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.