On March 7 1996, the then largest corporate merger in any industry was announced. Novartis was formed by the merger of Swiss drugs and chemicals leaders Sandoz and Ciba-Geigy in a deal worth Sfr75 billion ($41.2 billion). The new company held a 4.4% share of the world pharmaceuticals market, just behind GlaxoWellcome’s 4.7%, and was twice as large as its nearest rival in agrichemicals.
This momentous deal had been set in train on November 30 1995 when Marc Moret, chairman of Sandoz, crossed the Rhine in Basel, Switzerland, to meet Ciba-Geigy’s chairman, Alex Krauer. Moret carried plans to merge the two companies to strengthen their position in the fast-consolidating pharma industry and to exploit new synergies between pharma and agrichemicals.
Sandoz and Ciba-Geigy had been founded in Basel at the end of the 19th century. By 1996, both were still profitable enough to survive on their own. Sandoz had divisions in pharmaceuticals, nutrition, agribusiness and chemicals; Ciba-Geigy had divisions in healthcare, agriculture and industrial chemicals.
What followed was a remarkable period of corporate restructuring as the merged company sought a new identity. As part of the merger, the chemical businesses were divested. Novartis, from the Latin novae artis, meaning new arts or new skills, set itself the motto “new skills in the science of life”. A concept was invented.
This provided a hopeful distraction to executives nursing old rivalries from pre-merger days.
But the life sciences concept was a failure. Synergies between pharma and agribusiness could not be found. Furthermore the political outcry over genetically modified organisms, in which Novartis had sought a leadership role, and tough market conditions provoked the collapse of the agribusiness. Sales in 1998 amounted to Sfr31.7 billion, a meagre 2% increase in local-currency terms. Novartis stock declined, shedding 13% in 1999, underperforming both the Swiss Index and the Morgan Stanley World Pharmaceutical Index.
It was against this increasingly troubled background that Vasella became chairman and CEO of Novartis in April 1999, after Alex Krauer stepped down. Other senior management departures were to follow, as Novartis struggled to set itself on a new course. Vasella’s confidence was shaken.
Vasella has an unusual background for the chief executive of a large public company. A physician by training, he decided only at the age of 35 to enter business life. His eyes popping at the thought of one day climbing to become head of a medium-size country division, Vasella joined Sandoz Corporation, working First in the US as a salesman. He learnt fast. Within eight years he had reached the top job at Novartis. His opponents attribute this rise to family links with former Sandoz chairman Marc Moret, whose niece Vasella married. Too young, not experienced enough, have been the frequent criticisms of Vasella, as Novartis strove once again to restructure its businesses, revamp its position in the vital US market, and ride out a lean period until potential new blockbusters come on stream.
In a consolidating pharmaceutical industry, the volume of M&A transactions has risen from Sfr3 billion in 1992 to Sfr200 billion last year. Novartis is subject to constant speculation that it will soon take part in another mega-merger. Though he does not rule out any option, Vasella seems to be opting for organic growth in the short term, while hoping new product launches will boost his company’s growth rates soon. His goal is to become the world leader in selected therapeutic areas. Novartis’s pharma sales accounted for 48% of Sfr32.5 billion total sales last year. Its pharma R&D budget amounted to Sfr2. 8 billion, 18% of total pharma sales.
The pressure is still on Vasella. In the key US market, Novartis underperformed its peers by 20% in 1999. Sales in the pharma division rose just 4% compared with an industry average of 15% to 20%. Yet these accounted for 37% of Novartis’s sales and dollar strength has helped maintain its profits.
With the unveiling of a First draft of the human genome, the map of our genetic make-up, by the privately-funded US company Celera and the Human Genome Project, the race for decoding genes is open. Pharmaceutical companies are catching up by spending up to 30% of their R&D budget to buy products from biotech companies, compared with just 2% 10 years ago.
Vasella, who believes pharma is a hi-tech industry, is shifting Novartis from the old to the new economy. Investing heavily in e-procurement and biotech, he is trying to position his company for the future. A believer in decentralization, he is creating a network of biotech companies such as Chiron and more recently Verbex, recently acquired in a deal worth $800 million.
With the spin-off of the agribusiness in October to form Syngenta, a joint venture with AstraZenaca’s agribusiness division, and promising new products waiting to be launched, the future is beginning to look brighter once more.
In a candid interview, Daniel Vasella talked to Padraic Fallon, chairman of Euromoney Institutional Investor, about his successes, his mistakes and his hopes for the future.
Do you feel under siege?
No. I feel relief.
Why?
Because last year was more difficult.
For you, or the company?
Both. In a nutshell, when we merged we came out of a relatively conservative Swiss communication environment. We communicated our story very convincingly. We delivered on all the things we had said we would in the integration phase. We realized our cost synergies. We also avoided any major internal disputes.
You mean personality clashes between the Ciba-Geigy and the Sandoz people?
Yes.
And that didn’t happen?
No, it didn’t. Certainly not between me and Alex Krauer [founding chairman of Novartis and formerly chairman of Ciba-Geigy], which would have been an attractive story for the press and a disaster for the company. Did Krauer and you get on well? We complemented each other well.
Did you agree to get on well?
Absolutely. We knew from the beginning that we had to work well together to make this work.Was that a very frank conversation? Yes. I could discuss everything very candidly with him: the emotions, the difficulties, tensions, but also our satisfactions.
Did you force Krauer out?
No. It is incomprehensible that anyone would say something like this. Alex Krauer was asked to head UBS, to help solve a critical challenge for the bank. He knew he could help them, and that Novartis was well on its way. If Alex Krauer had wanted to stay, he would have stayed. He chose to join UBS to help restore stability to the bank. You didn’t influence his departure?Not to my knowledge. Krauer left when he had confidence that he could leave, and that it would work.
Would he now say that he left the business in good hands?
I would assume that, if he were asked, he would say yes. But we never discussed this in the recent months.
Were you friends before the merger?
No. I had never met him before.
So it was purely commercial logic?
Absolutely. I had one meeting with him before the merger where he had to say yes or no to me as a proposed candidate. We had a long discussion on values that were important to him, and some perceptions he had about Sandoz as a company, its style and so on.
Why were you so surprised when last year was so bad?
The pharmaceutical business was closest to me because I was managing it at Sandoz. Afterwards, Pierre Douaze from Ciba managed it. He was a very experienced sales and marketing executive who rose in the ranks, but he was less familiar with R&D. He acknowledged that. Even though that was his job?Not the only part, but part of his job which, in this merger phase, was most demanding. So I became more closely involved on the R&D side. You had to interfere?Yes, but it was not something I particularly enjoyed. We were in the early post-merger phase, so Alex [Krauer] and I discussed potential solutions. Eventually Pierre Douaze decided to retire and, in 1998, we hired Jerry Karabelas from SB, a PhD who understood R&D well. He is a Greek American, very optimistic.
A live wire?
Very extroverted, professional, positive, and he started very strongly. He’s a good communicator.
So you thought you’d hit lucky?
Yes. He said: “I’ve looked at the products. We’ll grow in double digits,” and I was more than happy to join his belief. But we didn’t get double-digit growth. In the fall of 1998, we were mistakenly optimistic. So he was still optimistic?Yes. But in February 1999, we had the collapse of the agribusiness. GMO [genetically modified organisms] also became a big political issue.But you’d been very optimistic about the agribusiness at the time of the merger.Yes, I was absolutely positive about it. I am still positive, but obviously in a more realistic way, after all the political events. In March, we said the agribusiness would have poor results. The share price fell. Alex Krauer retired. I became the chairman and CEO. Here in Switzerland, we had a public debate about joining these posts or keeping them separate. That was controversial. With the business not going well, I became the object of the criticism.
Because they said you should split the function of chairman and chief executive?
They said keep it split; there’s too much power in one person. Why you?Alex Krauer was seen as the elder statesman. For some, he was the guarantee of stability. Earlier or later in the Swiss environment, successes are criticized. The media’s best marketing tool is the same recipe as in a classical Greek tragedy: build up and let fall. There is a big difference in perception between the Swiss environment and the US.
In what way?
The US is much more factual, much more positive. Switzerland is much more critical and negative. You mean the attitude of the Swiss public towards business?Yes.
So what did you do when Jerry Karabelas didn’t deliver?
We couldn’t make another leadership change so soon. Furthermore, Jerry had tremendous strength and knowledge, but we needed the support of someone with a more commercial focus than Jerry had.
It was too much for him?
We decided to switch Thomas Ebeling from consumer health to pharmaceuticals. He is bright, he’s aggressive, and he is a strong implementer.
And is Ebeling producing better results?
Results are improving.
Is he a strong man?
He’s strong and intelligent, and he has good judgement. Did you think of resigning at any time?No. I couldn’t resign in the sense of abandoning the organization and its people. But it was not an easy time.
| Vasella: sensed the tide has turned this year | ||||||
Did you think about that a lot?
Yes. Often in the evening, when I was going to bed, or swimming. Swimming is a very interesting experience because there is silence; you only hear your strokes, and thoughts Flow inevitably.
Did you talk to anyone about it?
To my wife. Did she ask you to give up? No, she knows me too well. I knew that there would be a day when I would be criticized, but you don’t know until you go through it what your emotions will be. If the facts were wrong, logic would say, why do you care? Yet, despite that, it hurts.
What was the most difficult part – the decision to replace Karabelas?
It is always difficult to do something that might be the right thing for the business, but which is stressful for people you respect and may even like and, on top, creates negative headlines. But I was sure that Thomas Ebeling could support Jerry effectively.
Did the board support you fully?
It was very supportive.
Without exception?
Without exception. It was a gratifying experience. I never expected such strong support.
Did you seek support or advice from the heads of other large Swiss-based companies?
No.
You are a board member of Credit Suisse.Didn’t you talk to Rainer Gut or Lukas Mühlemann?
The only way you can work in a team, through conflict and difficult situations, is to be very candid with your directors.
In hindsight, were you too optimistic?
You couldn’t anticipate the agri thing. It’s a cyclical business: one day it will go down, but you don’t know when. On the pharmaceutical business, I would say I believed what I wanted to hear.
When did you feel the tide had turned?
In January this year, at the general managers meeting. The atmosphere was so different, so dramatically more positive. There was no day during the entire merger where I felt the room and the people were so aligned and so motivated as at this meeting.
| Norman Walker (standing) discusses human resources | ||||||
When the bad news started coming in, and it began to become apparent that Karabelas wasn’t the right person to run pharma, did the board raise it with you?
No, I raised the fact that we needed to reinforce pharma’s management. The board members were very lucid about the issues that we were facing in pharmaceuticals.
When you made the change, did Karabelas expect it?
Yes. We had had several direct discussions. While the nomination of a COO was not his choice, he accepted it. But, after six months, he preferred to take on a new challenge.Were you surprised that, as chairman of Novartis, you would have a much more visible role than, say, the chairman of Sandoz?I was not chairman of Sandoz, as you know. But Sandoz, at the time, wasn’t as visible as Novartis is today, because there had not been a merger, and the size was different.
Was it more of a Swiss than an international company?
It was, and it had been managed to give it exposure in Switzerland but not so much anywhere else. When we started to get a negative image in Switzerland, some began to ask whether Novartis was more a Sandoz company or a Ciba company. Ciba had a very good image -friendly, open, but with not very good business results. Sandoz had good business results but was regarded as closed, secretive, negative, threatening. What would the merged company be like? Developing a leadership styleYou made the transition from being a doctor to a manager. Was that difficult?It was. The transition from being a respected physician to being a sales representative is a difficult transition. Why did you do that?I was 35, an age where I had to decide if I would be a physician for life or not. I didn’t want to go into private medical practice. I liked the interaction, I liked the organization, I liked the hospital. I had the possibility to either pursue a hospital career or to discover something completely new. I didn’t understand what was going on in business or politics, but I wanted to. I Finally applied to a business school. This was a very tentative step. The answer was positive. That was frightening, because it was not a remote possibility any more. My wife was the key to my decision. She encouraged me, saying that otherwise I would always regret it. I had a chance to talk to the head of pharmaceuticals at Sandoz. As I explained my interest in business and Financial markets, he suggested that I go into banking. He obviously misunderstood me. He was wrong; pharmaceuticals were much closer to me as a physician. A few months later, after Max Link became head of pharmaceuticals [at Sandoz], I tried once more and got an appointment to see him. He had just returned from the US. He is a big motivator, less reserved than the traditional Swiss. He said: ‘we need people like you. Don’t worry about business school and don’t come to Basel; go to the US. Start at the bottom, work your way up and, if you succeed, you could become the head of an affiliate like Portugal.’ I went back and I thought: Wow! I could become head of the Portuguese division of Sandoz. I resigned three days later from my position at the hospital.
| Vasella hopes shareholders will see promise in pharma’s pipeline | ||||||
Did the change shock you?
I started in the US three months later. No-one knew I was coming. They looked at me as if to say: who is this guy? Fred Hassan, the head of Sandoz’s pharmaceuticals business then, put together a training programme and acted as a mentor. He proposed that I go to sales for a period of two years. This was too long. Finally, we settled for a shorter period of time. Why didn’t you want to spend longer in sales?Because I was 35. I had to catch up. The best use of my time was to understand sales and marketing quickly. After the sales training, I went into marketing research for a few months, and three months in Finance. Then I became a product manager, which was a fantastic job.
Why?
I was given responsibility for a product called Sandostatin, a tumour-growth inhibitor. Management said it might be able to reach $5 million in sales. When I left the product a few years later, it was four times that size. What did you learn?Getting things done without formal authority was challenging, but fun. A team can be powerful in integrating diverse functions around a product. In a product team, you need to have the right mix of people. For example, if you have six people who are an excellent team, excited about work, and one who makes it difficult, always focusing on what doesn’t work, it disturbs the group. When you remove someone who doesn’t Fit in, you unleash the energies and power of the whole team. The other thing I learnt was that managing a product management team in the US made Basel seem amazingly remote. From this experience, I always remember that it is important to foster strong headquarters/country interactions.
Do you believe in a flat organization?
An organization is better if it is simple. It should be flat because layers complicate management and slow down communication and execution. Focus is a very important factor. Everyone must know for what he is responsible and take ownership. Therefore, we would rather create more smaller units than larger ones. I’d rather have a person say: ‘I’m not responsible for many things, but I’m totally responsible for this one area.’ I believe in decentralization. Nevertheless, in some functions, we must co-ordinate very closely globally, or we cannot be effective.
Which functions in particular?
R&D in the First place, then key strategic marketing decisions and production planning. With the new media, purchasing becomes also an increasingly global function. It’s said that you’re a control freak, which is why you send thousands of emails. Is that right?I don’t think I send thousands of emails. But email is a very good tool, and it helps one to stay in touch with people throughout the organization.
I quote from a critic in Switzerland: “He writes thousands of e-mails to everybody. Tries to do everything. Doesn’t let people be autonomous. Vasella gives people directions and then he changes his mind.” What do you say?
Well, I don’t think it’s an accurate picture.
Do you send thousands of emails?
It’s physically impossible, I probably would have to sit day and night at the computer.
But you send a lot?
I Find emails very useful because they are immediate. They cut through layers. And you are reachable for people, independent of time zones. It erases distances and facilitates communications.
What do you say to the criticism that you don’t allow anyone to be autonomous?
Autonomous is a misleading word. I want people to be responsible and accountable for certain things, as part of our large global organization. Being autonomous does not Fit in with an organization’s needs. What is certainly true is that autonomy does not work in our environment, which is too complex, with too much interdependency.
Do you talk regularly to managers of other large global companies?
I occasionally used to talk to Helmut Maucher [Nestlé chief executive]. I talk to several other CEOs that I meet at various meetings and bodies. But I don’t think you can discover who they are and how they operate when you meet and see them in a totally different setting, away from their organizations. Sometimes it is absolutely appropriate to control more. And sometimes it is much better if you let go. What mistakes have you made?Several. But let me touch on the third critical point of your quote, about my changing my mind. I do change my mind, and I am open to fact-based debates and, therefore, flexible about my point of view.
How often?
I change my mind relatively frequently.
Are you making a virtue of it?
It’s very important to be able to change your mind. If you have a new insight into something, you have to be able to change your mind. But if people cannot understand why you’ve changed your mind, then it’s a problem; people think you’re temperamental. That’s bad.
You’re saying when you change your mind, you do so consistently?
Yes. I’m logical.
Would you say that you make decisions quickly or slowly?
It depends on how difficult they are. The easy decisions are quick. The others take longer to mature. How do you think the people who report to you would describe you?You would get a large spectrum of opinion.
Why?
Because I don’t interact with everyone in the same way. You deal with each person according to his or her competency?Yes, and according to personality. With some I can be very frank and tough, but with others they would Find it difficult.
Do you ever lose your temper?
Extremely rarely.
What happens when you do?
I can raise my voice.How often?Only twice in the last 12 years have I really been angry; but not in the last Five years.
Do you regret it?
No.
You believe you were justified?
Absolutely. It took me way too long to get angry.
Did you use violence?
I never have in business … but once, in my First year as a resident physician, I took someone by the tie who, day in and day out, made it a sport to bother us residents.
Would you describe yourself as a consensus man?
I prefer consensus, if it’s right for the business. Once you’ve talked a topic through, maybe three or four times in a difficult situation, you need to then make a decision. At that point, I don’t care if everybody’s on board or not. Would you make a decision against the consensus of your colleagues?No. But there’s never been that type of situation. If I know certain people are not on board, then I want to understand why.
What companies do you admire?
I admire how Pfizer is run. Bill Steere [chairman and chief executive] has done a fantastic job building it. I remember when it was not well regarded. He made one very important decision in the early 1990s, when he invested heavily in marketing and sales. This was at a time when others were downsizing sales forces. He went against the common wisdom. There are people whom I admire outside the industry, like Percy Barnevik [former chief executive of ABB], who, over the years, has done a fantastic job at ABB and repeatedly given me excellent advice. Jack Welch [GE chief executive], of course, also is a great leader, and he also was helpful to me in the discussions I had with him just after the merger.
What about your relations with your friends across the river at Hoffman La Roche?
It’s a long history, and it’s had to do with individual personalities. Marc Moret [president of the board of directors of Sandoz] and Fritz Gerber [chairman of Hoffman La Roche] may not have liked each other, but they respected each other.
Because Roche was bigger?
No, not bigger, but maybe more aggressive.
What’s it like now?
I would consider the relationship I have with Fritz Gerber to be a good one. We are competitors and I respect him. We can talk easily together. I like him very much. What about Nestlé? I know Peter Brabeck [former Nestlé chief executive], and I know Helmut Maucher. Though they are very different types of people, they are both top-class executives. As Peter and I went skiing together with some other colleagues, among them Lukas Mühlemann from Credit Suisse, I got to know him rather better than his predecessor. Is Lukas Mühlemann a friend?Yes. It depends, of course, on in what language you say friend, as the meaning varies in German and in English.
English.
Yes, he is a friend.
Did he put you on the Credit Suisse board, or was that Rainer Gut?
Rainer.
Had you known him a long time?
No, not long. I knew Lukas for much longer.
Do you view Roche as a competitor in the financial markets?
In the Swiss capital market we’re intense competitors. Particularly in the equity market?Sure. We have the same potential investors. They don’t all invest in both companies, so I want them to choose us.
Doesn’t Henri Meier [Roche’s head of finance] have a reputation for being better at financial engineering?
He has an excellent reputation and generated regularly a substantial Financial income for Roche. As we are listed on the New York Stock Exchange and, as a consequence, also report according to US GAAP, we are subject to some restrictions.
Is that why you listed in New York, to steal a march on Roche?
No. Definitely not. We listed for increasing our shareholder base and Novartis’s visibility in the Financial markets.
Is the relationship between you and Roche a sensitive issue?
Yes and no.
Is that because it’s a small town?
No. I would say it’s not sensitive at all as it relates to personalities and management relationships, but I know Fritz Gerber wants his company to be more successful than ours, and I want ours to be more successful than his. That’s to be expected.
Do you compete more with Roche than you do with Merck or Pfizer?
No, not in the marketplace. But yes, for capital, for the best valuation. Roche has a higher multiple than Novartis, and I admit that I dislike that. And that makes your costs for capital higher than Roche’s? Yes.
And do you think you should have at least the same valuation?
The future will tell.
You look as if you mean yours should be higher.
If you look at the pharmaceutical business, I can only comment that our business looks very promising. And theirs doesn’t?I hope, for their sakes, that they do well.I’ll move on: How did you become a director of Credit Suisse?Rainer Gut invited me to join the board. At the beginning, I was asked on several boards. Before I decided to go on Credit Suisse and Siemens, I hesitated, but I joined, and I’ve found it informative to see different governing systems.
Does the fact that you are on the board of Credit Suisse affect your relationship with UBS?
Implicitly it maybe does. But I have a good relationship with Marcel Ospel [UBS chief executive] and Alex Krauer, and we would do business with UBS, Morgan Stanley, and Lehman Brothers. It’s not exclusive that we work with Credit Suisse. As Rainer Gut explicitly did not expect any preferential treatment of Credit Suisse, I was able to join their board. Who would you use as an outside sounding board?Aside from my board members, and a few McKinsey partners, I occasionally discuss issues relating to Novartis with Lukas Mühlemann or Thomas Wellauer. Why Lukas in particular?I trust him and his professionalism. There is a level of trust which goes back a long way, when Lukas was in charge of the Sandoz account at McKinsey. I value his judgement.
The business of pharmaceuticals
Is drug discovery a scientific, well-managed process, or just luck? It’s both. You have to be lucky. But unless you attack it scientifically, you will never be lucky. Research is being organized globally, with different centres of excellence and external partners, so you have to organize it well. Luck comes to the one who is well prepared.
What does it cost to take a drug to market?
Including all costs, over a billion Swiss francs. But costs are just one factor; quality and speed may be even more important. Eventually, the question is, of course: what is the medical and economic value of the product you are bringing to the market?
What do you mean?
Is the product targeted to reach sales of Sfr1 billion, Sfr2 billion, Sfr3 billion, or is it only Sfr200 million? How did you differentiate the drug from already existing therapies and future competitors? How convenient is its dosing regimen? Did you look at the possible combinations, or did you just develop the drug in a simple, straight way? Sometimes, to spend less is not necessarily better. Looking at our drug development performance over the past few years, we see a clear improvement in quality and speed. We are now in the upper quartile of the industry. Nevertheless, my colleagues in development still want to improve their performance further. What’s the biggest part of that cost?Phase III of clinical development. These generally large trials include thousands of patients and so are very costly. The documentation of these trials is extensive; truckloads of documents are being delivered to the regulatory agencies, which have become very demanding. The US Food&Drug Administration is currently most prudent as it relates to side-effects. In some instances, this may be overly cautious, but it is preferable to check the safety thoroughly before registration. The last thing you want is to take a drug off the market. That happened to Rezulin from Warner-Lambert. Our neighbour also had two drugs taken off the market. Unfortunately, there are several examples of drugs which had to be withdrawn from the market or were lost in late phase III. This is very costly. But one has to be aware that pharmaceuticals are a risky business as it relates to new drugs.
Roche?
Yes. Posicor and the Parkinson’s drug, Tasmar, were taken off. The risk is not totally over once you go on the market. So you’d better get it right?Yes. You had better do your testing very thoroughly. It’s also a question of responsibility towards the patients.
Do you approve of the FDA’s process?
Yes. In most cases they act rationally. Sometimes, however, we disagree with their assessments. Novartis has one drug for Alzheimer’s disease which we Filed and for which I believe we should have gotten approval a year earlier than we did. But a reviewer saw two cases of death in one trial, and considered this might be a signal of an increased death rate in the treatment group. So we collected a huge amount of data and analysis. It turned out that, in another study, we had two more deaths in the placebo group, so these cases were, in all likelihood, not drug therapy related. FDA gave us the approval, but we lost over a year, while our US competitor built its franchise. But, as I said, initially FDA has a duty to be thorough.
But nothing is totally conclusive, is it?
There are things which are conclusive, statistically at least. Once a drug is on the market, and you see a signal that a certain event is occurring significantly more often than you would expect, then you have to acknowledge that. Every active drug has not just desirable, therapeutic effects but also side-effects, even if they are rare and benign. You always have to weigh risks against benefits.
Are there always side-effects?
Always. And also, by the way, with placebo. For example, with Zelmac, our new drug for irritable bowel syndrome, or Diovan for hypertension, there was the same incidence of side-effects in the treated as in the placebo group. How can you have side-effects in a placebo group?The human being is not a machine. Psychology plays an important role in health and disease. So placebos may work since the patient expects a therapeutic effect, with all the positive and negative side-effects. In one study with patients suffering from severe pain, 40% in the placebo group, who believed they were receiving morphine, reacted equally well as those in the drug treatment group. How long does it take for Novartis to bring a drug to market?From bench to market it is still about 12 years. What is the failure rate?One compound out of 10,000 that comes off the bench reaches the market. Can’t you shorten that?Everybody wants to, but it is difficult. But genomics promises to shorten timelines, as a result of better targeting. Truly, however, time will tell. Why is there a perception that there’s not enough in the Novartis pipeline?I can’t tell you. Perhaps it’s the result of the change in expectations, and observers not yet catching up on the available information. Our late-stage pipeline is among the best in the industry.
Did you have too many development projects going through?
Yes. We had lost some compounds late in development, so we want to diminish the likelihood of this happening by implementing early proof of concept studies. These studies are designed to test the validity of the animal study results in a small sample of patients. The effect is that we have fewer compounds, but stronger ones. Will that save a ton of money?That’s the idea, but we will have to wait to see if this is true. In the meantime, we are actively licensing in compounds to additionally strengthen our pipeline. Given the industry’s rate of innovation and its need to grow, I don’t believe we can generate all the necessary new compounds internally. We need to license in more actively from biotech and other companies to complement our in-house efforts. As compared with the past, collaborations have also become more important.
When will the drugs you are optimistic about come to market?
We expect the first approvals at the end of this year, or in the first half of next year. That’s why you’re looking more cheerful.Yes, I’m pretty confident. It’s not based just on beliefs, but on facts. The question, then, is how effective will we be as an organization to penetrate the market globally, deeply and rapidly?
Particularly in the US?
Yes. If you look at our performance, in Japan we gained market share last year. In Europe, we have performed well in Italy, Spain, Germany and France, and we have, as well, in the Asia Pacific region. In the US, we are still losing market share because of generic erosion of some large products. Nevertheless, I believe that we are on the right track. In fact, we are now progressing well with our newer products, and take market share from our competitors.
Which incoming drugs are you most cheerful about?
The most exciting one is Zelmac. That’s a treatment for irritable bowel syndrome, which hits many, many people. Until recently, there was no treatment. Glaxo has received approval for one product which is for diarrhoea-prone patients. We have Filed for constipation-prone patients.
Is Zelmac a potential blockbuster?
If it succeeds very well, then we might achieve $2 billion in sales.
Is irritable bowel syndrome that common?
It’s very common. It’s the most common gastroenteric disease. About 40% of patients who come to a gastroenterologist have IBS. The disease doesn’t kill; it’s just very difficult to live with and is the leading cause of days lost at work.In such a situation, it is important that the treatment have few side-effects, and our drug shows a very favorable profile with few and benign side-effects. The task, each time you penetrate a new area, is to change the treatment patterns of the doctors – to make them aware of newly available therapies, so they can treat patients who, up to now, just had to accept their condition. That needs more time and effort than if you enter an area which is established.
I can imagine that one of the greatest moments of excitement is when a compound reaches a certain stage and you think: this could be big. When does that happen?
Phase II or III of development, when you have the First solid results from patients. How long is it before the compound becomes a marketable drug?Maybe six years.
Do you have a feeling for what will get through?
Yes. Yes, but I have been wrong. But, on the other hand, I’ve pushed through compounds in recent years which would have died otherwise, and some are among our most promising.
There must be researchers working here who have never had a success.
Yes. In industry, most have never had a success, but have greatly helped progress concepts and scientific approaches.
How many researchers do you employ?
About 2,500 PhDs. Are they scientists first and commercial people a long way second?Most are absolutely scientists First. But they have a commercial attitude, and we worked hard to integrate this into our cross-functional product teams to sensitize them to market needs and opportunities.
The biggest thrill is developing an important drug. But great science is also exciting. Where do they get their pride, if something fails? They publish, they are recognized by peers, they are respected. That’s a lot of the gratification they need.
NOVARTIS AND THE NEW ECONOMY
How do you explain the tremendous rise of the new economy type stocks in Germany, and the lack of them in Switzerland?
I don’t think there’s a lack. You have stocks which have been labelled as new economy or technology, and they have taken off. In Germany, is Siemens new economy? Maybe, maybe not really. But they have performed well and have been repositioned as a tech company. They gained tremendous market value from that. Pharmaceuticals in general have rather been put in the old-economy basket, despite their high innovation rate and despite, I think, what has been a sustainable decent growth rate of profits.
Since the collapse of the dot coms, money has
been flowing back into pharmaceutical stocks. Why is that?Because it’s a hi-tech, highly profitable industry with very good prospects of growth and stability. One of the big shadows, however, is the uncertainty in the US market about new Medicare legislation.
As a business leader, how do you view the internet?
As a tool that already has an impact on our business. It will have an even bigger impact in the future. First, procurement has been simplified and made more transparent and cost-effective. Next, we’ll watch how we can use the internet to give our customers something they never had before. How we take advantage of that will be tricky. It’s easy to create an internet link with customers, but it costs a lot and it’s not easy to make money. We built a site which is about health and age. We have one million visitors a month, and it’s growing very quickly. It is free; it’s very neutral, not promotional. While it helps to build our reputation, it will be interesting to see how we can link it to business. The third element is research. The researchers are using the internet all the time, for communication, data sharing, databases. It will have a big impact on clinical trials – even more than it does today – for example, in remote data entry. But it’s hard work. We have people who are dedicated to these questions and, this morning, we had a meeting where we discussed very thoroughly what our customers want. We have an initiative which is company-wide in each sector: we have created a team of people who are responsible for applying the internet in their sector – in procurement, in the development arena, as a platform for communicating, in marketing and sales. A lot of experimentation is going on in that arena. Is the internet the biggest development for you?We are faced with three major evolutions. One is the demographic evolution: the growth of the population has doubled in less than 30 years. It will continue to grow about 35% in the next 20 to 25 years. The number of people over 65 will double. That creates a huge opportunity because, after 40, drug consumption goes up. The second is the internet and the popularization of knowledge. People already know more about diseases and treatments than ever before. They can get more facts than their physicians usually know. This creates a new dynamic in the decision about treatments and, therefore, how the physician responds. More people now influence decisions on their therapy. Therefore, for us, communications skills to consumers become more important. Patients become more important than ever before. Thirdly, the human genome will soon be publicly available. But we will not yet know all the functions of these genes. We still have to identify each function, and then develop the new drugs. Pharmaceutical companies will be playing in a huge arena – much bigger than ever before.
How will that change the business?
We have to Find a way to motivate researchers more, to give them more autonomy, more economic benefit. Traditionally, R&D associates have earned less than marketing associates, even though they generate a lot of the value in a pharmaceutical company.Does the industry attract the best?If you look at where top researchers go, most prefer universities; second is biotech, and third is a big firm. What are you doing about it?We set up an institute which is not under the leadership of our normal R&D managers. We located it close to a university centre at Scripps Institute in La Jolla, San Diego. The people can commercialize some of the technologies if we don’t use them. The head is also teaching at the Scripps Institute, and has experience with biotech companies. In no time, he hired a fantastic team of people. Our research foundation owns the institute but, as I mentioned, it has more freedom in pursuing attractive targets such as functional genomics, the discovery of specific gene functions or the development of novel research tools. The point being to attract better scientists?It is a war for talents. In the old era, life was very clear. You came to work at Sandoz or Ciba; you might not earn a lot but you were respected, you earned more than in academia, and you had a lifetime job. Now a new industry has emerged. The university environment has changed too: academics can create companies and still be academics. The mindset of the people in the academic institutions has changed. It used to be bad taste to talk about money. Today, it is fashionable.
How would you sum up genomics?
We will know what the normal genetic information of a person is. We will be able to identify aberrations and, therefore, predict the likelihood of someone developing certain diseases. This will create a huge opportunity and, also, huge ethical and privacy issues.
Is it as important as it’s hyped?
It is, but the road to success will be much longer than many believe. Will Novartis be a completely different company in 10 years’ time because of genomic developments?No. I believe chemical compounds will continue to play a significant role. Genomics has already dramatically changed the way we do research.
How big an impact will genomics have?
The impact will be very profound on human lives. But it will take years. The next complexity will be the interaction between various genes. What will happen if this gene is turned on, and this one off? And this one on, and the other one off? The complexity will increase as we discover more. The impact is already dramatic, and I think it will be even more dramatic. No generation before us has lived so long or so well. This is a factor of hygiene, of better nutrition and therapies. In the future, it will increasingly be a question of prevention and individualized treatments.
Could genomics change the major pharma companies like this into having internet rates of growth?
No, I don’t believe so, but that’s gut feeling. We will have more knowledge. Some of the hereditary diseases will be cured. For me, it’s not yet tangible enough. It will have a huge impact, but it’s not here yet. Will Novartis stay Novartis?The company is transforming rapidly. Another question you imply is: will it merge? I don’t know. If there is the right transaction, why not? If I look where we stand now, I believe we have an exciting period ahead without any transaction. Motivation is good, the compounds are here, the pipeline is rich. It’s a tremendous opportunity and a tremendous challenge. What would influence you about another merger?The rational factors like strategy and valuation are easily understood and can be checked. But other factors like timing, psychology, Fit are at least as important because they are more poorly understood and often mismanaged. For example, right now, the Swiss franc is cheap versus the dollar, so any transaction with a US company starts with a disadvantage for us but, at the same time, there might be a unique window of opportunity to do a transaction.
But equally it must make it very attractive for Americans?
The American investor should look at our stock and be thrilled at how cheap he can buy it.
Why?
Because the P/E ratio is relatively low, the pipeline has not yet been fully acknowledged in the valuation, and the pick-up of our growth has not yet been put into the valuations. I think analysts want to see that it’s sustainable.
Do you see Novartis as a stand-alone company in, say, five years’ time?
That depends not only on us but on industry dynamics. One thing the merger did was put us in a league where we now have the resources to compete as an independent company and one of the leaders in the industry.
You think you can?
Oh, yes, unless we see a dramatic outside development which is independent of us. What would make you contemplate a merger?We have two mergers that are creating a new league of drug companies. One is Glaxo SmithKline and the other one is Pfizer Warner. These two companies will have nearly double our market share. Next, you have companies like us, and then you have a lower tier. One can live well in the second rank of companies. But if more and more companies disappear as potential candidates, then you might be left at the end of the game with no choice but to proceed without external growth.
You mean you don’t want to be left with the last girl at the dance, do you?
Absolutely. But we won’t be forced. If you look at the girls and they don’t strike your fancy, you don’t necessarily want to dance, even if the music is playing.
The transaction volumes have increased tremendously as a result of the competitive pressures, increasing costs for R&D and commercialization, as well as ever more demanding Financial markets. Size is a relevant factor and we need to take advantage of the economies of scale, but, in an innovation-driven industry, we need to be big and small at the same time, the latter by creating smaller business units, which increase people’s focus and their feeling of ownership.
How the company is run
How important is the board and how often do you meet?
It’s very important and we meet roughly six times a year.
And the executive committee?
The chairman’s committee meets once a month.Isn’t that mainly non-executives?Yes. It has four people: two vice-chairmen, one additional member of the board, and myself. That’s [vice-chairman Hans-Joerg] Rudloff, [vice-chairman Helmut] Sihler and [Heini] Lippuner. What do you have on the agenda?Strategic plans and decisions, acquisitions, people, and the results, of course. But we can talk about things not on the agenda, generally at the end.
And how long will that meeting take?
Half a day.
| Those present at meeting last October | ||||||
Do you use the chairman’s committee to make things happen within the company?
No. For me it’s a sounding and decision board. I get advice and then, formally, I receive permission to move ahead.
Does it have the same powers as the board?
No. But some decisions have been delegated from the full board to the chairman’s committee, others to the compensation and audit committee. The full board has to approve the strategic plans, budgets, important investments, hires, and transactions strategy, to name the most important kind of topics.
What else do you use?
The management committee of the group, we call it the executive committee, the consumer health committee, and a healthcare committee. Among other things we discuss investments, licensing, acquisitions and people.
Is that where you decide what compounds to develop?
No. If we were to approve transition times for development compounds at the group executive level, we would have a lot of people there who didn’t understand the details of pharmaceutical development and therefore could not really contribute. The people who make these decisions have to understand everything about the portfolio and the development process. So who decides? The innovation management board which runs the development portfolio. It’s led by the CEO of pharmaceuticals. It has the head of development, the head of research, the head of toxicology, the head of marketing, the head of the US, the head of Europe, and country heads. It’s a mixed body between people from the markets and scientists. I follow the process with interest and, at any time, I feel free to ask questions. But I don’t run it.
You can question a development, but have you ever stopped one?
I’ve never had to. It’s more often the opposite. I often ask: “Why aren’t you moving on this? Why does that not come forward?”
Are there any other boards or committees that matter?
The consumer health committee and the healthcare committee. There we discuss specific business topics in more detail. On the executive committee of consumer health we would, for example, discuss the Gerber wellness programme. We would look at the bottles, we would look at the shape. The head of consumer health would explain in detail the competition from Johnson&Johnson, for instance. That would be impossible to do on the executive committee of the group. Then I have a third committee which is the Finance committee, where we discuss investments and our Financing issues. That’s with [chief Financial officer Raymond] Breu and [executive director Urs] Bärlocher. These last are not formal committees. It’s much more free format discussion and debate.
Where do you feel, in all of these, you are most effective?
A combination. These three particularly because we go deeper. How much of your time do you spend in committee meetings? About three days a month, not counting an off-site meeting of the executive committee. How much of the rest of your time do you spend in one-on-one meetings? All of it. I very rarely do much writing or reading in the office.
You take that home?
Yes. Or I do it during my commute.
Are you in danger of having virtually all your working time organized by others?
That’s always a danger. When it gets too much I say no, and we remove part of it. How much of it is internal?I had a time when it was two-thirds external and one-third internal. Today, it’s more balanced. I tend to spend more time with my people, because I feel it’s more important. But equally, I am not satisfied that I spend too little time with customers.
How much of your time do you spend outside Basel?
At least a third, mainly in the US.
Would it be better if you moved to the US and ran the company from there?
Operationally, I would say it would not be a disadvantage; it would probably be an advantage. From a corporation point of view, it’s more advantageous to be here, particularly for tax reasons. On that point, there’s no comparison.
How many people report to you directly?
Thirteen.
A management consultant would say that’s very inefficient.
I would counter and say that’s stupid. If I could only have four or six people reporting to me, it would mean too many layers in the organization. I believe you should be stretched. That means you cannot bother about minutiae. You bother about the big things instead, and make the decisions. My direct reports are highly competent and can run their business without my help.
You don’t spread yourself too thinly?
No, I don’t. If, one day, my people need me and I am not available, then there is a problem. If any of my direct reports want to talk to me or want to see me, they can always get me.
The same day?
Yes, by phone at least. And email, which is very efficient. What contribution does Rudloff make?He is very well informed on markets and the Financial community. He is an excellent communicator. He has ideas. He will describe things not only accurately but in a very entertaining way. He is quick. He likes change. And we laugh a lot.
Home, Harry Potter and the web
What time do you get to the office?
Between 8:00 and 9:00. That means I start to work at 6:30 or 7:30, when I get in the car. The journey takes an hour and 15 minutes, and I get a lot done during the commute. Where do you live?In Zug. I try to leave work around seven, to get home at about eightish. Then I have dinner.
How do you relax?
The family is the most important part of my life. And I also like to walk the dogs, as we live close to the lake, and I enjoy walking among the trees which grow near the water. I can walk for half an hour with the dogs and look at the trees, and the lake, and the birds, and the Flowers.
Do you play any sports?
I ski and swim.
Are most of your friends medical people?
As I get older, I make fewer friends. Most friends are from earlier times, which means they have common backgrounds. They’re mostly physicians. What do you read?Right now, The Memoirs of Albert Speer. It is captivating. Why?Because it describes how an apparently reasonable man got entangled in a murderous regime and became one of the technocrats who, through his skills, prolonged the suffering of millions of people. I read it as a warning never to lose sight of the consequences of one’s actions. One has to learn from history. But before that, I read Harry Potter with my children, which was great fun.
What business publications do you read?
I read the Harvard Business Review regularly, as well as the Wall Street Journal, Financial Times, Neuen Zürcher Zeitung, Fortune, Forbes and the New Yorker. I skim a few others.
Do you use the internet?
I go on the internet every day and do key word searches, particularly on the company and our competition.
Balancing customers and shareholders
What does shareholder value mean to you?
My view has evolved.
How?
When we consider the purpose of our company, we recognize that we’re primarily here for our customers and to deliver value to them. Regardless of your shareholders?That is not the choice. Of course we want superior returns for those who invest capital, ideas and work in our company. But fundamentally, the only way to achieve this and to create economic value is to serve the customers better than the competition does. The creation of shareholder value is the measure of how well we do this.
Would you describe Amazon.com as having created shareholder value?
I think it has, but the question is its sustainability. I believe you should create sustainable value. One must look at the risks to that. Personally, I value being in a pharmaceutical company compared with, let us say, a tobacco company.
Why?
Because the role we fulfill in society with our products is something I feel very much in sync with. We have an impact on people’s lives, dramatically sometimes, in a very positive way.
By developing drugs?
Drugs that cure people or improve their wellbeing dramatically, and that help physicians to do a better job. I feel very much in tune with this, and most of our people feel the same.
Do most people at Novartis feel that they have a social mission?
Yes, they have a right of existence in society which is rather on the nobler than on the baser side. I had 60 top sales people in here this morning: they were very proud that we had discovered new compounds to treat cancer.
How do you trade off shareholder interests with those of your employees?
It’s always a trade-off. If you don’t treat your employees decently and you are not competitive, you will not be able to provide superior returns to your shareholders.
Do you see a distinction in the so-called Anglo-Saxon version and the so-called continental European stakeholder approach?
Yes. I think our employees should participate with stock options, if we have good results. I personally have become much more oriented to shareholders and shareholder value creation.
Do you call that the Anglo-Saxon or the stakeholder version?
It’s much closer to the Anglo-Saxon version. Is that now common in Switzerland?Not yet. In Germany it’s even less common. There, corporate governance is set up in such a way that the interests of employees have a huge weight in decision making.What’s changing shareholder value here?The visible success of the Anglo-Saxon model versus other models. The fact that more and more people are becoming shareholders, including of course our own employees. We manufacture goods, but that’s not where we create most of the value. The real value creation happens through the brains and know-how of our people. So what’s changed?The fact that we now recognize that.
Since when?
Progressively over the last three years.
Which European companies have changed?
The perception from outside is that Novartis is shareholder-oriented, and it’s true. But in many people’s minds in Switzerland, it means we’re unethical, and that’s wrong. If I look at a leader like Lukas Mühlemann at Credit Suisse, there is no doubt that he is shareholder oriented. I’ve seen a big change in Siemens since the day I joined the board. It’s much more shareholder-oriented and more successful. If I consider a very successful company such as Nokia, I wonder whether it’s successful because of its drive for shareholder value, or is it just because it’s extremely well run, innovative and can move fast?
Isn’t it easier for Nokia to change than it is for Siemens?
Yes, that’s true. But, at the same time, Nokia was in a very poor state once.
What were the costs and benefits of seeking a New York Stock Exchange listing for Novartis ADRs?
If we look at the company as it is today, we are, from the point of view of market capitalization and importance in our industry, among the world leaders. It’s very difficult for a company of our size not to be listed in the largest Financial market in the world. Very few US investors invested in our stock, even though they understood IAS accounting. The listing brings visibility and, I would add, the credibility that comes with the transparency of adhering to the standards of the US market. It also underlines our increasing presence, focus and investment in the US market where we have over 40% of our business.
Has the share register changed significantly following the ADR listing?
There’s been no dramatic change – only a slight increase among American shareholders. I would say it’s a little too early to judge. But if we were one day to make a major acquisition in the US and wanted to use our shares, that would be very difficult without a listing. I hope our company will become better known among US investors, and not just institutions, but also among physicians for example.
Did you consider a global share instead of ADRs?
The reason for ADRs is that the price of a single Novartis share is quite high: it would be right up there with the most expensive American shares like Berkshire Hathaway. That is too high for many individual investors and brokers. We would want our shares to be priced under $100 in America. And Swiss law restricts us to splitting our shares only two for one. This means that even with a split, the price of Novartis’ shares cannot be brought in line with the price level of most of the shares traded on the NYSE. Here, we need a change in the Swiss legal system which, by the way, is under way. You undertook a share buy-back last year. Are you groping for the best capital structure?Do you mean should we be more leveraged? From a balance sheet point of view, we’re over-capitalized. The question is what do we really want to do with our cash and the priority is to invest in our industrial activities. Ideally we would like to invest in building up prescription pharmaceuticals. We are also interested on OTC (over the counter) medicines and we may make smaller acquisitions in generics. If you don’t have targets immediately in sight, share buy-backs are a more tax efficient way to return value to shareholders than special dividend payments which incur double taxation.
Over the past years, we have also moved decisively to implement a new equity strategy to improve the attractiveness of our shares, this included the simplification of our share structure, offering share deposits free of charge and initiating the Sfr4 billion share repurchase program which you are referring to. The listing on the NYSE was another step in this plan.
What approach do you take to managing your remaining cash?
Until you Find the right opportunity in the business activity you really want to invest in, you have to as the question how do you generate a decent return on your money and what kind of volatility are you willing to accept. We follow a medium risk strategy. We want to avoid huge volatility swings. This limits the amount we invest in the stock markets for example. We look at the ratio of our investments in cash equivalents, bonds and shares and check our performance against outside benchmarks.
Do you mean you use outside fund managers?
We have in the past, but their performance was awful, with one exception. We get much better performance from our own people.
Will you continue to manage the business portfolio actively? Analysts speculate that your eye-care division, Ciba Vision, may have been bulked up by the recent purchase of Wesley Jessen in preparation for a sale?
There’s nothing really for sale. What would I do with the money? Add it to our cash pile and produce lower returns? All of our businesses produce higher returns than we can generate from cash.
However the only true core business is pharmaceuticals. Every other business has to have some kind of synergy across the broad sector or be a pearl. By that, I mean it must show superior absolute performance or be a market leader. Ciba Vision, had we not made this acquisition, would have been a distant third place in its market. That’s not tenable. We have to be number one or two. There’s no thought of selling Ciba Vision now.
We are going to continue to manage our business portfolio to focus on our core areas and to expand via organic growth and, where we have interesting opportunities, via acquisitions.
| Vasella with Rudloff | ||||||
