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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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January 24, 2013

Daniel Vasella Steps Down at Novartis

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Posted by Derek

So Daniel Vasella, longtime chairman of Novartis, has announced that he's stepping down. (He'll be replaced by Joerg Reinhardt, ex-Bayer, who was at Novartis before that). Vasella's had a long run. People on the discovery side of the business will remember him especially for the decision to base the company's research in Cambridge, which has led to (or at the very least accelerated the process of) many of the other big companies putting up sites there as well. Novartis is one of the most successful large drug companies in the world, avoiding the ferocious patent expiration woes of Lilly and AstraZeneca, and avoiding the gigantic merger disruptions of many others.

That last part, though, is perhaps an accident. Novartis did buy a good-sized stake in Roche at one point, and has apparently made, in vain, several overtures over the years to the holders of Roche's voting shares (many of whom are named "Hoffman-LaRoche" and live in very nice parts of Switzerland). And Vasella did oversee the 1996 merger between Sandoz and Ciba-Geigy that created Novartis itself, and he wasn't averse to big acquisitions per se, as the 2006 deal to buy Chiron shows.

It's those very deals, though, that have some investors cheering his departure. Reading that article, which is written completely from the investment side of the universe, is quite interesting. Try this out:

“He’s associated with what we can safely say are pretty value-destructive acquisitions,” said Eleanor Taylor-Jolidon, who manages about 400 million Swiss francs at Union Bancaire Privee in Geneva, including Novartis shares. “Everybody’s hoping that there’s going to be a restructuring now. I hope there will be a restructuring.” . . .

. . .“The shares certainly reacted to the news,” Markus Manns, who manages a health-care fund that includes Novartis shares at Union Investment in Frankfurt, said in an interview. “People are hoping Novartis will sell the Roche stake or the vaccines unit and use the money for a share buyback.”

Oh yes indeed, that's what we're all hoping for, isn't it? A nice big share buyback? And a huge restructuring, one that will stir the pot from bottom to top and make everyone wonder if they'll have a job or where it might be? Speed the day!

No, don't. All this illustrates the different world views that people bring to this business. The investors are looking to maximize their returns - as they should - but those of us in research see the route to maximum returns as going through the labs. That's what you'd expect from us, of course, but are we wrong? A drug company is supposed to find and develop drugs, and how else are you to do that? The investment community might answer that differently: a public drug company, they'd say, is like any other public company. It is supposed to produce value for its shareholders. If it can do that by producing drugs, then great, everything's going according to plan - but if there are other more reliable ways to produce that value, then the company should (must, in fact) avail itself of them.

And there's the rub. Most methods of making a profit are more reliable than drug discovery. Our returns on invested capital for internal projects are worrisome. Even when things work, it's a very jumpy, jerky business, full of fits and starts, with everything new immediately turning into a ticking bomb of a wasting asset due to patent expiry. Some investors understand this and are willing to put up with it in the hopes of getting in on something big. Other investors just want the returns to be smoother and more predictable, and are impatient for the companies to do something to make that happen. And others just avoid us entirely.

Comments (18) + TrackBacks (0) | Category: Business and Markets | Drug Development | Drug Industry History


1. r on January 24, 2013 9:54 AM writes...

Okay, can we have a quick aside to the whole world? Please - everyone - stop beginning your comments, written or spoken, with 'so'. It has become some kind of pernicious meme especially orally. If you listen to the Chemistry World podcast, the majority of their reporters begin with "So researchers at the University of ....". So serves no purpose. It is just a more polite 'ummmm' or 'like'.

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2. Am I Lloyd peptide on January 24, 2013 9:56 AM writes...

"Most methods of making a profit are more reliable than drug discovery."

True, but then why was the pharmaceutical industry booming twenty, thirty, forty years ago? There seems to have been a fundamental change in investor mentality. I wonder if it's called "excessive greed".

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3. John Wayne on January 24, 2013 9:59 AM writes...

@2: You have to wonder if the speed of communications has diminished investor patience. My grandparents went over their investments with their guy once a year; these days you can get continuous updates on your phone.

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4. processchemist on January 24, 2013 10:00 AM writes...

See John Maynard Keynes, The General Theory of Employment, Interest and Money, Book IV, Chapter 12. The State of Long-term Expectation ....

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5. Anonymous on January 24, 2013 10:28 AM writes...

#1: It's almost as irritating as beginning comments with "okay."

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6. johnnyboy on January 24, 2013 10:35 AM writes...

@5: you beat me to it !

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7. drug_hunter on January 24, 2013 11:05 AM writes...

Okay, so thank you so (so so) much, commenters 1, 5, and 6, for your insights into the Novartis situation.

I interacted with him only a few times but my impression is that he had a clear vision and stuck to a reasonable long-term plan, avoiding silly short-term mistakes. Novartis has been, as Derek said, one of the more stable places to work in Pharma discovery. Let's all hope that doesn't change.

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8. Vader on January 24, 2013 11:08 AM writes...

"True, but then why was the pharmaceutical industry booming twenty, thirty, forty years ago? There seems to have been a fundamental change in investor mentality. I wonder if it's called "excessive greed"."

Probably not, since I doubt people were inherently less greedy forty years ago. What's more likely is that the cost of capital has gone up considerably since then, which creates pressure for greater returns.

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9. simpl on January 24, 2013 12:12 PM writes...

The jump in Novartis share price could have come from the 2012 figures, announced the same day, where the "cliff" of patent losses on some top brands turned out to be flat sales, and a 5% drop predicted next year. I'm not contrarian enough to see the increase coming from losing a good leader.

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10. Oldnuke on January 24, 2013 4:00 PM writes...

"Most methods of making a profit are more reliable than drug discovery."

Maybe true, the only disease most of them cure (for VERY short periods of time) is gluttony.

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11. Andy on January 24, 2013 10:16 PM writes...

"Most methods of making a profit are more reliable than drug discovery."

Go invest in these other profit making methods then. What's the problem?

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12. Fred on January 24, 2013 11:53 PM writes...

"Most methods of making a profit are more reliable than drug discovery"

No sh*t? Maybe that explains why BMS, Roche, GSK, Abb-not, and especially Pfizer have ALREADY shed in excess of 90% of discovery? Repackaging, in-licensing, and reliance on crappy, antigenic, injectable-only biologicals beats doing actual WORK or improving the human condition, I guess.

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13. anonymous on January 25, 2013 6:18 AM writes...

@12 - A bit of hyperbole there (90%) or are these numbers based in fact? Just curious...

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14. The Aqueous Layer on January 25, 2013 9:26 AM writes...

@12 - A bit of hyperbole there (90%) or are these numbers based in fact? Just curious...

It's an extreme amount of hyperbole.

I work at one of those places mentioned. Our discovery effort, while not growing much over the last several years, is not down 90%, or even 30% from where we were 5 years ago, even with a couple of rounds of layoffs.

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15. Fred on January 25, 2013 3:03 PM writes...

"@12 - A bit of hyperbole there (90%) or are these numbers based in fact? Just curious..."

Hyperbole based primarily on the number of PFE sites that used to exist vs. the number that do now.

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16. LighterFluid on February 3, 2013 9:56 PM writes...

I wonder though, if you 'internalise' the externalities of the other more reliable means of making money, and also factor in the cost savings/health improvements associated with drug discovery, that the profile of comparable returns might indeed look different...

Anyone know of any studies along that line?

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17. Jonadab on February 8, 2013 9:23 AM writes...

> And there's the rub. Most methods of making
> a profit are more reliable than drug discovery.

Indeed. Perhaps Pfizer should buy up (or start) a fast food franchise chain. You don't see people speculating about whether that entire industry is going to be able to remain profitable or not. 5% of all profits from the restaurants go to drug research. Maybe Novartis could run a casino, and AZ could get into consumer electronics...

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18. o on February 14, 2013 3:41 PM writes...

I worked for him one year (before he became the head honcho) and agree with (7) drug_hunter. (Although the decision to jettison the discovery kinase group to ink a deal with Vertex did not go down well while imatinib was being launched ...)

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