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Novartis CEO Daniel Vasella: That Vasella Fella

Swiss drugmaker Novartis has brought 16 new drugs to market in the U.S. since 2000, compared to 13 for Pfizer and 9 for Merck. Now CEO Daniel Vasella is using biologics as a platform for the next stage of growth.

The next decade does not look promising for Big Pharma. Research and development productivity has eroded and most top-selling products face patent expiration. Regulatory burdens and pricing pressures are sure to get worse. Cost-cutting can only do so much to preserve profits. Some drugmakers are desperately trying to repair gaps in their product lines by buying smaller firms with drugs that are already approved. Many are busy streamlining their research efforts to improve the payoff.

Daniel Vasella, 54, president and CEO of Novartis, the $37 billion Basel, Switzerland-based maker of patented and generic pharmaceuticals, vaccines and over-the-counter products, does not appear troubled by this. In true Swiss fashion, he tries not to gloat about his company’s pipelines (138 projects in development), which are considered by analysts to be among the strongest in the industry. Wall Street sees its key growth drivers (Diovan, Tekturna, Gleevec, Tasigna, Exjade and Aclasta) as the company’s “cliff protection” -when branded drugs go off patent and face competition from generics. By 2012 the top 10 drugs in the world (e.g. Prevacid 2007, Lipitor 2010, Nexium 2011, Plavix 2011) will have gone generic, leaving many large-cap pharma stocks on the wrong side of the cliff. With soon-to-be-genericized products representing 20 percent or more of earnings in some cases, a general industry concern is how Big Pharma can grow. Since it was formed in 1996, as a result of a merger of Sandoz and Ciba-Geigy, Novartis has been more diversified, with only 60 percent of its revenues dependent on patented drugs. Vasella has had to pursue a different course than his competitors.

Earlier this year, the company had its share of woes when the FDA rejected its most important pipeline product (Galvus) and watched rival Merck charge ahead. Last March the FDA asked Novartis to stop selling, at least temporarily, its chronic constipation drug Zelnorm after a combined 29 clinical studies turned up an increased cardiovascular risk. It, too, faces a revenue hole from patent-expiring drugs such as Lamisil and Trileptal but doesn’t have to face a major problem until 2012, when the $4.2 billion Diovan goes off patent. The company is facing problems with patent issues in India and is planning to shift its major R&D center to China. Still, through its Sandoz division, Novartis gained European regulatory approval of its Epo alfa drug, a cut-price “biosimilar” version of Amgen’s Epogen, the drug that made Amgen one of a handful of successful biotech companies. The move is an important step in the fast-growing $55 billion world market for biological medicines. Having traveled a considerable distance from his clinical practice in Bern, Switzerland, Vasella is an unassuming figure for the CEO of the world’s fourth largest pharma with a market cap of over $125 billion-and it’s not just because he is Swiss. As a student at the University of Fribourg, where his father was a professor, he was something of a wild-eyed Trotskyite. (The highest paid executive in Switzerland says it was the “authoritarianness” of its adherents that ultimately turned him against Marxism.) He says he continues to question authority-even his own judgment- because “one should assume nothing.”

A private but relaxed leader, Vasella likes to ride a Harley-Davidson on weekends and enjoys the solitude of mountain hikes in Austria or family getaways in Tanzania. CE‘s J.P. Donlon recently caught up with him in New York. 

Given that Big Pharma is investing twice as much in R&D as it did 10 years ago to yield 40 percent of the new drugs it produced then, is it time for the industry to change its development model?
That’s only partly true. Ten years ago, the industry had very high that has been resolved. Over the last 40 years, approval rates have seen highs and lows. Taking this into consideration, the industry’s approvals today are about average. However, we pay much more  per compound, which means the dollaramount spent for each approved drug is more expensive by anywhere from 1.2 to 1.5 times what we used to spend. The output hasn’t declined, but the productivity certainly has. And, of course, what is being approved today was discovered 10 to 15 years ago, so you would have to look at the research productivity 10 to 15 years ago.

Today, pipelines are fuller than ever. As a result, we potentially have more approvals coming, particularly in biologics. However, we also see a regulatory authority that has become much more conservative.

Clinical trials are longer. The risks are higher. There are more technologies to finance; the studies are more complex. And they don’t want just one study; they want four. Years ago a study had a few hundred patients. Now, it’s thousands of patients. In one drug study we had 18,000 patients. At such large numbers it’s very expensive.

How do you resolve this problem?
First, we compete in an industry where the hurdles are big for everybody. It makes market entry high. Second, the question is, Are you better than the competition? To do this, one must attract and retain great talent to create an environment in which they have all the technologies available and the freedom to operate. This is especially important in the discovery area. When one reaches the development stage, one must be much more disciplined. Five years ago, we created a new institute in Cambridge, Mass., where we’ve moved our research headquarters from Switzerland to the U.S. We’re now opening a new center in Shanghai. How well are the incremental investments in discovery research paying off? The number of completely new molecules has steadily increased over the last five years. We increased that number from a low, single digit to 25 percent of the portfolio. The portfolio has grown to about 138. We have many more biologics, proteins and more complex drugs but also with lower attrition rates, meaning less risk of dying in development. We also increased R&D investments by about 90 percent since 2002. It’s a huge commitment, but it seems to pay.

Why not just license?
Licensing compounds has become more expensive, as fewer assets are chased by more people interested in them. I also believe strongly that once dependent on outside sources, you’re hostage. In the end, surviving in this industry is completely dependent on the power to elevate-to bring products differentiated from others in the marketplace, meaning better efficacy or fewer side effects. If one is able to do that, patients and payers will pay a premium. If you aren’t, there will be no money available.

What about having better or more productive scientists than Merck, Pfizer or Roche?
That’s important, but it’s more about having the right environment, the culture, the smell of the place, where people are engaged, can live their ambitions, and are not under-motivated by 500 bureaucratic rules.

How do you as a CEO, conducting this Wagnering-sized orchestra of scientists and others, convince yourself that you’ve got the right environment for each member to play his or her instrument in the Novartis symphony?
You have to choose the right leaders for the different functions and countries in which you operate. If you have the wrong guy in place, you’ll have a lot of work to do. The problem is when you find out. You hope to be as close to real time as possible and not find out after a number of years that you made a really bad decision. I was trained in medicine during the late 1980s and early ’90s. I’m not up to speed anymore on what’s cutting edge. So we have people who are. In research, we hired a scientist who also is a clinician, so he also understands the condition of the patient. We have scientists who understand genomics and microbiology because what you need to know is evolving so rapidly.

Novartis’ strategy of launching generic biodrugs seems akin to Target stores’ “Get more, pay less.” How far can you run with this strategy?
You have to ask, What does the customer want? The customer wants either a differentiated product that offers benefits not found elsewhere or a known product for less money. If you are not differentiated and the patents are gone, you want to have a quality product that is less expensive. We see huge volume gains for generics. In the U.S., it’s over 50 percent of drugs consumed today. On one side, there is aging, obesity and diabetes; on the other, we have emerging markets. Both represent a huge pull for the industry, putting pressure on prices. People try to contain it by driving physicians to prescribe generics. We are competitive in innovative pharmaceuticals, in generics and in OTC drugs. We’re gaining market share, so something is right.

Are the small margins with generics an issue?
What is a small margin? Okay, it’s not the Big Pharma margins of 30 percent, but I don’t think 15 to 20 percent is a bad business. [Over-the-counter drug] margins are around 20 percent. In generics you can have a nice margin if you are fast in development, because you make the money at the beginning of the lifecycle and if you have products that are not too easy for others to develop. Once you have three or more competitors in the field, it becomes a cutthroat business. That’s why, for example, we have biologic follow-on products like erythropoietin, a growth hormone, because not everybody has the capabilities to launch those generics. And we make forms like patches for long-term release, which is not everybody’s business.

You’ve warned that India‘s recent court judgment will push Novartis to divert substantial future funding to other countries. Why?
India has many scientists, a great university system and a growing middle class, all of which offers a great opportunity for innovation in pharmaceuticals as it did in software. Because of their agreement to join the WTO in 1995, they have good patent laws. But they discriminate against one industry, which is against WTO rules. We had a product that is clearly innovative, but India ruled that it’s not. The rules of the game, in our view, are flawed. We raised the issue with a drug that we basically give to everybody almost for free. Now, it is a matter for the WTO and the member countries to decide if they want to make it a point or not. We are not going to withdraw funds for India. But you cannot justify investing in innovation in a place if property is not protected. Why would you do that?

Are you sobered by the role shareholder activists played in forcing three Big Pharma CEOs (Pfizer’s McKinnell, Merck’s Gilmartin, BMS’s Dolen) from their jobs?
What gives me pause is not the fact that shareholders expressed their view -they should. Nor am I troubled that sustained, weak performance forces a CEO to step down. Rather, it is that activists want to castrate boards by taking power away without being aware of their role of setting long-term objectives and performance standards. If you take this away from boards, you will never have the necessary insights you need to make good judgments. I find this worrisome. If you are a shareholder and you elect board members, you should trust them or vote them out. Boards are the shareholder’s delegate and have the insight and are close enough to the business and its people to make the required judgment about management.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.