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Keeping the Pipeline Full

Thanks to its indefatigable CEO, Novartis’s R&D effort is paying off.

Soon after his Swiss pharmaceutical company, Sandoz, merged with rival Ciba-Geigy in 1996 to form Novartis, CEO Daniel Vasella set out to meet some of his researchers. One of them told him about a drug compound languishing in Ciba-Geigy’s labs that seemed to show promise against a rare form of leukemia. Even more intriguing, it worked in a completely different way from conventional cancer therapy: Instead of hitting healthy and cancerous cells alike with blasts of radiation or chemotherapy, it targeted only a particular activity of the cancer cell.

Many colleagues questioned the wisdom of pouring money into a product with such a narrow market, but Vasella persisted. Over the next five years, he personally pushed the drug closer and closer to final proof. As it became clear that the drug might be extraordinarily effective, he insisted on speeding up the production schedule. When cancer patients wrote to him, asking to be included in the trials, he answered every letter and email himself.

Finally, in May 2001, the U.S. Food and Drug Administration approved the drug, named Gleevec, in a record two and a half months. “Dan Vasella really put himself on the line with Gleevec,” says Michael Parker, director of ISO Healthcare Consulting in New York. “He drove it through the company when others in the organization weren’t so comfortable.”

The drug may have been unusual, but for Dan Vasella, the M.O. definitely was not. A medical doctor who spent eight years in clinical practice, he thrusts himself into his company’s labs more like a scientist than a CEO. He constantly meets with researchers, reads daily updates and even conducts job interviews for middle managers. Every quarter, he holds a “town hall meeting,” in person and via Webcast, with all 78,500 of Novartis’s employees.

Vasella doesn’t like cutting costs, and says he doesn’t believe in setting a fixed budget percentage for research and development. That may be unconventional thinking, but whatever he’s doing, apparently it works. In the pharmaceutical world, nothing really matters except the chemicals in the test tubes. And recently, the test tubes at most companies have been pretty dry, as the burgeoning sciences of genomics and proteomics (a field of study that uses similar techniques to analyze proteins) have taken longer than expected to produce marketable results. Only 21 innovative new drugs were approved by the FDA last year, compared with 53 in 1996. (The FDA also approves scores of other drugs that are simply new uses for existing products.)

But Novartis, after struggling for the first few years after the merger, now has one of the strongest product pipelines in the industry. It has introduced 12 new products since 2000 and plans to file for U.S. approval of 10 more by the end of 2006. Vasella was the only pharma executive included in Time magazine’s list of the world’s “100 Most Influential People” this spring, and readers of the Financial Times recently voted him Europe’s most influential business leader of the past 25 years.

A native of Switzerland, he speaks in a soft, vaguely German accent, his English flecked with old-fashioned turns of phrase like “if I may say.” Behind the Old World courtesy, however, is an aggressive, ambitious executive who is known to send emails at 3 a.m.

There are risks in Novartis’s future, to be sure. One danger is that Vasella’s approach to R&D could spread the company thin by chasing too many targets, rather than concentrating on a handful of winners. Vasella’s obvious hunger for another merger, as evidenced by his recent unsuccessful romancing of French drug giant Aventis, could also backfire in the labs. Mergers can be highly disruptive.

Family Medical Woes
But for now, Novartis is clearly winning. In large part, the 51-year-old Vasella says, his management philosophy stems from his medical background. “If you have a strong connection to your end-customer, which is the patient, and if you care about the impact, that’s a starting point” for successful R&D, he explains. Many experts agree that in an industry where the work is as technical as pharmaceuticals, it helps if the CEO is a scientist or doctor. “Really having an M.D. who understands the biology of the disease is instrumental, particularly as we get closer to individualized medicine,” says Gerald J. McDougall, the partner in charge of PricewaterhouseCoopers’s global pharmaceutical consulting practice.

Vasella certainly has seen medical practice up close. As a child in the small Swiss town of Fribourg, he suffered from tuberculosis and meningitis. When he was 10, his older sister Ursula died of cancer; watching her three-year battle with the disease, he says, inspired his interest in medicine. Three years later, his father, Oskar, died of complications from surgery. The younger Vasella earned his M.D. from the University of Bern in 1979 and spent the next eight years working in pathology and then internal medicine, eventually becoming Bern’s chief resident.

But as time went on, he says, he grew more fascinated with business. Conveniently, his wife’s uncle, Marc Moret, was chairman of Sandoz. Although Vasella says the older man tried to discourage him from switching careers, ultimately Vasella joined the company and was sent to the U.S. marketing headquarters in New Jersey. So, when Sandoz and Ciba-Geigy merged and Vasella was named chief executive, there was some sniping about how he had married into the job.

One advantage of Vasella’s medical experience is that he is able to ask sophisticated questions about the R&D pipeline. And ask he does€¦quot;on frequent visits to the labs, at monthly meetings of Novartis’s Innovation Management Board (a half-day gathering of senior and mid-level managers to discuss products under development), when he gets fresh data from a drug’s patient trials and at any time in between. Last fall, when former Medtronic CEO Bill George, a member of the Novartis board, joined Vasella on a tour of the company’s new eight-story research headquarters in Cambridge, Mass., Vasella kept stopping to chat with the bench scientists. George says he asked things like, “Show me this new piece of equipment. Is it accelerating your research? Is it getting better data?”

A CEO’s Personal Touch
I do ask about these and others, to really get to know what we have, what is the quality,” Vasella explains. He had, for instance, just read that Novartis’s drug for Paget’s Disease, a chronic bone disorder, was likely to be submitted for regulatory approval ahead of schedule, and he debated whether it was too soon to send a congratulatory email to the team working on it. George compares Vasella’s level of involvement with the personal touch that’s more likely to be found at a small biotech or technology firm, not a big bureaucratic pharmaceutical house. “It’s highly motivational,” George adds.

Beyond motivating the staff, most experts€¦quot;and Vasella himself€¦quot;say the main thing that a chief executive can do is to bring in talented people. Here, too, the Novartis boss uses his medical background to get involved at a nitty-gritty level. Sure, you would expect a CEO to personally approve the hiring of a head of pharmaceutical research who will be running the brand- new, $4 billion research center in a building shared with the Massachusetts Institute of Technology in Cambridge. But Vasella acted as his own headhunter as well. First, he asked several academics on Novartis’s nine-member science advisory board for a list of who they considered the top 10 scientists in the world. Then, he spent months courting one of those recommendations, Mark C. Fishman, a highly respected geneticist and cardiologist at Harvard Medical School who did pioneering gene discovery work with zebra fish. When Fishman declined a job offer, Vasella says, “I couldn’t take a no.” He persisted until, ultimately, Fishman accepted.

As many as 50 times a year, according to development chief Jörg Reinhardt, Vasella talks to job candidates, sometimes at far lower levels of the management chain. In the winter of 2002-’03, he spent an hour interviewing a potential head of clinical research and development€¦quot;that is, a scientist two levels below Reinhardt. Vasella says that when conducting an interview, “I generally leave it wide open to the incoming person to talk about what I should know about them specifically. After having heard them, I follow up very systematically to compare that with external assessments.”

It was also Vasella, by most accounts, who personally decided to move Novartis’s R&D headquarters from Basel to Cambridge. The Cambridge location gives the company access to perhaps the single biggest concentration of biological sciences talent on the planet.

Vasella is clearly drawing upon his American experience to recast his company. After taking over, he swept through the newly combined work force, cutting 12,500 jobs in two years and replacing 15 of the top 21 managers. He also threw out the old compensation schedule and put in a more performance-based system that made everyone down to the technician level eligible for bonus pay. “He changed the whole R&D model at Novartis to much more of an entrepreneurial focus,” says McDougall of PricewaterhouseCoopers. “They are incredibly innovative. That would have to come from the CEO.”

But in the paternalistic and staid Swiss business culture, “it was a big political issue. Everybody in Basel was afraid that jobs would be lost,” recalls Patrik Frei, CEO of a Zurich-based firm called Venture Valuation that analyzes investments for venture capitalists. In hopes of creating some replacement jobs, Novartis set up a venture capital fund to provide loans€¦quot;and, later, equity stakes€¦quot;to the more entrepreneurial among its newly unemployed. By now, it has invested about $220 million in 127 companies, mainly based in or around Zurich and Basel and specializing in health care. Novartis generally gets first crack at anything these startups develop, so occasionally the investments feed back into Novartis’s pipeline. On the other hand, Novartis-funded ventures may also sign deals with the giant’s rivals, which, Vasella says, is perfectly fine. “If we are not interested in something, they should make arrangements with others.”

Where Vasella really throws the CEO manual out the window is in setting research targets and budgets. “There are 1,001 different directions in which one could go,” says Viren Mehta, a managing member at Mehta Partners, a small, New York-based money management and advisory firm specializing in pharmaceutical and biotech stocks. “They’re all equally exciting. The CEO needs to be able to provide the direction.”

Vasella and Reinhardt, however, seem happy to pursue nearly all 1,001. “For 95 percent of diseases, there is still a need,” Reinhardt argues. “To narrow yourself down from the beginning is wrong.” As he points out, many times a compound that a company starts researching for one disease target turns out to also work for another condition or two.

End Result: A Rich Pipeline
Money doesn’t seem to be much of a limiting factor either. Novartis has been steadily increasing its R&D funding, to about $3 billion now, or 19.1 percent of pharma sales, well above the industry average of 13 to 16 percent (depending on who’s measuring). How high could it go? “If we have a lot of good compounds, it would be stupid not to do something just because, instead of spending 19 percent of sales on R&D, we would have to spend 20 percent,” says Vasella. In fact, the CEO has been known to demand more funding for particular compounds. Twice this year, after being shown the plans for clinical trials for two different late-stage drugs (officials won’t say for what diseases), Vasella ordered the scientists to come back with designs for expanded trials that would study more possible uses, eventually upping the funding for each drug by 40 percent. For the moment, at least, Novartis can afford such generosity, since it has more than $10 billion in cash.

If Novartis, the world’s fifth-largest drug company, is trying to be a jack of all trades, it hasn’t succeeded so far. It is considered strong in oncology, cardiovascular disease and drugs to help prevent rejections of transplants, but it has yet to really crack the huge and growing diabetes market. Still, its annual report lists a whopping 64 compounds in the medium and late stages of development. Among the most promising are drugs for diabetes, asthma and hypertension, all in late-stage testing, and one that is seeking marketing approval for transplants and may also have a use in multiple sclerosis. By contrast, Roche, which is considered to have a strong pipeline, lists 37 products in medium- and late-stage testing (see table, page 21.) And Merck, the third-largest drug company, has launched only four truly new products since 2004 (not counting new uses for existing drugs) and has a pipeline of just 14.

Of course, success in the prescription drug industry depends mostly on the scientists in the lab€¦quot;and pure luck. In the end, for all the money a CEO may shower on a project, for all the sharp questions and careful hiring, there’s not much the CEO can do to make sure a new drug works. “I can’t do it myself,” Vasella says. But he can, and does, create a culture that makes things happen. s

Fran Hawthorne is author of The Merck Druggernaut: The Inside Story of a Pharmaceutical Giant and the upcoming Inside the FDA, to be published next winter by John Wiley & Sons.

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