From Life Sciences to Healthcare

Regrouping

By 1998 Novartis results were disappointing, hurt by below par pharmaceutical sales and the Swiss franc’s appreciation. Moreover, Novartis was losing ground in the U.S., the largest and most profitable pharmaceutical market, while U.S. competitors were making major gains. With only a few new drugs in the 1999 pipeline, analysts observed that Novartis risked falling further behind U.S. competitors and should consider a large acquisition or merger.

Instead, Novartis doubled down on R&D. As a result of increased investment, the company was able to accelerate a large pipeline of products in late-stage clinical development, many of which came from Ciba’s labs. By the end of 1999, Novartis had 50 projects in clinical development—23 in Phase III clinical trials, 24 in Phase I and II clinical trials, and three in registration.6 Global Pharmaceuticals Head David Epstein noted: “We launched a new drug every 100 days from 2000 to 2003. Most companies are happy to launch one product per year, let alone three or four.”7

Global Bets for a New Century

At the start of the new century, Vasella decided on several strategic initiatives: 1) shift the focus from life sciences to healthcare, 2) invest in businesses not attractive to competitors, 3) globalize research, 4) globalize the investor base; and 5) transform headquarters to reflect the company’s global scope, innovation and care for its associates.

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Novartis: Leading a Global Enterprise 413-096

From Life Sciences to Healthcare

In 2000, Novartis decided to focus entirely on healthcare. It spun off and merged its agricultural business with the Anglo-Swedish firm AstraZeneca’s business to form a new company, Syngenta, with revenues of $8 billion and a market value of $12 billion, then the world’s largest agrochemical business.8

Also in 2000, the company reorganized its pharmaceutical business to focus on its strongest products, dividing it into primary care, specialty care, and mature products business units, providing each with greater autonomy. “We are aligning our pharmaceutical activities around franchises and strategic brands with a focused management structure,”9 Vasella said. “These changes provide entrepreneurial space, speed, and resources to our leaders.”10

Vasella changed pharmaceutical leadership, replacing Jerry Karabelas with Thomas Ebeling who ran consumer health, having joined Novartis from PepsiCo. Ebeling noted, “The new business unit leaders will have autonomy and clear accountability, with responsibility for managing their portfolios from research through market activities.”11 As a result of shifting marketing resources to key products, sales of the company’s top 10 products grew 12% in 1999.12

In 2001 Novartis purchased 20% of the voting shares of cross-town rival Roche. In 2002-03 it acquired additional shares, bringing its holdings to 32.7%, slightly below the level at which Swiss law required Novartis to make a tender offer for the company. Meanwhile, Roche’s two founding families, which held over 50% of voting shares, were bound together by an agreement prohibiting them to sell. Novartis’s moves were not well received by Roche management, in spite of Novartis’ commitment to be only a passive investor. In 2013 Novartis still retained its shares, with the power to block any change of Roche’s capital structure needed for a large transaction.

Beyond Blockbusters

In pharmaceuticals, Vasella challenged the firm to look beyond blockbusters by focusing on smaller patient populations or emerging market diseases. In 1990 a team of scientists began testing 400 molecules to find one targeting Chronic Myelogenous Leukemia (CML). After two years of testing, the team developed the molecule that became Gleevec. Referred to by many as a “miracle drug,” Gleevec targeted the genetic defect causing the malignancy. The market was small, with only 28,000 CML patients worldwide. Early animal tests hinted at some liver toxicity, and Ciba-Geigy had been hesitant to take risk on a potentially toxic drug. Listening to the complaints of Dr. Alex Matter, head of oncology research, during a hallway discussion, Vasella pushed for the start of clinical trials.

After seeing stunning results in just 31 patients in Phase I clinical trials, Vasella went to the labs to talk to the Gleevec team. There he learned that the project had effectively been shelved due to lack of funds to proceed with further clinical trials. Despite disagreements with some senior colleagues who were hesitant due to the small market for CML, Vasella decided to accelerate Gleevec’s development, telling them he wasn’t concerned with the high cost. In less than two years, U.S. Food and Drug Administration (FDA) approval was received in 2001 due to the FDA’s special “fast track” procedure for life saving cancer and AIDS drugs. Through 2013, Gleevec had proven effective against six other life-threatening diseases, validating Novartis’ early strategy.13 In 2012 Gleevec and its successor drug Tasigna generated $5.7 billion in sales worldwide, making it Novartis’ largest product.

Early in his tenure, Vasella committed to making the fight against leprosy and malaria a cornerstone of Novartis’ access-to-medicine programs providing all drugs for the treatment of leprosy worldwide free of charge. In 2001 he launched the Novartis Malaria Initiative, unveiling a 10-

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