OR WAIT 15 SECS
Novartis CEO Daniel Vasella has built the Swiss firm into the fastest growing pharma in the world, and in the process gained a reputation as an outspoken visionary. But is he really as good as all that?
Dr. Daniel Vasella, who created Novartis 13 years ago, turning it into what many analysts consider the world's leading global healthcare conglomerate, is the sole industry CEO with any purchase on greatness. During a decade when the industry has lost its high margins, public trust, and business model, leading to the exit of an entire generation of pharma leaders, Vasella, 56, remains the outstanding exception.
In a Business Week cover story last June, business guru Ram Charan spared no superlative. "He is not a prisoner of the existing paradigm. Instead, he is trying to change it," he said. "The same way Steve Jobs did at Apple, Andy Grove did at Intel, and Sam Walton did at Wal-Mart."
Cliff Kalb, president of C. Kalb & Associates, compares Vasella to Roy Vagelos, who led Merck from the mid-'80s to the mid-'90s, when it was annually voted America's most trusted company. "They are both MDs, and they both emphasized science over marketing, picking financial winners because they addressed significant medical needs."
In fact, Vasella is the only physician to lead a major drug company, a distinction lending his public image a certain gravity. Vagelos set a precedent for pharma philanthropy in the developing world in 1988 when he ordered Merck to donate its drug for river blindness free of charge until the disease is eliminated; in 2000, Vasella made a similar commitment to eradicate leprosy. He built the Novartis Institute for Tropical Diseases in Singapore in 2002, to focus on neglected diseases. Novartis' new malaria drug, Coartem, is available at 20 percent below cost.
Plus, Vasella is a media darling. In 2004, Time magazine named him one of their "100 Most Influential People." He speaks three languages, collects rare books and Dutch Master paintings, and rides motorcycles. Above all, he is the most quotable of CEOs—frank, bold, and unscripted.
This summer, when animal-rights activists targeted him in a series of chilling attacks (including arson at his summer house and desecration of his family grave site), Vasella was quick to make a public statement, condemning them as "terrorists." (See "Animal Testing: Terrorism and the Militant Fringe")
But all this would be mere affectation if Vasella hadn't demonstrated a commitment to innovation. "Vasella saw where the industry was heading, how science itself was transforming the model," says Jeff Elton, former senior vice president of strategy and COO at the Novartis Institute of Biomedical Research
That visionary quality is even more noteworthy given the setting for Vasella's success. Long dominated by three chemical companies—Ciba-Geigy, Sandoz, and Hoffman-LaRoche—the business environment in Basel, Switzerland, was anything but congenial. Yet the potential Vasella saw in the merger of Ciba-Geigy and Sandoz was not to be measured by local standards. "He made the merger with an ambition far exceeding any fight about which side of the Rhine river you were on," says Elton.
He built Novartis on a business model of diversification—Gleevec, Gerber, and generics all under one metaphorical roof. "It's hard enough to run a pure-play pharma consistently," says Peter Young, president of Young & Partners. "But managing the volatilities of a diversified healthcare company successfully for more than a decade is very rare."
Vasella's apparent independence from the industry groupthink has alerted him to opportunities invisible to his peers. When generic manufacturers were viewed as barbarians at the gates, Novartis was quietly acquiring one shop after another, turning Sandoz into the world's number two generics manufacturer. Criticized for sleeping with the enemy, Vasella stood his ground. "I am a strong believer not only in intellectual-property rights [but] also in generics," he said in a McKinsey interview. "Once the monopoly of this knowledge and invention is over, somebody can copy it and sell it very cheaply, which in turn saves a lot of money."
Plus, Basel is a long way from Wall Street. As far back as 2002, Vasella was decrying the tyranny of quarterly earnings. "The men and women running public companies ... become preoccupied with short-term 'success,' a mindset that can hamper or even destroy long term performance," he told Fortune. "It may sound trite, but I truly believe my ability to keep shareholders' faith in our company depends not on whether I make the quarter but on who I am, what my guiding principles in life are, my behavior."
The Vasella back story has been repeated so often that the details are almost the stuff of legend. His youth in rural Switzerland was "blighted by illness": asthma at age five, then TB and meningitis at eight; at 10, he watched an older sister die from Hodgkin's lymphoma; three years later, his father died suddenly. A career in medicine may have seemed like fate rather than a decision. In any case, his rise was swift; specializing in internal medicine, he found himself, at age 31, married with children, an attending physician at a university hospital in Berne.
Then he lost himself. The details of Daniel Vasella's move from medicine to business are sketchy in the various published accounts. In the most dramatic version, he suffered a "breakdown"; according to others, a mentor suggested that he enter psychotherapy to deal with his arrogance or, alternately, as a kind of pedagogical experience. In fact, Vasella underwent a four-year psychoanalysis, a treatment he has described as transformative. "Psychoanalysis liberated me from my past and my destructive patterns," he told Pharm Exec. "It can make transparent who you really are, what you like, how you want to live your life."
In 1987, he joined Sandoz as a drug rep in East Hanover, NJ—reportedly against the advice of the chairman of the board, Marc Moret, who happened to be the uncle of Vasella's wife, Anne-Laurence. A year later he was named product manager for Sandostatin, a new growth hormone–inhibiting analog for rare pancreatic tumors—not exactly a blockbuster-to-be. But Vasella got researchers, clinicians, and marketers to see Sandostatin's potential, ultimately expanding its indications to other rare tumors. Soon he was the head of the pharmaceutical division. When the merger of Ciba-Geigy and Sandoz was finally sealed in 1996, Moret tapped 43-year-old Vasella as CEO.
If psychoanalysis introduced Vasella to the transformative imperative, Vasella did the same for Novartis. He imposed performance-based compensation, laid off 12,500 staff, and then established an $80 million VC fund to help former Novartians fund startups. In his first two years he nearly doubled the US sales force; by 2000, he had doubled R&D investment. Annual drug sales rose at double-digit rates.
Yet under his leadership, Novartis has seen its share of reversals. In 2007, US sales dropped due to copycat competition for a slew of Novartis' primary-care products. FDA nixed cox-2 inhibitor Prexige, flagging kidney danger; Galvus, its DPP-4 inhibitor for type-2 diabetes, never even got past US regulators. The company had to yank Zelnorm for safety issues. These setbacks contributed to a 45 percent drop in fourth quarter profits, resulting in a 33 percent pay cut for Vasella.
His response to the downturn was sweeping. He announced a cost-cutting regime dubiously dubbed Forward Initiative, aiming for $1.6 billion in savings by 2011. He also axed another 2,500 jobs, including a near-total turnover at the top. Thomas Ebeling, global head of pharma, got the boot; he was replaced by Joe Jimenez, a recent star hire from Heinz.
Last December, the turnover continued. Vasella tapped longtime lieutenant Joerg Reinhardt to be his new chief operating officer. Then Vasella removed veteran Andreas Rummelt from the top generics spot, substituting emerging-markets chief Jeff George. At the same time, Andrin Oswald became head of the vaccines and diagnostics division. Next April, Jonathan Symonds, the former AstraZeneca CFO, will grab the financial reins when current CFO Raymond Breu gets his gold watch. Indeed, the clock on Vasella's own tenure would seem to be running down.
After hitting a seven-year low in March, Novartis' stock is on the rebound, with analysts giving high grades to its pipeline. At a time when rivals like Pfizer and Merck achieve boa-like growth, swallowing more productive, slightly less enormous prey, Novartis boasts an in-house R&D engine that seems to run better with age. (See box)
NOVARTIS BY THE NUMBERS
In the first half of 2009, the two main therapeutic franchises, oncology and cardiovascular, both recorded a 15 percent rise in sales. (See box, above.) "Novartis has succeeded in launching products in a fairly wide range of categories, from big primary-care drugs to niche spaces where there is little competition," says Datamonitor pharma analyst Simon King. "Even their patent cliff isn't the kind of threat of, say, Glaxo's or Pfizer's."
Novartis' top two products, Diovan (number one in the anti-hypertensive market) and Gleevec (the "magic bullet" for CML), lose exclusivity in 2012 and 2015, respectively. But according to JP Morgan Securities, projected sales from nine new (or newly formulated) drugs launched since 2007 are set to break $7 billion just as those cash cows quit producing milk. But what the pipeline lacks in big hitters, it partly makes up for with a robust mix of targeted, hormonal, and cytotoxic therapies. "In the rush to develop high-margin targeted agents like Avastin, most other Big Pharmas are abandoning these older approaches," says Decision Resources analyst Kate Keeping. "Novartis has gone the other direction."
2008 TOP-SELLING DRUGS
Most innovative is mTOR pathway inhibitor Afinitor, which won FDA approval for kidney cancer in March. (Keeping projects peak sales of $500 million in 2015.) The three novel molecules in Phase III are being tested in lung cancer, ovarian cancer, and a series of niche cancers. Decision Resources is bullish on their value for patients, but bearish on their sales—around $200 million or less.
Novartis' money minter is Diovan (valsartan), an angiotensin receptor antagonist that soars among chemicals for high blood pressure. Vasella has been deploying a range of tactics to blunt the fall off this steepest patent cliff. Tekturna (aliskiren), the novel direct renin inhibitor was hailed as the first new approach to hypertension at its 2007 approval. But this blockbuster-wannabe notched a measly $120 million last year. "Novartis is a victim of its own success," says Decision Resources' Graeme Green. "Diovan works great for most people; persuading them to switch to Tekturna is a no-win." Meanwhile, Novartis has been employing Diovan life cycle management, marketing it in combination with a calcium channel blocker amlodipine to create Exforge, and adding a diuretic to create Exforge HCT.
PLANNED FILINGS 2009 to 2012 and beyond
In February, Novartis inked a deal with Portola Pharmaceuticals for $75 million up-front and up to $500 million in milestones for a Phase II anti-clotting drug elinogrel, which would compete for the a piece of the enormous Plavix pie. The company also nabbed Speedel's cardio drug pipeline in its quest for Tekturna. And in August, Novartis got the nod from FDA to sell a copy of Betaseron, Bayer's old interferon-B drug. "It's a way to build a strong commercial and medical organization ahead of FTY720," said Joe Jimenez.
Without a doubt, Gleevec (imitanib) is the Excalibur of the Vasella mythology. Without that "magic cancer bullet," he would be, at best, CEO of a very successful, highly diversified pharma—not a radical redesigner of R&D or a hero to CML patients.
Gleevec is the ultimate in rational drug design. Once the genetic mutation associated with CML was fingered, Novartis began screening tyrosine kinase inhibitors until they got a hit in 1999. In early human trials, the drug produced sudden, near-total remission with minimal toxicity. There remained only one hurdle: The commercial forces inside Novartis "argued against rushing and taking risks for a drug that would produce such little return on investment," according to Vasella
The good doctor, of course, prescribed taking risks. Recognizing that if word got out, armies of patients and their advocates would demand the cure, he put the manufacturing of imitanib on fast-forward. After three short-term, early-stage trials FDA sent it to market. Since then, Gleevec's label has been expanded to include GIST and other cancers. In the first half of 2009, it garnered nearly $2 billion in global sales. Last month, the scientists who discovered Gleevec were awarded the 2009 Lasker Award for clinical medical research.
Vasella seems to have embraced the Gleevec moral ("follow the science") like a true believer. In the boldest gamble of his career, in 2002 he moved Novartis global R&D headquarters from Basel to Cambridge, MA, investing $4 billion in a new Institute for Biomedical Research and hiring Mark Fishman—the Harvard cardiologist who decoded the zebrafish genome—to lead the company into the translational-medicine future Gleevec had augured.
Refocusing R&D was not an entirely novel notion—GSK was unveiling its Centers for Excellence—nor were biologics completely off Big Pharma's radar. Yet the idea of staking the company's future pharma business on an academic outsider, an untested model of drug discovery, in the Harvard-MIT biocluster made some wonder whether Vasella was crazy like a fox or just plain crazy. The kicker? "'And we won't even know if it works for another decade,'" Vasella says he told the board.
Russ Somma, who worked 30 years at Ciba and Novartis, helping to develop Gleevec, recalls: "Back in 2001, the Novartis pipeline definitely needed work, so moving the early-development stuff to Cambridge made sense. But translational medicine, genomics, biomarkers? There were plenty of people who thought Vasella was just blinded by the 'Gee-whiz!' factor'."
Says Jeff Elton: "It was a time when the industry was pulling in double-digit margins with primary-care blockbusters, so the argument was against taking risks, let alone embracing a new paradigm. All credit to Vasella, but also to his team and to the board, too, for trusting in his vision."
Eric Lander, director of the Whitehead Institute-MIT Center for Genome Research, told The New York Times in 2003 that it was a "watershed move that sent tremors through the pharmaceutical industry. This move says that the lifeblood of the industry is changing from chemistry to molecular biology, from art to engineering."
For Fishman, molecular pathways were the holy grail, the "missing grammar," compared to which the genome's 22,000 genes are merely words without sense. And his model makes sense: "Take rare diseases and use them as an entrance to more common ones—wherever science is strong and disease mechanisms are understood, we'll be able to make progress quite quickly," Fishman said in 2004.
In June, after a five-year wait, Fishman's first compound, Ilaris (canakinumab), won FDA approval for cryopyrin-associated periodic syndrome (CAPS), a rare inflammatory disorder caused by a single gene mutation that causes the overproduction of IL-1. Like Gleevec, its targeted gene-specific mechanism provides stunning efficacy. "All you have to do is touch a patient with the medicine, and the symptoms start to disappear," says Hal Hoffman, associate professor of medicine at the University of California, San Diego.
Still, the drug lay in limbo for 18 months. With the means to chemically control the expression of IL-2, an inflammatory protein involved in some 30 diseases, there was confusion about where to start. "It got completely bogged down in these debates around value that have paralyzed drug companies for years," says Trevor Mundel, Novartis' global head of development. Once again, Vasella rode to the rescue—or so the PR goes.
Whether or not Ilaris will validate the translational-medicine concept remains to be seen. As a treatment for CAPS, it's a slam dunk. But CAPS is an ultra-rare disorder, and rarely fatal; nor is it an unmet medical need, since Regeneron has a rival drug carrying an annual price tag of $250,000. To pay its way, canakinumab will have to prove effective against bigger diseases, and Novartis is rolling out tests in gout, juvenile rheumatoid arthritis, diabetes, and respiratory disease—whose causes are far more complex than the single-gene target.
Elton points out that Ilaris is only one drug, while the number of compounds that have moved from discovery to the clinic increased nearly 50 percent from 2004 to 2008. "A Phase II/III bottleneck" is how Mundel described the fruits of Fishman's R&D. The current Novartis pipeline does reflect a possible bottleneck—17 NMEs to be submitted in 2012 and beyond, but mainly in common cardiovascular or oncology indications, not rare diseases.
For now, most analysts give Novartis the benefit of the doubt "Every Big Pharma has been looking for the magic bullet for R&D innovation. Vasella picked this early on, and took a big gamble. In a few years, if we don't see a bunch of compounds, it may look like the bet didn't pay off," says Miller Tabak's Les Funtleyder.
Vasella's early embrace of the generics business was, in its way, as risky as translational medicine. But there he was following not the science but the accounting—yet still he was more or less blazing his own trail. He steered Sandoz through a series of acquisitions in strategic regions, such as Lek in Slovenia, Sabex in Canada, and Durascan in Denmark. Sandoz products gradually slipped into markets across Western Europe, as well as in Mexico, Argentina, Turkey, and a other key emerging markets. After consolidating these far-flung ops under the Sandoz name in 2002, the firm's "branded generics" strategy began to gain traction; in 2004, its $8 billion acquisition of Hexal, in Germany, and Eon, in the US, has established Sandoz as world's number-two global generics maker.
But the generics bubble will burst by 2015, as the last small-molecule megablockbusters lose their patents. Biologics already make up almost half of all the products on the global market, and next year $18 billion's worth of biologics will lose exclusivity. The quick-and-dirty copycat chemical companies will vanish, yielding to an elite with the expertise, technology, and money to produce specialty generics and biosimilars.
Sandoz has already dug in, producing the first biosimilars—recombinant human growth hormone and epoetin alfa—to win approval in the EU, Japan, and the US (though Novartis had to sue FDA to get the submission accepted). Yet despite the fact that these drugs are among the most lucrative on hospital formularies sales have been slow. "It will take time for physicians to fully understand how biosimilars fit into the treatment options," said Ajaz Hussain, Sandoz's vice president and global head of Biopharmaceutical Development. "It will take several products, and several companies, to promote wider uptake."
In May, Novartis paid $1.2 billion for the injectable generic cancer drug business of Austria's Ebewe Pharma, which recorded only $272 million in sales last year. That raised eyebrows, but Vasella countered that Ebewe has new molecules on tap. The main road to future growth is in emerging markets, where demand for affordable chemo agents will soar as the global oncology market hits an estimated $60 billion in 2017. Several of the company's products are already standard-of-care for many types of cancers. "Ebewe's current geographical reach is small," says Keeping. "But as part of Sandoz, it will expand very quickly."
Following the accounting also leads directly to the payer, the point at which all of Vasella's strategies converge. "Diversifying into OTC, generics, and vaccines enables bundling the entire spectrum of products when negotiating with payers, putting it in the best possible position to get coverage for high-cost drugs," says Cliff Kalb. "Novartis has elevated it to a fine art."
And Joe Jimenez is the master. After Jimenez was promoted as pharma czar, he slashed jobs in Basel and reorganized the drug development group into eight-person teams tasked with getting a single drug to market. Jimenez also prioritized early and frequent check-ins with regulators. The pharma unit is asking for input about specific products from public health systems like NICE in order to design clinical trials that provide data that better reflect the value proposition. Rebate pricing in Germany, a reference market for much of the EU, is another innovation.
Sandoz sales slowed for the first time in 2008, partly because it had no new US product launches. But now the gloves are off. Vasella hired a new general counsel for the US market when Jeff George took over the top job. Late last year, Novartis also ruffled feathers when, through some administrative legerdemain, it managed to exclude Sandoz from membership in the International Federation of Pharmaceutical Manufacturers and Associations (IFPMA), exempting its own generics division from the trade group's marketing standards.
Ethics matter in the drug industry, until they don't. Novartis gets 8 percent of its annual pharma sales from emerging markets, one of the highest percentages of any Big Pharma; by 2020, one in every five dollars spent on its products will come from the developing world. Such rewards come with responsibility, as Vasella recognized by having Novartis signed onto the UN's Global Compact in 2000. Yet the best intentions of corporate citizenship are often tested by the dire inequalities of wealth, and the high price of branded drugs, especially for life-threatening conditions, has been a flashpoint for pharma.
Vasella has frequently asserted his belief in the morality of patent exclusivity, an essential link in the ecosystem of innovation; he has calling fighting patents "unethical." For the head of the world's second largest generics producer, this position suggests a certain inconsistency.
In 2007, Vasella challenged a ruling by an Indian patent office invalidating Novartis' Gleevec patent. India only extended protection to drugs patented after 1995, so Novartis had to file a new patent, based on a minor modification that it claimed was a "significant improvement" and so merited a 20-year exclusivity. The patent office disagreed. Vasella went to court.
Whatever the merits of Vasella's case, in the court of public opinion, Novartis stood no chance: It was a big, fat pharma vs. dirt-poor Indians. Vasella's challenge was portrayed by his opponents as a threat to the Indian generics industry, then the main source of affordable essential drugs for the developing world. Doctors without Borders, NGOs, patient advocacy groups, and figures ranging from the Indian Health Minister to Brian Drucker (the scientist who discovered Gleevec and 2009 Lasker Award recipient), lined up to support the global protest campaign, urging Vasella to change his mind. His supporters defended the challenge as a test case of the Indian government's resolve to enforce patent-protection legislation in conformity with WTO guidelines.
When the court denied the challenge, Vasella refused to admit defeat. He threatened to shift hundreds of millions of dollars in planned investment from India to China. In a typically memorable riposte, he told the Financial Times, "It's not a punishment. It's just a question of the culture for investment. Do you buy a house if you know people will break in and sleep in your bedroom?"
What else does Vasella have to prove?
Any fire he may have felt about acquiring cross-town rival Roche and creating Pharma Suisse has likely flickered out. After laying out $2.1 billion in 2002 to increase Novartis' stake to 33 percent, and reportedly mounting a failed charm offensive on the secretive Hoffmann-La Roche family, which owns slightly more than 50 percent of the shares, the final nail in the coffin materialized last month. A shareholder pact, which was to have expired at year's end, preserves the controlling voting rights among the family. "Nobody really believed Novartis would be able to take over Roche," said Allianz Global Investors' Joerg De Vries-Hippen in the Financial Times.
Still, the fact remains that the competition between the two firms has driven each to great feats of innovation. In what may be at once the most unlikely story of the pharma industry in this era, sleepy, cosmopolitan Basel has given rise to the world's two most dynamic drugmakers.
Vasella also has to solve the conundrum of his biggest-ever deal: a two-step acquisition worth up to $28.2 billion (with a locked-in share price), in which Novartis is aiming to grab a majority stake in Nestle's Alcon, the vision-care behemoth that makes a strategic fit with Novartis' Ciba—and would help ease the upcoming patent cliff with OTC cash. But Alcon's stock value has plummeted, analysts are frowning, and Vasella is likely to face shareholder fury if he proceeds with the deal.
The gee-whiz! factor, encoded in Novartis DNA, looks to be sending the healthcare giant into the orbit information technology. Two modest examples from the past few months: The first-ever genetic test to ID patients most at risk for side effects associated with cox-2 inhibitor Prexige, which FDA shot down because of evidence of liver toxicity. And, a little dicier, computer chips implanted in humans to improve drug compliance.
"Novartis would be the first pharma there—GE, Phillips, and Siemens are the main competitors," says Cliff Kalb. The timing is right. On the one hand, the Obama administration has dropped billions for healthcare records. On the other, Pfizer, Merck, and Roche are currently distracted by megamergers.
In 2008, Vasella made $15.1 million, ranking him seventh among pharma CEO packages. But Vasella's views on money are typically iconoclastic. In a 2002 Fortune interview, after criticizing the tyranny of quarterly earnings and the danger of CEOs believing their own good press, Vasella offered an anecdote from his own career: "The strange part is, the more [money] I made, the more I got preoccupied with money. When suddenly I didn't have to think about money as much, I found myself starting to think increasingly about it. Money corrupts the mind. ... One day the glitter will be gone anyway," he said. "Only once you are unencumbered by that will you become free to do the right things as leader of your company."
Yes, yes—money corrupts, glory is fleeting, and only through losing your attachment to the things of this world can you find your authentic self. But we rarely hear such truths—or truisms—from the mouth of the world's leading healthcare conglomerate, who makes $15 million a year and whose daily schedule is booked solid well into the next decade. Credit four years of psychoanalysis or what you will, but Vasella is one of a kind. He may take himself very seriously, but he definitely doesn't believe his own good press.
Novartis is created through the merger of Ciba-Geigy and Sandoz.
Novartis ups its owndership of Roche stock to just under 33 percent.
Novartis Institutes for BioMedical Research opens as the firm's new global HQ.
The Novartis Institute for Tropical Disease opens in Singapore, focusing on dengue and TB.
Novartis nabs Hexel and Eon Labs, establishing Sandoz as the global no. 2 generics firm.
Novartis agrees to acquires British vaccine maker Chiron for $5.1 billion.
Novartis plans a biomedical R&D center in Shanghai.
The EU approves Sandoz's Omnitrope, the first-ever biosimilars product.
Novartis sells Gerber and its medical nutrition business to Nestle for $8 billion.
Novartis agrees to buy a majority share in eye-care company Alcon for $28.2 billion.
The Novartis Vaccines Institute for Global Health opens, focusing on neglected diseases.
On October 1, Novartis says it has begun delivery of its first batches of H1N1 flu vax to US.