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Great Titchfield Street, London -- Shire Pharmaceuticals Group (LSE: SHP) is one of the FTSE 100's lesser lights despite its stellar share price performance since its 1996 flotation. However, today's news that it is merging with BioChem Pharma (Nasdaq: BCHE) to create a company valued at almost £6b may force it into the spotlight. Once the merger of Glaxo Wellcome (LSE: GLXO) and SmithKline Beecham (LSE: SB.) is completed, Shire will become the UK's third largest pharmaceutical business. So what does Shire do? Shire's traditional approach has been to do little in the way of basic research and development and instead buy products after they have completed initial tests. This means that the risk of failure is reduced but still avoids paying the large price tags demanded for completed products. Shire's main product is Adderall, designed to treat attention deficit disorder. Currently this accounts for a massive 40% of Shire's revenues and it is unpatented. Copycat versions are expected to hit the market within a couple of years. Shire has taken some steps to address this by developing SLI 381, which treats the same problem and has a patented delivery system. Why the merger? Shire does have a number of other drugs forecast to produce strong revenue growth over the next few years, such as Dirame for moderate pain relief and Agrylin for thrombocythemia, but it will still be heavily dependent on the combination of Adderall and SLI 381. BioChem Pharma broadens the product range of the group with its concentration on HIV and cancer products. BioChem is more involved in early stages of drug development. Like Shire it is already profitable. The combined group would have produced profits after tax of £100m on sales of £400m for 1999. Profits for the first nine months of 2000 have come in at £120m. Shire is issuing a large number of new shares to fund this merger. It is offering $37 of its ADRs for each BioChem share. That's a 40% premium over BioChem's share price at the close of trading on Friday. It is a good deal? Shire's shares are down about 8% at the time of writing, which indicates a reasonable thumbs-up from the market given the large number of new shares being issued. In some respects Shire is going back on its stated strategy by buying a company involved in the early stages of pharmaceutical development. But balanced against that is the fact that its product base will become a lot broader, although Adderall still accounts for 33% of sales. But Shire has proved itself to be a shrewd operator over the last few years and it still looks a company worth backing for the long-term. Where Next? Shire Pharmceuticals discussion board
Merger presentation
TMF Guide to Biotech Investing (on Fool.com)
Read more about Shire in TMF's Industry Focus 2001