Twin Pillars - Pharmaceutical Executive


Twin Pillars
After a banner year, Roche looks ahead. What does it see? Drugs and diagnostics transforming medicine (and no mergers).

Pharmaceutical Executive

Patrick Clinton is Pharmaceutical Executive's Editor-in-Chief.

At the sprawling Roche Pharmaceuticals campus in Nutley, New Jersey, the US headquarters of the Swiss-based company, dominating the lobby of the main building stands a statue of a winged horse—white, alert, poised for flight.

It's meant as a sort of visual pun: Pegasus, the mythical steed, as a symbol for Pegasys—Roche's new therapy for hepatitis C, whose launch and spectacular sales performance were the company's high notes in 2003. It's a launch worthy of its own statue: Faced with a strong competitor in the form of Schering-Plough's PegIntron (which like Pegasys is based on pegylated interferon), Roche quickly captured a substantial share of the US market: 35 percent by summer, 55 percent early in the new year, and in some European countries where it has been on the market longer, 70 or 80 percent, achieving 2003 sales of 942 million Swiss francs (CHF), or about $750 million.

Winged Pegasus, poised for flight, may be an apt image for the company as well. After a tough spell that led to significant layoffs and restructuring in 2001, Roche stripped away noncore businesses, filled in a strong pipeline of products, trained a powerful sales force—and, last month in its annual report, announced a return to profitability, driven by a growth in pharma sales of more than 20 percent in local currencies.

A winged horse is a combination of two disparate things that yields something more potent than either. Again, not a bad image for a company that has staked its future on a strategy of combining drugs with diagnostics. With the success of Herceptin (trastuzumab) as a model, the company has restructured itself to take maximum advantage of synergies between its pharmaceutical and diagnostics divisions.

There's a third way to look at the mythical creature: It's something never yet seen on earth. And that's relevant to Roche too. The company's portfolio of personalized medicines, seamless integration of drugs and diagnostics, and "hub and spoke" management, is very much a work in progress. The horse in the lobby is a reminder, that in a fast-changing industry, if you're not flapping your wings as hard as you can, if you're not executing, the most potent vision can turn out to be, well, horse feathers.

Curing the Hiccough

George Abercrombie is the president and CEO of Roche North American Pharmaceutical Operations and a 20-year veteran of the industry, but he got his start as a retail pharmacist. After earning his degree from the University of North Carolina at Chapel Hill, he practiced for three years in the Blue Ridge Mountains before moving on to business school and a career that took him to Merck, Glaxo, and, in January 2001, to Roche. "When I was a pharmacist, the products in the fastest moving section of the pharmacy were Valium, Librium, Dalmane, Librax—all Roche products," Abercrombie says. "It's a great company with a great legacy."

Legacy notwithstanding, by the time Abercrombie arrived in New Jersey, Roche was having problems. In the mid-1990s, the company had experienced a "hiccough" in the research pipeline, as CEO Franz Humer described it. By 2001, pipeline issues were affecting the balance sheet.

"My initial assignment was to understand the economics of the business," Abercrombie says. "It was painfully obvious within the first month on the job that we had too many expenses for the level of revenues. The expense base had been built up over time to support the expectation of new product launches. We had a couple of products that didn't make it to the market and one that failed after it hit the market. So we had a mismatch.

"On the plus side, I found an incredibly devoted, smart, dedicated work force with tremendous loyalty and pride in the company's legacy. I found a research pipeline and a product portfolio that, at the time, was generally underestimated outside the company. And I found a group of employees and team members who really wanted to be winners. To me that's half the battle."

Within six months, a painful round of layoffs was complete. "To the credit of the employees, many said that they saw it coming and that somebody had to do it," Abercrombie says.

The company, meanwhile, had already begun working on its pipeline. Humer hired Jonathan Knowles to lead global research, Ed Holdener to lead global development, and Lee Babiss to head global preclinical development—a job that expanded to include the crucial areas of overlap between pharmaceuticals and diagnostics. Roche also picked up the pace and sophistication of its deal making. By the time Abercrombie finished his rationalization in North America, things were already looking more hopeful. "Coming out of that period, we took a look at our existing portfolio," Abercrombie says, "and we said that we had a great portfolio. If you look at our existing products today—we have about 10–12 promoted products—nine of those are market leaders in their therapeutic classes; a couple are No. 2, in terms of market share."

To get maximum benefit from that portfolio, Roche decided to upgrade its sales force. "We determined that sales force effectiveness is a key driver to the business in the US," Abercrombie says. "We said, 'We want to have the most effective sales force in the business.' So we undertook an initiative to enhance our training, to enhance district manager coaching and counseling. We upgraded dramatically our sales force automation system." The payoff: a sales force that in three of the past four surveys conducted by Health Strategies Group has ranked first in sales force effectiveness.

The pipeline, the financial rationalization, and the attention to sales force were all important. But just as important, a new model was emerging. Innovation, long a key Roche value, took on new meaning as the company stripped away noncore activities, including its vitamin and fine-chemicals divisions. (The company recently announced its intention of selling or spinning off its nonprescription drug business.) Meanwhile, the old holding company model was giving way to a new "hub and spoke" approach, and a new commitment was emerging to what Roche calls the "twin pillars" of drugs and diagnostics.

Coping With Innovation

Late in the 1950s, Roche's legendary chemist Leo Sternbach was winding down a research program. He had been searching for a drug to control anxiety, and the quest hadn't gone well. Then, almost as an afterthought, he had tests run on one last sample, the last result of an abandoned line of exploration.

It turned out to be a great moment in pharma history. The sample was benzodiazepine. Its discovery led first to Librium and then to Valium—drugs that altered the way patients and physicians thought about mental illness, set a new standard for safety, and changed forever the way that companies thought about the economics of medicine.

"Valium was a true innovation in its day," says Abercrombie. "It was the leading prescribed product in America from 1969 through 1982. And it represented the first blockbuster. It was a major product that put Roche on the map. And it is truly an icon in its own right."

For Roche, which at times derived as much as a quarter of its revenue from Valium, the drug was an example of the power of a truly innovative product. The lesson stuck. Over the years, the company has demonstrated a preference for drugs that open categories and introduce new methods of action. The current portfolio includes Fuzeon (enfurvitide), the first HIV drug to operate by fusion inhibition, Xeloda (capecitabine), the first oral chemotherapy drug for late-stage metastatic breast and colon cancer, and Invirase (saquinavir), the first protease inhibitor, to name just three.

Roche frequently partners with Genentech (it holds a majority of the company's stock). And outside the United States, Roche markets such groundbreaking Genentech drugs as Herceptin, the first oncology drug to be paired with a matching diagnostic that determines whether the cancer is likely to respond, and MabThera/Rituxan (rituximab), the first monoclonal antibody for non-Hodgkin's lymphoma (NHL).

"Building a brand is all about providing therapies that are meaningful to patients," says Abercrombie. "If you do that well, then recognition comes as a consequence. If your product doesn't work, if it doesn't offer an advantage, the name recognition will never be there. It's all about innovation."

Innovation presents its own challenges, as is illustrated by the case of Fuzeon, which was developed in partnership with Trimeris, a biopharmaceutical company based in Durham, North Carolina.

"I believe Fuzeon represents the best of Roche and the best of the research-based pharmaceutical industry," says Abercrombie. "In every regard, Fuzeon is unprecedented. It is one of the most complex molecules ever manufactured on a large scale. If a table is the size of a protease inhibitor, Fuzeon is the size of a room—a protein made up of 36 amino acids. It takes six months to make a batch, 100 manufacturing steps compared to 10 for a protease inhibitor. The cost of goods is 10–20 times that of a protease inhibitor. The process is so complex that many skeptics said it could never be done.

"Conventional therapy attacks the virus once it is inside the cell. Fuzeon prevents the virus from entering the cell. This is a totally new mechanism of action that offers the ability to build combination therapies that attack the virus at more points in its life cycle, as well as a way to beat forms of the virus that have become resistant to therapy."

The novelty of Fuzeon is good for patients, but it presented obstacles to the company. Because the manufacturing process is complex and unfamiliar, there were concerns about how much of the drug Roche could provide and when. Even as production began to ramp up, the company held a six month supply in reserve, in case problems emerged. (Production questions have been resolved.) A typical HIV drug reaches several thousand physicians before launch through expanded access programs, but Fuzeon reached only 250 or so. Currently, more than 2,000 physicians have prescribing experience with Fuzeon—but that level was reached months after launch rather than before.

Fuzeon was expensive to develop and is expansive to manufacture, so the company charges approximately $20,000 a year for it. That means that it was essential to work carefully with Medicare, managed care, and other payers. The effort paid off, and Trimeris' CEO Dani Bolognesi recently announced that 94 percent of the 142 largest insurance companies had agreed to cover the drug, including United Healthcare, Aetna, Well Point, CIGNA, Kaiser, Humana, Health Net, and Blue Cross Blue Shield. The drug is also covered by 34 AIDS drug assistance programs (ADAPs).

In addition, as a protein, Fuzeon is a twice-a-day injectable in a field dominated by oral drugs. "We knew patients would have to get accustomed to a twice-a-day injection," Abercrombie says. "We have programs where patients can phone a call center with nurses to help them walk through how to self-inject. In another program, nurses go to the physician's office or the patient's home to coach them. In major metropolitan areas across the country, AIDS service organizations are sponsoring programs where a Fuzeon patient stands in front of 30–50 other HIV patients and talks about their personal experiences and demonstrates how to give an injection. Those have been remarkably successful.

"There is no question that this product works. There is no question that viral resistance is a growing problem, and there are an increasing number of treatment-experienced patients who have virus resistance to conventional therapy. We are convinced Fuzeon will ultimately be a backbone therapy for HIV."

That's not to say that building a fusion inhibitor franchise will be easy. In January, Roche and Trimeris announced they were halting the development of T-1249, their next generation fusion inhibitor. At the time, some commentators said the halt was a response to the sales performance of Fuzeon. Not so, says Abercrombie.

T-1249 is biologically different from Fuzeon, and behaves differently in manufacturing. "The truth is simply that we are facing technological hurdles on the mode of administration," Abercrombie says. "We recognized that getting an injection at the right frequency in a dosage form that will be convenient for patients is a huge technological hurdle with proteins of this type—and that is the sole reason.

"In that same announcement," he continues, "we explained—and people seem to forget this—that we signed an extension of our ongoing research collaboration with Trimeris," says Abercrombie. "I think that alone demonstrates our long-term commitment to fusion inhibition."

Commercializing a single innovative drug is one thing. Guaranteeing an adequate supply of truly innovative drugs is another. Roche spent CHF 4.8 billion on research and development in 2003, about 15 percent of sales. It concluded 30 research alliances in 2003 alone. But what the company is unlikely to do is buy a pipeline by acquiring another company. Roche's culture includes a deep distrust of mergers.

"The model of going in and trying to impose your culture on other companies has been proven wrong and destroys value," says Lee Babiss, vice-president of preclinical research and development. "You can look at the data, and it's very consistent in every company that's done major mergers that there's going to be a three-year gap in pipeline productivity. In the short term you're going to be doing great because you're bringing two product lines together. But a few years down the line that gap is going to progress to the right and where you should have been launching for the next three years there's nothing there. And that puts you in a vicious cycle of having to do more and more alliances and acquisitions to maintain the revenues you need to keep that engine going."

Abercrombie agrees: "Success in this business is not about size, it's about getting better," he says. "We are committed to growing organically. We are committed to remaining independent. And I think not only has our own financial performance success proven that our strategy is right, the way we deal with our partner companies also proves that it is right."

At a time when many companies are struggling with the task of integrating smaller biotechs and pharma companies into their operations, Roche has pursued what it calls a "hub and spoke" approach. It owns majority stakes in both Genentech and Japan's Chugai. But it has left both to run independently, instead creating opt-in arrangements that control how Roche gains access to its partners' products.

"We did not gobble up and merge with Genentech," says Abercrombie. "We recognized that the best way to optimize Genentech is to let them stay independent, the size they are, with their great track record."

The system creates some interesting situations: Roche in the United States competes with Genentech's Herceptin and MabThera (as it will with Genentech's upcoming Avastin (bevacizumab) for metastatic colorectal cancer. Outside the United States, Roche co-develops and markets the products.

Only time will tell whether hub-and-spoke management is really superior to integration, but Roche is not alone in thinking that scale and independence are powerful factors in preserving innovation. The Harvard economist Clayton Christensen, in The Innovator's Dilemma (1997), documented some ways in which small companies were freer to pursue "disruptive technologies" than their larger counterparts.

The real question is how effectively Roche can make use of the opportunities that hub-and-spoke creates. In preparing for the launch of Avastin (bevacizumab), for example, Roche in Europe took on part of the responsibility for manufacturing Herceptin, to free up Genentech's capacity for the new drug—a move that weaves together the interests of both companies on multiple levels.

If Roche can extend that kind of thinking, and spread it over a network of additional partners, hub-and-spoke could become an important model for the industry.

Twin Pillars

For Lee Babiss, one of the principal attractions of working at Roche was its "twin pillar" philosophy of pairing drugs and diagnostics. "I was recruited to Roche by Jonathan Knowles, who is president of research. Jonathan and I had worked together at Glaxo, and he had been actively recruiting me for about a year prior. One reason I joined is the twin pillar concept. I worked with Jonathan to create a whole genetic and genomic strategy at Glaxo, which eventually led to the creation of a new division of genetics.

"One of the things that was lacking in that strategy was the ability to take the concept and create products from it. Roche is the largest diagnostics company in the world and had the full capability of turning those biomarkers into assays that could then make it to the market."

The goal is what Babiss calls "personalized medicine"—a term that for many at Roche has come to replace "individualized medicine" and "customized medicine." In the Roche world view: "Personalized medicines can't stand alone independent of a diagnostic," Babiss explains. "Personalized medicine is the mantra for our pharma side of the company, and personalized healthcare becomes the mantra for the Rx and Dx units.

"Personalized healthcare comes from the use of diagnostics to help us best apply the personalized medicines. It is based on the identification of biomarkers—anything from substances derived from tumor tissue or patterns of proteins in organs to something as simple as glucose in the blood.

"What you have to do is take that knowledge to see if you can get a better understanding of the disease and how your drug works. We have invested in programs predominantly in oncology and autoimmunity. It's been proven to work in oncology; certainly the example that gets cited is Herceptin.

"We also have some examples in the great work that's been done in the area of viral diseases by our diagnostics colleagues—who are studying viral resistance emerges by actually genotyping the variants that emerge during treatment."

It's not that every product will need to come with a molecular-level test, Babiss explains. For a product like Tamiflu (oseltamivir) for influenza, with its low cost and low side-effect profile, the presence of flu-like symptoms might well be enough. But chronic diseases—such as diabetes, a major focus of Roche Diagnostics—are a different story.

"In type 2 diabetes, you have to be on these drugs for a very extended time, and the response rate is 30–40 percent," Babiss explains. "So we're focusing heavily now on trying to understand what distinguishes responders from nonresponders, from understanding the molecular basis of the disease. We've got some really good progress with that in working with deCode Genetics, the Icelandic company, on the genetic front, as well as doing proteomics and other sorts of technologies by gaining access to human tissues to identify biomarkers.

"As we look at our portfolio in metabolics, we have an insulin sensitizer that's entering Phase III. That's one in which we'll actually use biomarkers to see if we can direct the drug to the most susceptible portion of diabetics."

Babiss says the challenge is not just scientific, but organizational. "It is easy to create a very clear group with clear lines of reporting," he says. "But sometimes what's easy to do is not what's best to do. So we've chosen not to go that path, and we have a highly matrixed organization. All of the activities that support integrated healthcare and personalized medicine are supervised by a team composed of the head of diagnostics the head of pharma, the head of pharma research, myself, and then the person who has full-time accountability for all of this. That's Tom Metcalfe, who comes to us from diagnostics and heads the Roche Biomarker program."

In the long run, to Babiss, the real advantage of the twin pillars approach is the deep understanding it provides of disease—understanding that can lead to far more effective utilization of products.

"We're learning how to look at a primary indication for a drug and get it to market, then see its potential in a broader set of disease indications," he says. "If you want to talk about the greatest way to create value in a pipeline, that's the way to do it. So I'm very excited about our autoimmune and inflammatory drug pipeline, because the potential is enormous.

"One program we have running is for asthma—basically an integrin inhibitor, which prevents infiltration of immune cells into various tissues. It also has implications that range from asthma and emphysema to rheumatoid arthritis to inflammatory bowel disease and multiple sclerosis—an endless number of disease indications. When you are able to take a drug that's on the market and find new indications for it that's a windfall. You've saved essentially all the money it cost to bring the drug to market, and you can generate a huge business opportunity."

An Exceptional Year

Roche's eye is on the long term, but in the short run, 2003 was an exceptional year for the company.

Sales for the entire group were up 6 percent, from CHF 29.5 billion to CHF 31.2 billion. Operating profits before exceptional items more than tripled from CHF 1.3 billion to CHF 5.6 billion. The results were even more striking when only ongoing businesses were considered, and the vitamin and fine-chemical businesses were factored out. On that basis, sales were up 11 percent, from CHF 26.1 billion to CHF 29 billion. Operating profits increased by 28 percent, from CHF 4.5 billion to CHF 5.8 billion, and the company went from a net loss of a bit more than CHF 1 billion in 2002 to a net income of almost 3.3 billion in 2003—11.4 percent of sales.

Prescription pharmaceuticals accounted for sales of CHF 19.8 billion—slightly more than two-thirds of sales were from ongoing businesses. Rx drug sales rose by 23 percent on a local-currency basis in 2003—and even when the effect of the integration of Chugai into Roche's balance sheet is factored out, prescription pharmaceuticals outpaced the market.

The leading Roche drugs worldwide for 2003 (see also "Top-Selling Products," page 76):

MabThera/Rituxan (rituximab), a monoclonal antibody therapy for non-Hodgkin's lymphoma, was co-developed with Genentech (and sold by Genentech in the United States). Sales rose 34 percent to CHF 2.8 billion.

NeoRecormon (epoetin beta), a treatment for anemia, marketed only in the EU, saw sales rise 30 percent to CHF 1.2 billion, partly because European authorities approved a new regimen for dialysis patients with stable hemoglobin levels. When results of Chugai's epoetin beta product, Epogin, are factored in, epoetin accounted for sales of almost CHF 2.1 billion for Roche.

Rocephin (ceftriaxone), an antibiotic, is facing generic competition in Europe and will go off patent in the United States in 2005. Strong US sales, buoyed by an early season for respiratory diseases, maintained sales at CHF 1.4 billion.

CellCept (mycophenolate mofetil), an immunosuppressant used in organ transplantation had sales of CHF 1.3 billion, an increase of 27 percent. Roche presented data that the product, unlike some other immunosuppressants, does not increase the risk of cancer in transplant patients.

Herceptin (trastuzumab), for the treatment of metastatic breast cancer, is another product co-developed with Genentech (and marketed by Genentech in the United States). Sales in 2003 rose 27 percent to CHF 1.2 billion. New data point to the use of the drug in combination therapies, and European approval of Herceptin in combination with Aventis' Taxotere is expected this year.

Pegasys and Copegus (peginterferon alfa-2a + ribavirin), a combination therapy for hepatitis C, just passed its one-year anniversary on the US market and is performing strongly, passing Schering-Plough's PegIntron as the market leader. Sales for 2003 were CHF 942 million.

Not at the top of the list, but performing strongly this year was Tamiflu (oseltamivir), for the prevention and treatment of influenza A and B. An unusually hard flu season produced sales of CHF 431 million, almost double 2002's figure.

Challenges remain—perhaps not least, the challenge to remain independent. Novartis, the other major Swiss pharma company, has made no secret of its interest in merging with Roche. In 2001, it purchased 20 percent of Roche's stock. The stake rose to more than 30 percent, and this winter, Novartis took its holding to 33.3 percent—just below the level that under Swiss law automatically triggers a formal bid.

A majority of Roche's voting stock is still owned by the Oeri and Hoffman families. (They own a much smaller share of total share equity, thanks to the company's dual share structure.) Family members have so far been fiercely attached to the idea of independence. But there is no guarantee that situation will last forever—and the fallout of Sanofi's bid for Aventis demonstrated some of the pressures, including the interests of national governments, that may be brought to bear on the company in the future.

But that, if it comes, is tomorrow's problem. For now, says Abercrombie, the task is clear.

"You cannot sit back and rest," he says. "Our job is to constantly seek new and better ways of treating patients. If you have areas of strength, like oncology, hepatitis, and transplant, where you have a certain knowledge of customers, you have an expertise, that's where your focus should be in addition to looking for new areas of opportunity.

"The beauty of this market is that patients and physicians recognize when new therapies work. It's a market that rewards success and rewards innovation."


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