George Abercrombie, Roche Holding’s top guy in the United States, has been administering first aid to the troubled drug company’s American operations. “Roche has turned around,” Abercrombie declares. “There’s a noticeable, palpable feeling, a fundamental difference from two years ago.”
A cynic might say things had nowhere to go but up.
Back in January 2001, when Abercrombie became CEO of North American pharmaceutical operations, the century-old Swiss-based company-renowned in the 1960s as the creator of Valium-was besieged by trouble on all sides. Over the prior three years, it had abandoned seven drugs in the last stages of clinical trials and pulled two others already on the market, an extraordinarily high failure rate even for an industry that expects failures. Moreover, acne medication Accutane-Roche’s third-best-selling drug-was expected to face low-cost generic competition in a year, and sales of another hoped-for blockbuster, the diet drug Xenical, had been disappointing. In Europe and the United States, regulators were investigating the parent company’s vitamin business as part of a price-fixing probe. Operating profit was trending down and would ultimately plunge by more than 50 percent for the year. And Abercrombie did not even have unfettered freedom to try to improve things because he answers to top management in Basel.
For this, Abercrombie had left a position as senior vice president at GlaxoSmithKline, the world’s second-largest drug company-not to mention his beloved University of North Carolina basketball games. He had put his reputation as an up-and-comer on the line.
But analysts on Wall Street and in the pharmaceutical industry generally agree that Roche has begun to turn around. Abercrombie deftly managed to pump up morale while laying off one-quarter of the U.S. work force within his first six months. In addition, he has launched two important new drugs in the past year. Insiders say he also increased the influence of the U.S. unit at headquarters.
As the CEO responsible for the biggest drug market in the world, Abercrombie is a key player in determining whether Roche can continue its recovery. “The U.S. is the biggest, most dynamic and most important market in our business,” says Franz B. Humer, the parent company’s CEO. “The standing of the U.S. has increased [at headquarters] because of the success George has achieved.”
Adds Lee E. Babiss, vice president of preclinical research: “George was able to articulate a very clear vision early on that he wanted to be Number One in the U.S. in all the areas in which we compete. It might sound a bit vanilla, but no one had ever said it here.”
Short and trim, with wire-rimmed glasses and the occasional remnant of a Southern twang, Abercrombie started out his career managing a retail drug store in North Carolina for three years after college. That didn’t satisfy his managerial ambition for long, however. He enrolled at Harvard for an MBA, then in 1983 headed to what would soon become the premier drug company in the world, Merck. He spent 10 years there, mainly in marketing, and eight more at Glaxo.
When Abercrombie took charge of Roche’s 123-acre collection of labs, assembly lines and offices in suburban Nutley, N.J., his boss, Humer, told him, “Have a look at the organization and come up with a plan on how you want to tackle this.” Expenses were out of line with revenues because the company had built up, anticipating success with Xenical and the nine abandoned products. To cut costs, Abercrombie laid off 900 people, the bulk of them in sales. After all, there were nine fewer products to pitch now.
If there’s no good way to hand out pink slips-nor an easy way to keep morale up during a downsizing-Abercrombie seems to have done it as well as anyone. The key, he says, was communication: “Whenever we made a key decision about a time and events schedule, we immediately told the employees.” It also helped that the reasons were so obvious. “They saw it coming,” he says.
With profits and the stock price sagging, so many hoped-for drugs trashed and such a wide swath of layoffs, “the challenge was to rebuild the belief in the company,” Abercrombie says. He tried everything from employee recognition lunches to a management restructuring to a $20 million upgrade of the marketing staff’s computer system. Much of his effort focused on the 2,000 remaining sales people. He sweetened incentives, revamped training and went with them to meet customers. To pump up Xenical’s sales, “we undertook one of the most sophisticated attempts to segment the obesity market,” distinguishing patients by such criteria as their history with other diet products and their relationship with their physician.
The most important boost to morale, though, came from the launch of two products: the hepatitis C drugs Pegasys and Copegus, and the AIDS drug Fuzeon.
Pegasys, a once-a-week injection, is taken in combination with Copegus, a pill. The two are aimed at the estimated 2.7 million Americans with hepatitis C, which can cause cancer and cirrhosis of the liver. Roche faced one big disadvantage: By the time its combination got approval from the Food & Drug Administration last December, Schering-Plough had already had a product on the market for nearly one and a half years. To catch up, Abercrombie decided to offer 15,000 new patients a 12-week free trial-a tactic that is becoming more common but is still far from standard in the industry, according to Shaojing Tong, a pharmaceutical analyst at Mehta Partners, a small money management firm. In addition, Copegus was priced at a 43 percent discount to its Schering-Plough rival. “We sent a series of signals that said, €˜Roche is serious about helping patients reduce the cost of treating this disease,’ ” Abercrombie says.
The result: By July, the combination had grabbed a 35 percent share of the U.S. market. “They have been doing great, and it’s mostly attributable to great marketing practices,” Tong says. (A Schering-Plough spokesman wouldn’t comment, except to say, “We are the established product and the standard of care.”)
The AIDS drug Fuzeon, which was approved in the United States this past winter, is both more complex and more controversial. Roche officials insist that it is the most elaborate pharmaceutical ever manufactured, a long chain of amino acids that requires 106 steps to produce-more than 10 times the number of procedures involved in making a typical drug. They say the company invested more than $600 million to develop the product. Moreover, they note that it’s the first major AIDS innovation since the protease inhibitors that revolutionized treatment in the mid-1990s. Whereas other drugs try to block the AIDS virus from replicating inside a cell, Fuzeon prevents it from entering a cell to begin with. Because patients quickly develop resistance to existing drugs, it’s crucial to have a new one like Fuzeon.
At nearly $20,000 a year in the United States, Fuzeon is also by far the most expensive AIDS medication on the market. “We could not afford to bring this product to market at a price less than what we are charging,” Abercrombie contends. AIDS activists like Mark Milano of the New York branch of ACT-UP (AIDS Coalition to Unleash Power) aren’t convinced. “We agree that this is a very difficult drug to make,” he says. But since drug makers say it costs $800 million to develop the average drug anyway, Milano notes, “the process to research and develop [Fuzeon] is no more than for any other drug.”
Overpriced or not, the innovative Fuzeon and strong-selling Pegasys have clearly enriched Roche’s image. “The company, with its launches this year, is presented with some opportunities to turn a corner,” says Catherine Arnold, a senior research analyst at Sanford C. Bernstein & Co. Sales for the pharmaceutical division were up 21 percent in the first six months of 2003, and the stock price climbed steadily from March through mid-summer. For the year, the company is projecting total sales growth (including a small diagnostic division) at between 10 and 20 percent.
The big question is, will growth continue? “The jury is still out on the long term,” Arnold says. The key is what else Roche has in its pipeline, including alliances with smaller biotechs.
Even before Abercrombie arrived, R&D was drastically revamped. Roche still prides itself on cutting-edge research, but it’s hedging its bets by pursuing more standard types of research in osteoporosis and anemia. It also tries to pull the plug on disappointing drugs sooner. Among the most promising prospects are CERA (Continuous Erythropoiesis Receptor Activator) for anemia, Bondronat for osteoporosis, the still-unnamed R450 for stress urinary incontinence (most common in women) and MRA for rheumatoid arthritis. Much excitement also has revolved around the colorectal cancer drug Avastin, being developed by Genentech, in which Roche owns a majority stake. For his part, Abercrombie refuses to single out any particular bright hopes among the 195 projects in development, insisting that the company has “a well-balanced, very healthy research pipeline that has the right number and types of projects at the right stages of development.”
But most of the eye-catching prospects are still in the middle or early stages of clinical testing. Abercrombie says they will be hitting “milestone” decision points in 12 to 18 months.
As another potential problem, most of Roche’s recent signature products-including the breast cancer drug Herceptin, Pegasys and Fuzeon-are considered specialty treatments with narrow markets. For instance, just under 1 million Americans have AIDS and 2.7 million have hepatitis C; by contrast, there are fully 33 million potential American customers for a diabetes drug and perhaps 38 million for a cardiovascular drug. In its pipeline, Roche is aiming for some bigger markets, including osteoporosis, depression, diabetes and asthma. But when it tried to branch out to broader markets in recent years, it rarely succeeded. The narrow focus of its product line means it’s tough for Roche to come up with drugs that sell $500 million to $1 billion a year.
That, in turn, means Roche will have trouble breaking out of the second tier. Right now, it has only one drug, Genentech’s Rituxan, counted among the world’s 50 best-selling prescription drugs as tracked by Med Ad News. In listings of the world’s 500 largest companies, it also falls in the lower half of its industry. Those ratings make it prime merger bait. Novartis, headquartered across town in Basel, owns a 32.7 percent stake and has made no secret of the fact that it would love to own the rest. CEO Humer and the founding Hoffman-LaRoche family are resisting all merger talk.
Nor does Abercrombie call all the shots on R&D. It’s a strange position: on the one hand, he is charged with ensuring Roche’s success in the U.S.; on the other hand, he doesn’t have the final say in R&D. Research is done throughout the world. Key decisions are made by two committees in Basel, the pharmaceutical executive committee and the lifecycle committee. Abercrombie is a member of the former, while his boss, pharmaceuticals division chief William M. Burns, sits on the latter.
But Abercrombie clearly has more influence than any other regional chief. “All I have to do is pick up the phone and call my boss,” he says. “The significance and importance of the U.S. market are recognized by everyone.” Agrees Humer: “I don’t give marching orders. I am a firm believer that I can’t solve problems 10,000 miles away.”
Abercrombie gets even more deeply involved in R&D in Nutley, which includes depression, asthma, anemia and nausea. People who knew Abercrombie at Merck say they can see why he’s been so effective. “His interpersonal skills are superb,” says J. Martin Carroll, president and CEO of Boehringer Ingelheim Pharmaceuticals Inc., who worked with Abercrombie at Merck. No one would call Abercrombie the back-slapping type; rather, he’s described almost universally as “a class act” and “a gentleman,” with a sharp, analytical mind – maybe too analytical. “He can drive people crazy. He was always involved in the details,” says Kevin Lokay, head of the oncology business unit at Glaxo, who was one of Abercrombie’s closest colleagues at Merck.
Being so meticulous about details may not be such a bad trait for a CEO in an industry that relies on precise science. For Roche to continue pulling out of its slump, it could take all of Abercrombie’s meticulousness, personal skills and marketing savvy. And then some.
Fran Hawthorne is the author of The Merck Druggernaut: The Inside Story of a Pharmaceutical Giant (John Wiley and Sons).