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Roche has always gone its own way with biologics, deals, and new medicines. Now that the rest of industry has caught on, how can Roche stay ahead of its time?
"Roche looks like the best pharma play to me in Europe, if not in the global Big Pharma space," said Nick Draeger, an analyst at Adamant Biomedical Investments, as the Swiss drugmaker announced its '07 results this January. "The company has a solid profile in terms of patent-expiry issues, and it is still the leading company in oncology."
Draeger's enthusiasm may betray a slight hometown bias—Adamant and Roche are both headquartered in Basel, Switzerland—but industry analysts agree that Roche is on a remarkable roll.
In 2007, Roche posted sales of $42.1 billion with 10 percent growth—the highest in the industry. (For more on Roche's financials, see the box at right.) It remains the uncontested global leader in oncology, pharma's hottest field, and its two breakthrough monoclonal antibody (mAB) products, Herceptin (trastuzumab) and Avastin (bevacizumab), drove almost 50 percent of its revenue. But topping sales, at $5 billion, was a third Genentech mAB—Rituxan (rituximab), currently approved for lymphoma, set for approval for rheumatoid arthritis, and showing strong effects against multiple sclerosis and a host of other B-cell-related diseases.
For the first time, Roche even beat hometown rival Novartis in sales by $2.4 billion—sweet revenge over the powerhouse that only eight years ago was said to be on the verge of taking over a weakened Roche.
At a time when drug giants face the prospect of losing up to half their current sales when their megablockbusters go off patent in 2011 and 2012, and companies are scrambling to buy enough late-stage drugs to staunch the revenue hemorrhage, Roche has escaped the prevailing panic. According to Lehman Brothers, patent expirations will cost the company only 11 percent of sales between 2008 and 2012. Most of its leading growth drivers were approved within the past five years. (For a list of Roche's top-selling drugs, see the box.)
But robust productivity alone hasn't given Roche the luxury of staying focused on a future beyond the patent cliff. Its pioneering strategy of investing in promising biotechs, starting in 1988 when Roche paid $2.1 billion for 60 percent of Genentech, has delivered a portfolio rich in biologics. And its famously arm's-length approach to managing Genentech and Chugai has preserved their entrepreneurial spirit and innate culture, earning Roche the status of biotech's most-favored partner. What's more, as the longtime global leader in diagnostics, Roche enjoys a head start over its richer competitors in the race for personalized medicine.
In many ways, the self-proclaimed "world's biggest biotech" looks a lot like the new business model that other pharmas are downsizing, restructuring, and licensing their way toward. Yet Roche didn't set out to be ahead of its time. The family-controlled firm apparently just never felt compelled to follow the pack—an independent streak that was paradoxically easy to ignore in a pack as obdurately conformist as Big Pharma. Above all, Roche never went in for '90s-style megamergers that promised much but delivered little.
At Roche's analyst meeting, CEO Franz Humer, who deserves credit for the company's turnaround, remarked tellingly that Roche was now solid enough "to maintain its independence for another 50 years." This month, as he hands the reins to protégé Severin Schwan—who, at 40, is the industry's youngest CEO—the challenge couldn't be clearer. Now that the rest of Big Pharma is rushing to buy up biotechs for products, platforms, and partnerships, can the Swiss juggernaut remain first among equals while making good on its promise of personalized medicine?
M&As have become the new R&D, and Roche is, by default, ahead of its time in this way too. Only a handful of its most innovative and profitable drugs were developed in-house. From Genentech's treasure trove of oncology mABs to Chugai's hot, new Actemra (tocilizumab) for rheumatoid arthritis to the late-stage diabetes and cholesterol NMEs, partnering has long been the key to Roche's success. And that makes Dan Zabrowski, who was tapped last July as global head of pharma partnering, the man to meet.
It's the Friday before Christmas, and Roche's US headquarters in Nutley, NJ, looks deserted. The employees have flown. A bitter-cold wind batters the chain link fence that surrounds this sprawling campus of featureless buildings that house everything from a manufacturing plant to research labs to executive suites. At the high-security checkpoint that serves as the single entrance, the guards are all business.
Inside the near-empty administration building, Zabrowski wraps up a long phone call to Roche's home base in Switzerland, where it's 5:00 P.M. on the last working day of 2007. He's wearing a colorful funny tie, and his backpack is parked by his desk. He's clearly doing the corporate thing with a twinkle in his blue eye. Born and raised in the Midwest, he now lives with his wife and three sons in Basel, that bastion of old Europe, and still makes time to do the AIDS Ride from Boston to New York.
Zabrowski's a molecular chemist, not an MBA or lawyer, and his career path to business-development honcho hasn't been typical. He started out at Searle, testing serotonin-receptor antagonists for GI diseases, and continued more or less straight down the pipeline to become the global head of regulatory affairs at Roche. He spent five years shepherding compounds from Phase III to their judgment day at FDA and its global equivalents, racking up an enviable string of successes: Avastin for solid tumors; the osteoporosis drug Boniva (ibandronate); Rituxan for rheumatoid arthritis and lymphoma; Pegasys (peginterferon alfa 2a) for hepatitis B and C, and the Xenical-to-Alli (orlistat) partnership with Glaxo.
I ask Zabrowski about the rumor that heads of deals have the highest turnover rate in pharma. He laughs. "I just got here," he says. "So I hope I'm not already one of those statistics." Then he turns serious. "Roche really doesn't have a lot of turnover, period," he says. "In business development, we have a very talented group that love the work they do, and love making deals. They're also very stable—people tend to like working at Roche."
But isn't the pressure to close the deal overwhelming? After all, Roche has inked about 100 partnerships. "I'm used to pressure," he says. "I come from the regulatory world, where FDA approval of the product you're working on can impact the shareholders by 10 or 15 percent. That's pressure.
"Our core strategy is innovation," he continues. "And we understand that with innovation comes a need for risk taking, and with risk taking sometimes comes failure. But this is not a finger-pointing culture—instead we ask, 'What did you learn for next time?'"
At Roche, business development is divided into four appealingly Neanderthal-sounding functions: "want, find, get, manage."
Pharma is rife with misbegotten deals where M&A and R&D end up pointing fingers at each other for going off strategy. So "want" requires signoff at the top with input from all sides.
Zabrowski's R&D experience is a big plus: "At every one of our meetings, I spend 30 minutes to an hour getting an early read from my R&D colleagues about the opportunities we are looking," he says. "We have to be in sync—otherwise we'd bring in products that the company doesn't embrace."
"Find" and "get" are the exclusive mandate of Zabrowski and his team. They keep track daily of the phenomenally fluid pharma and biotech landscape relevant to Roche's five DBAs (Disease Biology Areas): oncology, virology/infectious diseases, autoimmune/inflammation, cardiovascular/metabolism, and central nervous system. This requires sleuthing through all the public information, identifying compounds of interest, and analyzing each one. "The analysis consists of determining the prospect of the compound succeeding as well as finding out who owns it, who else wants it, and what is the doability of the deal," he says.
As the competition over biotech products and platforms increases along with their valuations, the ability to make a keen, quick risk assessment is key. "With deals being focused on earlier in the R&D lifecycle, you have to have a balance between the scientific data generated to that point and your belief," he says. "Belief is a critical component in all this."
Yet belief requires confirmation. "How do you determine whether your belief is wholesale optimism or grounded in reality?" says Zabrowski. "You ask a lot of scientific experts and key opinion leaders, and develop some understanding of whether your belief has merit." He leans back in his chair. "And the whole time you're doing that, you also need to be aggressive against the competition while keeping an eye on the economics," he says. "Don't end up overpaying."
Is there a secret to creating good partnerships? "Large pharmas have to check their ego so they can really understand what their partner wants," Zabrowski says. "If you can transcend yourself and put yourself in their shoes, then you can have an open dialog about both your and your partner's needs. That is very important in our business-development world."
But even at Roche, when Zen fails, reach for the stick.
Last year, one of the biggest deals was Roche's acquisition of Ventana. The Arizona-based diagnostics company is the world's leading maker of human tissue–based systems for both disease diagnosis and drug discovery. One of its many products is the HER2 test used to genetically screen breast-cancer patients for susceptibility to Herceptin. Owning both the diagnostic and the drug would be a bonanza for Roche, giving it not only market exclusivity but many additional potential test-and-treatment synergies.
After Ventana snubbed Roche's numerous bids, the Swiss company began pursuing a hostile takeover in July with a $3 billion offer. Ventana dismissed the offer as "grossly inadequate"—even though it had immediately jacked up its stock by 50 percent. When Roche insisted in October that it would never sweeten the deal, Ventana reluctantly opened its books.
It all got a little nasty in the press—proof that the staid Swiss firm was determined to win.
In January, Roche relented, slapping down $3.4 billion, and Ventana not only accepted—CEO Christopher Gleeson gave Roche a big bear hug, saying he was "very excited" to be joining its ranks.
When I spoke to Zabrowski, the happy ending was still three weeks off. "Hostile takeovers in general are obviously not something one would want to do," he said. "But if we acquire Ventana, we'll maintain the same autonomy and independence we allow all of our partners." In fact, Gleeson, who had once refused to answer Humer's calls, is staying on. (For Roche's other top deals in '07, see the box .]
Roche's reputation as most-favored partner derives largely from this hands-off style of management. "This approach to partnering is one of our key differentiators in negotiations," says Zabrowski. "From a price standpoint, of course, you have to be competitive. But what Roche also brings to the table is flexibility in the deal structure. For many companies, involvement in decision-making is very attractive. And when we say we work collaboratively, they know we mean it."
Many other large-caps have had to learn the hard way that there are real risks in buying a biotech for a product and then discarding the human talent that produced it. "It's unrealistic that you're going to go to the parents of a newborn and say, 'Let me have him—and I'll invite you to his wedding,'" Zabrowski says. "That just isn't going to work."
In 2002, Roche bought a 50.1 percent share in Chugai for an estimated $1.4 billion, marking the first foreign takeover of a Japanese drug firm—and giving Roche a sizeable footprint in that emerging market. Its deals were regularly praised in the press as "elegant" and "innovative."
"The concept of arm's-length management is an important cornerstone of how we work today," says Zabrowski. "Our partners have a vested interest in the success of their innovation. They are the experts. At Roche, we value that. We want to engage them as much as we can."
As an example, Zabrowski points to a recent deal with Actelion for its novel S1P-receptor agonist in Phase I for autoimmune diseases. "They are making all the decisions through Phase II," he says. "We respect their ability. We do not tell them what to do. It's a true collaboration."
Roche's early-stage pipeline is packed with such joint projects.
Yet Roche isn't completely free of the general pharma malaise. The company's in-house discovery is no more productive than most large-caps'. This year, Roche projects that its sales growth will drop into the single digits for the first time in eight years.
"Even though our own patent losses are five, six, seven years off, our sense of urgency is no less," says Zabrowski. "I wake up every morning thinking, How do we fill our pipeline through our internal R&D and our licensing efforts to help offset the loss of sales over the next decade?"
Like other drug giants, Roche is restructuring its R&D organization to increase efficiency and cut costs. It is flattening hierarchies, integrating functions, pushing responsibility down. Budgets for both R&D and M&As will increase.
But to realize the dream of personalized medicine, Roche will have to improve in-house discovery, and that means rolling the dice on long-shot biotech inventions.
Roche inked a deal with Alnylam of Cambridge, MA, less than a week after Zabrowski took charge of pharma partnering. All the rage, RNA interference is a process of gene silencing that could potentially lead to breakthrough drugs and diagnostics for a vast range of diseases. Roche's Alnylam gamble could add up to $1 billion, a measure of Zabrowski's belief. "We see RNAi as having the same potential as monoclonal antibodies," he says. "It could transform the way medicine is practiced in 2020. To be a part of that potential is one of the things that makes my job great."
Oncology is Roche's cash cow; the company commands 30 percent of the global market. According to Decision Resources analyst Mohamed Muhsin, the Swiss firm can coast in first place for another decade just by extending applications. He estimates that in 2013, Avastin sales will peak at $6 billion, Herceptin sales at $5 billion, and Rituxan sales at $5.5 billion; Taxeda, a kinase inhibitor, like Novartis' first-in-class Gleevec, will hit $1.5 billion. But beyond that, Muhsin says, "Roche's oncology pipeline is not what you would expect."
Says Zabrowski says: "Our licensing efforts over the next three to five years will be partly driven by the need to find the next successful cancer treatment." At the same time, his team will be searching for deals to boost Roche's portfolio, which is expanding in very strategic ways.
Its autoimmue pipeline has three potential blockbusters, including the much-anticipated Actemra, a Phase III first-in-class IL-6 inhibitor for arthritis; R-3421, a novel PNP inhibitor in Phase II; and Rituxan, which reported spectacular results in February in a Phase II trial against multiple sclerosis.
But it's in the cardiovascular/metabolics group that Roche is really raising the stakes. For the type 2 diabetes market, it has R-1579, a DPP-4 inhibitor to compete with Merck's Januvia and Novartis' beleagured Galvus, and R-1439 (aleglitizar), a novel PPAR co-agonist kin to the glitazones like Glaxo's Avandia, which took a dive after news of heart risk surfaced last year. A third NME for type 2 diabetes, R-1583, a GLP 1 analogue, may also be tested for weight loss. As a leader in diabetes diagnostics, having three different classes of treatments on offer could make Roche the 800-pound gorilla in this massive market.
Meanwhile, the firm is racing to enroll 15,000 patients in a global Phase III trial of R-1658, its CETP inhibitor, in hopes of beating rival Merck's own Phase III candidate. Whether either compound can escape the fate of Pfizer's torcetrapib, a $1 billion Phase III disaster, will be eagerly followed.
"We want to become more focused in regards to the targets that are high-interest to our disease biology leadership teams," he says, "and be extremely determined to go out and get those targets in a highly competitive environment."
In fact, it isn't competition from rolling-with-dough large-caps that keeps Zabrowski up at night. After all, Roche has its own Fabergé nest egg. "In pharma, the bigger impact is shareholder activism," he says. "They buy a large percentage of a company and then pressure management to change its operations or strategy. Companies that we may be trying to acquire may instead choose to remain independence."
Is it ironic that Roche, which seems to value independence and an independent spirit above all else, might be wrestling with the likes of Carl Icahn to possess a biotech's own independence? Business is business.
Roche's ambitions aren't limited to novel drugs and market share, however. "If you look at our business structure and innovation strategy, it is all about personalized medicine," says Zabrowski. "You need both the drugs and the diagnostics."
Unique among Big Pharmas, the Swiss firm was an early enthusiast of personalized medicine. Since it didn't sell many mass-market products, it had nothing to lose from giving "the appropriate drug, at the appropriate dose, to the appropriate patient, at the appropriate time." And its partnership with Genentech opened a window on the revolutionary potential of genetic engineering to diagnose disease and develop drugs. In 1997, in its single major merger, Roche paid $11 billion for Boehringer Mannheim, a large German maker of diagnostics.
Over the next decade, personalized medicine materialized as the wave of the future, and Roche was riding it. "Roche has paved the way," says Mohamed Muhsin, ticking off a range of genetic tests tailored to treatments for cancer, HIV, and hepatitis, as well as clinical tests and other biomarkers measuring drug benefits and side effects.
When Roche first got involved in personalized medicine, its primary payoff was thought to be clinical benefit. But at a time when both public and private payers are refusing to cover high-priced innovative treatments, cost-effectiveness is an equal incentive.
And nowhere is the incentive greater than in oncology, where six-figure treatment costs are hitting a ceiling.
With Ventana in its corner, Roche will soon be rolling out a model of personalized medicine: the HER2 gene screening test to identify Herceptin patients.
And not a moment too soon. Critics are no longer wide-eyed about personalized medicine, noting that after 15 years, all Roche and Genentech have to show is a handful of test-and-treatments. Some cynics even suggest that it's mostly smoke and mirrors to impress Wall Street.
Zabrowski is clearly a little tired of all the naysaying. "People keep wanting us to point to other examples of personalized medicine," he says. "Personalized medicine will take many years to be validated as a commercial reality. In some cases, we'll have genetic markers to help predict outcome. In other cases, we'll have empirical things to help predict outcome over time. And I think we live that today."
Another vexing angle is economics. Says Michael Russo, a partner at the Bruckner Group: "Without careful planning, the payer environment into which these very important innovations will launch may not be so favorable. Insurers are willing to incorporate personalized treatments—after all, they should bring safety and efficacy advantages—but pharma will have to prove their worth. In the extreme, they have to be careful not to butt up against basic affordability. How personalized can medicine get before its treating a handful of people at a cost of millions per year each? No one wants to be caught on the wrong side of that very fine line."
Zabrowski says he's not authorized to discuss economics, but he can state what is clearly the Roche credo. "Personalized medicine is too great an advance in patient care to get bogged down in the economics," he says. "It's our view that it's our ethical responsibility to pursue this."
As pharma looks for its next business model, Roche, with its portfolio of biologics, its entrepreneurial partnering, and its synergies between diagnostics and drug development, is obviously a potential prototype for other companies to imitate. But is that practical? After all, it took Roche two decades to get where it is today.
How are the giants of the industry going to be able to make such a radical change before it's too late?
"They're not. Because it already is too late," Zabrowski said. "And we've already done it."