The alchemist's gamble

Trying to pick a winning medicine is a task to make even a lottery punter tremble. Yet Rolf Stahel has found a way to turn this gamble to his advantage, building Shire from a one-drug company worth $40m six years ago, to one valued at $500m with a very promising future
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Just suppose for one fleeting, wistful moment that it was possible to delay placing bets on the spin of the roulette wheel. Imagine that chips could be laid not as the wheel was spun, not even while it was spinning, but when the ball was wobbling over its chosen number. In the pharmaceutical industry's version of roulette, that is exactly what Rolf Stahel has done, and it has resulted in a spectacular lowering of the odds against success in an industry where finding the right drug makes gambling on the lottery look a cinch.

Just suppose for one fleeting, wistful moment that it was possible to delay placing bets on the spin of the roulette wheel. Imagine that chips could be laid not as the wheel was spun, not even while it was spinning, but when the ball was wobbling over its chosen number. In the pharmaceutical industry's version of roulette, that is exactly what Rolf Stahel has done, and it has resulted in a spectacular lowering of the odds against success in an industry where finding the right drug makes gambling on the lottery look a cinch.

Instead of gambling on early stage research projects with an outside chance of them leading to marketable drugs, he waits until they have been tested and all but proven by others before taking them on. His cherry-picking of tomorrow's drugs, from academia, biotechs and research boutiques, has not only dramatically shortened the odds against commercial success, it has made his company, Shire Pharmaceuticals, hugely successful.

When Mr Stahel, now 56, took over as its chief executive officer (CEO) six years ago, Shire was a modest company with a turnover of around $3m and market capitalisation of about $40m. Today, turnover is more than $500m and revenue has increased a hundredfold.

Before being headhunted to run Shire, Mr Stahel had been with Wellcome for almost all of his working life. He had worked around the world for the company, latterly as regional director for the Pacific Rim, before being brought back to the UK as group marketing director responsible for global marketing. It was four years into that job, and 12 months before the Wellcome merger with Glaxo, that the call came to join Shire. He says he doesn't know who initiated the headhunting, but Schroeder Ventures is top of the list of suspects.

"Shire contacted me through a head-hunter. The message was, 'Please join Shire. They want to go public. You have been involved in the flotation of Wellcome. We want your experience to guide the company and to get it listed on the London Stock Exchange'," he says.

After 27 years with Wellcome, it was a tough call: "At first I was very concerned, as you can imagine, after so long with one company. I consulted a friend of mine in the City and my argument was that I didn't want to change, I didn't know Shire, it was a tiny company, and I didn't want to leave Wellcome where I was safe and where the company knew me and where I liked the company," says the Swiss-born businessman. "My friend replied that nothing was safe. Mergers were occurring everywhere, and that I was better off as a CEO of a smaller company which I could guide to new markets.

"It was an opportunity to join a company where I could implement my ideas. It was a time when the industry was changing, mergers were taking place and so on, and strategies worked out 20 years earlier were no longer appropriate. It was a convincing argument."

It did convince him, although it took him a few weeks to decide before making the switch. That change, from Wellcome to Shire, was a move to a different world. True, they were both in the same industry, but there any resemblance ended. While Wellcome was then spending £1m a day on research and development, Shire's R&D costs were £1m a year. While Wellcome numbered its reps alone by the thousand, Shire's total payroll was a modest 50 or so. Wellcome was also a world player in the industry, and Shire was then in only two markets, the UK and Ireland, and most of its business revolved around one calcium product.

At the time, the early 1990s, the pharmaceutical industry worldwide was engaged in a round of titanic mergers creating huge multi-nationals with enormous resources that dwarfed the likes of Shire. The focus of drug development was also continuing to change. Earlier in the last century, the focus had been on drugs for treating infectious diseases. Now, with people surviving those diseases, they live longer and have greater expectations. The hot money now is on drugs for age- related, chronic and degenerative diseases like Alzheimer's and arthritis, as well as cancer.

Although the pharmaceutical industry appears to offer the prospect of riches galore, the key to real success lies not only in choosing the right product focus, but also in getting the right ideas to work. The pharmaceuticals had traditionally had their own self-contained production lines, processing ideas from the test tube to market. The downside was that so few of the drugs that began as a twinkle in the scientists' eyes ever made it on to the right side of the balance sheet.

"Even the most conservative figures will show that only one in 10,000 research programmes make it to the market. That means that if I want to be statistically successful, I need to run multiples of 10,000 projects in order to have a number of products to launch. That is too expensive for Shire to get involved in, so we don't," says Mr Stahel. "There is nothing wrong with going into early development. What in my mind is wrong is to take 10 programmes and hope that out of those 10 you are going to be totally different to anyone else and finish up with a product launch out of the 10. Statistically, that is a dream and only if you are a successful gambler will you succeed."

With the rapid rise of gene-based therapies thanks to the completion of the human genome project, some analysts believe the odds against early discovery drugs making it to market may rise to 100,000 or more to one. Shire's winning philosophy is to reduce those odds by simply not doing discovery work. It also focuses on drugs for specialist markets, mainly treatments for the central nervous system, thus avoiding the need for employing manpower to sell to thousands of GPs. In addition, actual production of all drugs is outsourced.

"Our whole philosophy is based on just three areas, search, development and marketing. Search means finding projects rather than doing discovery research in-house, Discovery research is the first step in the development process of pharmaceuticals and it is where scientists look for ideas that may work.

"They would have made patent applications and they would have been pretty convinced from animal testing and whatever other models they used that they had a winning project. We would buy that program and at the stage we are buying I would hope we would have something of the order of a one in 10 chance of bringing it to market.

"It is at that stage that we buy ideas in from biotechs, universities and research boutiques. We are looking for jewels around the world. We are going out to try to sniff out projects that have a chance-of-success factor of one in 10. That is still pretty hairy but much better than one in 10,000. Finding projects is the key to the success of our company and everyone in the company knows that. Every executive in his or her area is looking for opportunities, and we have now built up a dedicated search team of highly qualified specialists in the US and the UK, people who are able to identify projects, negotiate deals and so on."

And these feeder companies are keen to talk to Shire at its new headquarters in a former farmhouse complex in Andover. "Because we haven't got our own discovery work, they all know there is no competition from within. Many companies who have products but no downstream marketing or development capability are now coming to Shire to see if we are interested in becoming a partner."

Although a one-in-10 chance is phenomenally successful in pharmaceutical terms, Shire has worked out a strategy for reducing even those odds. "When you have a research project there are three possible areas for failure. Either it doesn't work because it has no efficacy, or it is efficacious but it has such horrendous side effects it is not useful. The third possibility is that it is OK on the first two, but it cannot be delivered to the site of the disease. What we try to do is to eliminate two unknowns and only develop products that have one of these three risk factors, and then we are talking about risk odds of one in three or four."

The company's new drug for Alzheimer's, Reminyl, developed from active compounds in daffodils and launched in the UK last week, is a case in point. It had been used for treating another condition for a number of years and so its side effects were known. It was also known that it could get through to the brain. The only unknown was whether it would work against Alzheimer's, and clinical trials showed it did, although Mr Stahel stresses it is not a cure.

Big pharmaceuticals have also moved to using more outside early development work, Mr Stahel says, something that would have been unheard of a decade ago because of what he calls the not-invented-here syndrome that operated in the big companies.

"Now, some of the big companies are 50 per cent external projects. In five years it may well be 75 per cent. We take 100 per cent. All the big pharmaceuticals are moving that way. Why? Because the inherent growth for big companies is in single digit figures which is not what the investors want."

So what do the big pharmaceuticals think of Shire? "They are amazed at the rate at which we are growing. We are looking at an increase in market capital of 80 per cent in 12 months, while they are growing 15, 10 per cent, or less." And the future? "We have made five mergers in the last six years. I have on my task list, without any promises or guarantees, a number of things we would love to do. We may only do part of it, we may do none at all."

One of his targets is to add a further £100m profits after tax. Another is diversification with more early stage products in the pipeline. "The big advantage Shire has is that we now have 15 projects in development, and 10 of them are already into phase three, late-stage trials. It is unheard of in our industry to have so many products, such a big percentage of the portfolio, so late," he says.

It's a portfolio that his old chums at Wellcome would have been proud of. It's also a portfolio that few would have predicted in 1994 when he left Wellcome to join Shire.

But despite his success and the spectacular rise of Shire, he still has a dewy eye for the old Wellcome company. "In those last four years at Wellcome I learnt a lot. Without that time learning about risk management and what to do and what not to do, I would not have been able to guide Shire in the way that I have and do. I owe everything to Wellcome."

In the cut-throat world that is the pharmaceutical industry, that's a rare message from the heart. Almost as rare, indeed, as a winner at the roulette wheel.

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