity for up to 10 years to makers of medicines for disorders affecting relatively small numbers of people. That lets drugmakers such as Shire maintain high prices and smaller, cheaper sales forces because, in some cases, their treatments are the only option. “The clear benefits they offer mean you can price these drugs relatively highly,” Howd says. “They’re small addressable markets with a limited number of people, so you don’t have to provide as much infrastructure.”
Shire’s plan for staying ahead of the pack is to “push the boundaries” of treatments for rare genetic diseases, Chief Executive Officer Angus Russell says. “The next frontier is about where these diseases have migrated into the brain,” Russell says. He points to a rare brain complication of Hunter syndrome, an enzyme deficiency disorder that kills most of the boys it strikes before they’re old enough to vote. The only current treatment involves drilling holes in the skull and injecting drugs.
Shire’s solution: an implantable device that will deliver its medicines to the brain. “All the leading physicians in the space told us it would be impossible,” Russell says. “But what we’ve proven is that we can get as much drug in there as if you’d done it directly intracerebrally.” Shire is testing the approach in about 15 patients with Hunter (which affects only 2,000 worldwide) and another 15 with Sanfilippo A, a related malady. After two years of trials, Shire says, none have experienced serious side effects. Data showing whether it’s working will become available as early as mid-2012, Russell says. If it is, the approach could add $500 million a year to Shire’s sales, says Cowen analyst Ken Cacciatore.