01 Mar 2007
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Daniel Vasella

Chairman and CEO of Novartis AG
by Roger Thompson

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Twenty years ago a young doctor with a hankering for business experience gave up his clinical practice in Bern, Switzerland, and moved to East Hanover, New Jersey, to try his hand at drug sales with the Swiss conglomerate Sandoz. As high-risk career moves go, this one played out brilliantly. Within a decade, Dr. Daniel Vasella (PMD 57, 1989) rocketed through the ranks of Sandoz and in 1996 led the firm’s merger with Ciba-Geigy, emerging as CEO of the new company called Novartis, based in Basel, Switzerland.

The merger put Vasella’s leadership skills to the test as he methodically refashioned the two old-line chemical companies with disparate corporate cultures into a single entity focused on health care and powered by an innovative approach to R&D. Today, Novartis is one of the world’s most dynamic and admired drug companies, ranking No. 4 with 2006 sales of $37 billion. The company’s aggressive investment in research has made it an industry leader in new drug approvals. And when opportunity knocks, Vasella doesn’t hesitate to broaden Novartis’s business mix through acquisitions. He recently added generic drugs and vaccines to the company’s portfolio of product lines, setting Novartis apart from its global competitors.

Although initially regarded by critics as too inexperienced to lead a multinational pharmaceutical company, Vasella has triumphed. Three years ago he was named “the most influential European businessman of the past 25 years” in a Financial Times poll of 4,000 executives. He recently spoke about the public policy and business challenges ahead.

U.S. consumers complain loudly that prescription drugs cost too much. What’s your response?

We have a phenomenon where drug prices have been increasing above the rate of inflation, so from that perspective, complaints are understandable. On the other side, there are benefits. Mortality for many diseases has dropped dramatically over the last forty years. Analysis shows that 40 percent of that decline was due to drug therapy.

The big cost item in health care is not drugs, which account for between 15 and 18 percent of the overall health-care costs. The big item is hospital costs. Even if you take away all profits from the pharmaceutical industry, you could lower overall health-care costs by maybe 3 percent at best. So tweaking drug prices will not solve the fundamental problem.

The Medicare prescription drug program that went into effect last year bars the federal government from negotiating with drug companies over the prices seniors pay. The new Democratic majority in Congress has vowed to remove that barrier. Would seniors benefit?

This program is very much appreciated by seniors. We have approval rates of way over 70 percent. The costs of drugs in the program are lower than anticipated, and consumers are purchasing drugs at very high discounts. So I think the system seems to work pretty well. The initial issues about confusing coverage and so forth have pretty much vanished.

In some ways, the prescription drug program is one that should have been introduced by the Democrats years ago because there was a real need for seniors to get drug coverage. It wasn’t right that since 1965, when Medicare was enacted, they didn’t have any drug coverage. So the Democrats are probably unhappy that the Republicans passed the prescription drug law. And some don’t like the fact that it relied on private insurance providers.

Do drug companies have sufficient patent protection for new products?

There are two issues here. One is the length of patent life (twenty years in the United States), and the other is the solidity of the patent. Regarding length, it’s a sensitive point. If we have delays in FDA regulatory approval because more questions are being asked, or if we are more diligent about studying a drug longer, we pay by having a shorter patent life remaining once a drug goes to market. There are people who say we should have a fixed number of years of patent protection after FDA approval. It would be quite difficult to change current law. But there is a lot of rationale behind such an argument.

The second issue is solidity of the patent. We have significant challenges of existing patents from the generics industry. If you are not careful, generic companies will be very creative about circumventing patents through litigation. So patenting a product in a smart way has become much more complex. That means patent lawyers have become as important to the defense side as to the attacking side.

Novartis has 138 drugs in its pipeline, more than any of its competitors. How has the company become so successful at creating a culture of innovation?

Initially, we spent a lot of time integrating development with research and marketing, functions that had been separate. On a global basis we created project teams to move drugs forward. That allowed us to have more approvals by the FDA than any other major pharmaceutical company since the year 2000.

But those changes didn’t solve the problem of creating new compounds. There we took an approach characterized by three things. First, we work closely with academic institutions and with biotech companies. Secondly, we created a genomics institute at The Scripps Research Institute in La Jolla, California. And the most important step was to create in 2002 the Institutes for BioMedical Research in Cambridge, Massachusetts. We moved our research headquarters there from Basel and developed a new, integrated approach to genomics, biology, and chemistry.

Novartis is the only drug company with leadership positions in both patented and generic drugs. Given the low margins, why did you decide to get into the generics business?

We have been active in generics for many years. When the industry started to consolidate, the question was, do we get out of it or increase our stake? In view of the long-term trends that we are seeing, generics is a field that is here to stay. And if we want to be in that field, we need to be able to compete with the best.

The generics business is less profitable than the patented, branded business. But it’s growing at a faster pace. Whenever possible, people switch from branded drugs to generics to cut their expenditures. The question is: Are you in it for the margins, or are you in it for growth of profits and top line? Our philosophy is to look for sustainable growth and to create and maintain a business that is competitive and that satisfies the needs of society and customers.

You also bought vaccine maker Chiron, even though vaccines have not been a popular business for years. What makes vaccines an attractive business now?

First of all, we owned 42 percent of Chiron. Secondly, we thought we would run it better. The California biotech firm famously failed to produce enough flu vaccine for the U.S. market in 2004. And thirdly, we saw that there was a significant growth opportunity due to new vaccines, new diseases, and new technologies. We believe that in the next five years the growth rate of the vaccine industry will be between 15 and 20 percent, making it a very attractive industry. The margins are, again, not as high as in patented, branded products, but they still are quite attractive.

Also, one of the reasons why big pharma exited the vaccine business was that we had terrible litigation issues. That abuse of litigation now has been limited (with new legislation) because the U.S. government saw that nobody wanted to produce vaccines anymore.

Do drug companies have a responsibility to supply low-cost drugs to poor countries, even if it means losing money on the effort?

Our most important responsibility is to discover, develop, and market better products. That’s fundamentally our first responsibility.

If we are successful, that success raises the question of what other roles and responsibilities we have in society aside from our primary mission. And there I believe we have an opportunity, as much as a responsibility, to help people who don’t have the means, for whatever reason, to afford medicines that, in many cases, can be lifesaving.

Last year we delivered to underdeveloped nations products and services valued at about $700 million, which was over 2 percent of our sales. And that exceeds the development aid as a percentage of GDP of many countries, where the agreed target should be .07 percent of GDP. Most countries are way below that.

However, we cannot fix poor governance, corruption, inadequate distribution systems, or lack of health-care professionals. So the primary responsibility for health care is and remains with governments to take care of their citizens. And in many cases, unfortunately, it appears that government leaders care more about their own pockets than about the well-being of their citizens. We cannot punish patients because they have bad governments. Not surprisingly, there is a tendency to shift responsibilities from governments to private industry. But it would be unfair to push all responsibility to private industry. One has to be careful about how much of this shifting is reasonable, and when it starts to become unreasonable.

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