Twin Pillars

After a banner year, Roche looks ahead. What does it see? Drugs and diagnostics transforming medicine (and no mergers).
Mar 01, 2004

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.

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