Best Pharma not Big Pharma is Merck Serono head Elmar Schnee’s business philosophy. Here he tells Pharm Exec Europe how the Swiss-based company aims to achieve that goal, and points to the political obstacles currently in the way.
As we’re at the height of the credit crunch, I am at first a little taken aback by the opulence of CEO Elmar Schnee’s office when I visit Merck Serono’s headquarters in Geneva, Switzerland. As big as a three-bedroom apartment and boasting mezzanine ‘living quarters’ and an elegant boardroom-sized table, it gleams with the modernist beauty that defines the building at large, a 21st century crystal palace of steel and glass covering 58,000 square metres and flooded with light from every angle. From an ethical point of view, this much glass can convincingly stand for ‘business transparency,’ not to mention a considerable saving in light bulbs. But the luxury of Schnee’s office in particular seems a little conspicuous, and not necessarily in keeping with a new world view promoting modesty and cost-effectiveness.
So I am a little relieved when I hear that the office was originally designed for the former Serono owner, the unashamedly wealthy Ernesto Bertarelli. It’s clearly the lair of a billionaire, and was just one of the things inherited by Schnee when Germany’s Merck KGaA bought Switzerland’s Serono for E10.5 billion in September 2006.
Of course, that acquisition also saw Merck inheriting a good deal more. As of the end of 2006, Serono had 38 drugs in its R&D pipeline compared with Merck’s 27 drug candidates, and the Swiss company had 50percent more biologicals. Serono was an established force in therapeutic areas outside Merck’s focus—multiple sclerosis, fertility—and also provided Merck with a much needed route into the US market. Schnee himself became CEO of the new operation, having been head of Merck’s ethical pharma division from 2005. Retaining the Switzerland facility (and its 1,200 staff) was a key aspect of clinching the deal; Schnee duly moved over to Geneva from Darmstadt, Germany, to put his name on the door of his grand new office in early 2007.
Best not biggest His immediate surroundings not withstanding, Schnee begins by telling me that the company philosophy that engendered the Serono merger was about “best not biggest.” He is eager to point out the difference between that deal and the recent, headline-grabbing mergers fuelled by Pfizer and US Merck. “The Serono acquisition was for us what I call a transformational merger,” he says. “It was a knowledge merger, not a merger of scale as we have seen with Pfizer and the US Merck. We had four criteria for our acquisition: critical mass in R&D; access to the US; the ability to decrease our dependence on Erbitux (Merck’s cancer drug); and to strengthen our oncology pipeline. On top of that we got all the biotechnology knowledge.” Schnee believes that the size of Pfizer means it had no other choice but to pursue its megamerger—“if you have a 50 billion turnover, you would need to add Merck Serono’s whole turnover every year to grow 10percent”—and although the Serono acquisition propelled his company to the position of seventh biggest drug group in Europe, he is confident that Merck doesn’t need new blockbusters to grow; he is content to place the company’s future in tailored medicine and to continue “happily making products that make 300 or 400 million.”
That said, it has been widely reported that Merck Serono is splashing out E350 million on expanding its biotech production site at Corsier-sur-Vevey (Switzerland) in order to manufacture greater quantities of Erbitux, which had notched up sales of E565 million by the end of 2008. Production will start in 2012. Schnee says however that this is as much a move to protect the knowledge of future products as it is to put eggs in the Erbitux basket. “We currently use contract manufacturing,” he explains, “which is an expensive endeavour, and means that, as you develop a drug, you give away a lot of knowledge about it. So it’s not only a financial consideration to build this new plant, but also a strategic one for new products. Our pipeline is now predominantly biotech, so the expanded plant will allow us to scale up and to our development and production in house.”
It’s nonetheless a sign of great confidence during these times that Merck Serono is putting money into opening new facilities and the creation of new jobs (over 200), when much of the industry is doing the opposite. So I ask Schnee the question I have routinely asked pharma leaders since the middle of last year: is his company recession-proof? Of course, the answer is dependent on the duration of the crisis. But Schnee has already expressed that some of Merck KGaA’s other industry areas are by nature to be hit; the liquid crystals business, for example, is suffering as sales of expensive flatscreen TVs recede. Closer to home, the fertility business that Serono brought to the merger could also be impacted, as half the costs are paid by those couples receiving the treatment.
“There are of course worries if the crisis extends to the mid-term,” Schnee says, “but, as I tell people, we are one of the few stable businesses in the economy. We haven’t fired anyone; we are still increasing employment.” And he points out that there are even opportunities to be seized: “Assets can be picked up, and a good management team can show its strength when times are hard. It’s like sailing. Sailing in fine weather isn’t a challenge, but when a storm comes up, that’s the test.”
Of course, as a family company (70percent of Merck’s total capital is privately held by the company’s founding family), quarterly results are less important for Merck than they are for 100percent public companies, enabling it to take a long-term view. And any company that has been around since 1668—when Friedrich Jacob Merck acquired the ‘Engel Apotheke’ (Angel Pharmacy) in Darmstadt — has already seen off a good few economic slumps (not to mention a couple of world wars and the odd global pandemic). NICE and IQWIG
Schnee’s biggest concern is more political, namely Germany’s Institute for Quality and Efficiency in Healthcare (IQWiG) and the UK’s National Institute for Clinical Excellence (NICE). Erbitux is still unavailable on the UK National Health Service (NHS) after being rejected by NICE in 2006, but Schnee reserves his strongest criticisms for IQWIG. “There is a danger that mechanisms are used just in the short term to fix budget problems. This is what IQWiG has done in Germany. I am absolutely for health technology assessments. But we cannot only focus on drug costs; what about the healthcare costs related to work absence, for example?” As you might expect from a man who sits in an office of windows, Schnee is most aggrieved about what he calls IQWIG’s lack of transparency. “IQWIG is a closed shop; it does not use state-of-the-art processes. It chooses its studies. It has a very strange hurdle rate for incremental innovation, which is used nowhere else. And its use of experts is not public; we don’t know who it is consulting.”
At least NICE, he says, does have transparency, and uses “some sort of global standards in its evaluation of the costs and benefits of treatment.” But NICE’s controversial calculation of the ‘price of human life’—the Institute sets a threshold of Ł30,000 per year of good-quality life (QALY) gained when it considers drugs for NHS use—is something Schnee has trouble accepting. “How can you actually calculate that?” he says. “Look at cancer survival rates. In Switzerland and Sweden, for example, it’s five years longer than in the UK. It’s not acceptable in my view that, in the UK, a patient with colorectal cancer does not have access to Erbitux as a first-line treatment, when he does in Poland, Hungary, Macedonia, Venezuela and so on. Richer patients may be able to get the drug if they try, but it generally means that if you are not well off you die earlier than when you have money.”
Schnee appreciates that the cost of healthcare is a serious issue and that the pharma industry has to be part of the solution and not the problem “even if it costs a few percentage points in profit.” Indeed, he points to the increasing use of biomarkers as a key area for achieving the kind of cost-effectiveness striven for by NICE and IQWIG. With the use of diagnostics identifying the 40percent of colorectal cancer patients in which Erbitux doesn’t work, patients falling into this group have since not been given the drug. “That means the cost of Erbitux just got 40percent cheaper,” he explains.
Ultimately though, Schnee feels there has to be a system where innovation is rewarded. “New products cost more than old products. Clinical development costs have doubled in the last ten to fifteen years. If we want to have a thriving industry, societies, governments and consumers have to be prepared to pay more for this innovation, or innovation is dead. This equation isn’t always understood.”
A clearer vision As frustrating as Schnee finds this situation, he is calm in his discussion of it. After twenty years in pharma, he still feels privileged to be engaging with these issues on a daily basis. He still finds pharma “a fabulous business” and appreciates the fact that “we can make a real difference to the man and woman on the street, and it’s hard to be able to say you can do that unless you are a doctor or surgeon.”
In dealing with these challenges and hurdles, it must also help when you’re soothed by a view of Lake Geneva, which lies not far from where the Merck Serono building stands. The lake is famous for its tranquility and for being crystal clear. It’s certainly a calming counterpoint to the financial storms of the recession and the political turmoil of NICE and IQWIG. Schnee seems to have physical transparency all around him. There’s no wonder he takes inspiration from it.