Wall Street Journal - September 20, 2004
Jeanne Whalen at jeanne.whalen@wsj.com

BASEL, Switzerland - In December 2001, Roche AG drug scout Hari Kumar packed his warmest parka and flew to Edmonton, Alberta, to chase down an experimental medicine called ISA247.

Dr. Kumar had heard about it early that year at a medical conference, and every month he called the Canadians who were developing it to propose talks. After much coaxing they agreed to meet, and a few months later they struck a deal giving Roche world-wide marketing rights.

At most top drug companies, such hotly pursued deals involve products with mass-market potential. But ISA247 isn't another pill for erectile dysfunction or blood pressure. It's a drug that would be given at a hospital to prevent people who have received a kidney transplant from rejecting the organ.

At a time when all pharmaceutical companies are desperate to find new drugs, Roche has an unusual strategy. It's focusing on drugs in areas such as cancer, AIDS and transplantation that are marketed primarily to specialist doctors and used by a relatively small number of patients. These drugs cost hundreds or thousands of dollars per pill or shot. The other top pharmaceutical companies, while pursuing those areas, put higher priority on mass-market pills costing $2 or $3 a day.

Roche says these specialty medicines have several advantages. The company doesn't need a large, expensive sales force or advertising budget to market them. And as governments in Europe and employers in the U.S. face skyrocketing medical costs, they're more likely to pay for an innovative cancer drug than another treatment for toenail fungus.

"There is and will continue to be constant pressure on drug and diagnostic-test pricing," Roche Chief Executive Franz Humer said at a presentation in May. "We believe strongly that in order to succeed, this requires clear clinical differentiation of products."

The strategy is showing signs of early success, although many of Roche's initiatives will take years to bear fruit. After years of slow growth, Roche's pharmaceutical division posted a 14% rise in revenue last year to 21.55 billion Swiss francs ($17.1 billion). In the first half of this year, its revenue rose 15% over the same period in 2003 and operating profit was up 30%. Analysts generally project that Roche's drug revenue will grow around 10% per year over the next few years as its new products expand their market share. That's several percentage points above the industry average.

Because many of the most innovative treatments for cancer, AIDS and other such diseases are being discovered at smaller biotech companies, Roche has struck partnerships in recent years with more than 50 of them. Roche usually allows the smaller firm to take the lead in research, stepping in to help with larger human trials and to sell approved drugs world-wide. It's an approach that worked spectacularly well with Roche's acquisition of a majority stake in Genentech Inc., the South San Francisco, Calif., biotechnology pioneer, and is beginning to pay dividends elsewhere too.

All of the top drug companies, from Roche to Pfizer Inc. and GlaxoSmithKline PLC, are placing more emphasis on licensing and partnership deals because their own labs can't come up with enough hit drugs to replace those losing patent protection. Unlike Roche, Pfizer and Glaxo woo prospects with their marketing prowess: License your drug to us, they say, and every family doctor's office from Topeka to Tokyo will be blanketed by sales representatives promoting it.

Roche can't promise that but doesn't need to because most of its drugs aren't prescribed by general doctors. One of the few Roche drugs that is, the antiobesity pill Xenical, has fallen far below initial sales estimates. Roche's U.S. sales force of 1,600 people is dwarfed by Glaxo's 9,000 salespeople and Pfizer's 11,000.

Pfizer, Glaxo and the newly formed Sanofi-Aventis SA in France are all products of megamergers that came about because of the need for large marketing machines, especially in the U.S. By contrast, Roche's specialty focus means it faces less pressure to make a deal and get bigger. Mr. Humer has steadfastly rejected the idea of merging with Roche's crosstown rival in Basel, Novartis AG, despite persistent overtures from Novartis Chief Executive Daniel Vasella. Novartis has scooped up nearly one-third of Roche's voting stock in recent years.

Mr. Humer says mergers cause disruption and damage scientists' productivity. Autonomy suits Roche for another reason: The Hoffmann-Oeri clan of Switzerland that controls the company doesn't want to surrender its 50.01% voting stake in the firm, which grew out of the region's medieval dye-making trade.

When it comes to licensing new drugs, Roche plays itself up as the antithesis of a megamerged drug giant -- stressing its willingness to cede control, its scientific acumen and its lack of interest in global conquest. Roche's approach "eliminates a bureaucratic layer that tries to run everything," Mr. Humer says. "When you operate out of a small country like Switzerland you realize more easily that you cannot control the world."

Significant Risks

Roche's strategy has significant risks. Mass-market pills for high cholesterol, depression and other common ailments are still by far the biggest sellers. A single successful sleeping pill -- like the drugs in advanced testing that Pfizer and Merck & Co. have recently licensed -- would probably record several times the sales of a transplant drug sold to hospitals. [Image]

Mr. Humer believes, however, that specialty fields are likely to produce more billion-dollar-plus drugs in the future. He points to the recent success of a Roche/Genentech cancer drug called MabThera in Europe and Rituxan in the U.S., which is expected to have sales of $2.5 billion this year.

Roche's strategy draws on the success of its first big partnership, struck in 1990 with Genentech. That deal has filled Roche's pipeline with some of the world's most innovative cancer treatments, from the breast-cancer drug Herceptin to the colorectal-cancer treatment Avastin. Although 55.6%-owned by Roche, Genentech operates independently in the U.S. and sells these drugs with its own sales force. Roche sells them in Europe and other overseas markets. Roche paid $2.1 billion for 60% of Genentech in 1990; its current stake is valued at about $30 billion.

The Genentech deal was critical in transforming Roche away from the older model of selling "small molecule" drugs -- those with a fairly simple chemical structure that can be taken as a pill. In its earlier heyday in the 1960s and 1970s, Roche sold one of the original small-molecule blockbusters: Valium.

Today, much of Roche's business is from newer biotech drugs, which scientists engineer by manipulating genes to produce complex molecules modeled on the body's own proteins. One advantage of biotech: The drugs are hard to copy, making Roche less exposed than Pfizer to generic competition.

Roche scientists carry out their own research but often get tapped to help an outside partner complete a difficult chemistry experiment or run a clinical trial. "We encourage our people never to think of an external relationship as different from an internal product," says Mike Mulqueen, Roche's global head of alliance management. More than a third of Roche's $16 billion in annual prescription-drug sales come from products discovered by outside labs.

To spot the best drugs, Roche has set up a team of scouts like Dr. Kumar, known inside the company as "finders." They visit biotech fairs, devour medical journals and call on small companies around the world. Each finder specializes in a disease area and is expected to know all the top scientists in the field.

Many of the dozen or so finders search for treatments in specialty fields, but Roche says it hasn't stopped looking for breakthroughs in diseases that primary-care doctors often treat, such as asthma and depression. Jonathan Knowles, head of global research, says Roche can tie up if necessary with another big pharmaceutical company to sell a mass-market drug, as it did recently with Glaxo for an osteoporosis treatment.

Although Roche pitches itself as the top player in specialty medicines, it still faces competition. The Canadian company with an immune-suppression drug for transplant patients first played hard-to-get with Roche. The company, Isotechnika Inc., told Dr. Kumar it was interested but had offers from other large companies. It wanted a $3 million deposit before it would let Roche examine its confidential data. Roche agreed.

In 2002 Roche bought 10% of Isotechnika and agreed to pay 70% of the cost of the drug's remaining human trials. But hurdles soon arose. The trials were delayed because Isotechnika, with Roche's help, realized it needed to tweak the drug's makeup. And the Canadians decided they also wanted to sell the drug as a treatment for the skin disease psoriasis. Roche was only interested in using the drug in transplant patients, but it didn't impose that view. It agreed to a deal in which Isotechnika bought back the rights to sell the drug for psoriasis.

Success Story

One of Roche's favorite success stories -- and one that illustrates how its size can overcome obstacles -- is its partnership with the biotech firm Trimeris Inc. of Durham, N.C. In February 1999, David Reddy, a Roche HIV expert attending a medical conference in Chicago, heard Trimeris present early data on a new kind of HIV treatment that appeared to beat the toughest strains of the virus. Impressed, he buttonholed the Trimeris scientists by the hotel escalator and asked to take a closer look at their slides.

Trimeris was happy to talk -- if Roche could help it solve a problem. "The biggest hurdle was, will we be able to make this product?" says Dani Bolognesi, Trimeris' chief executive until this month and a former Duke University microbiologist. Dr. Bolognesi wasn't sure anyone could assemble the raw materials for the drug, a chain of 36 amino acids, let alone combine them properly.

Roche promised it could do the job. Because it's a big buyer of ingredients, Roche persuaded suppliers to get ready for the day when the AIDS drug, called Fuzeon, would be approved. Trimeris and Roche engineers, meanwhile, overhauled a Roche factory in Boulder, Colo., building giant new tanks to store costly solvents.

As the partners finished trials of the drug, what they found was far better than expected: Fuzeon caused a 90% reduction in patients' viral load, much higher than the 64% they were hoping for. With the manufacturing plan already set, the drug was on the market within weeks of approval by the Food and Drug Administration. Now in its second year, Fuzeon is expected to have sales of $150 million this year.

Not every partnership goes so well. In April, Roche and Antisoma, a British biotech company, disclosed that an ovarian cancer drug they had been testing failed to show efficacy in late-stage clinical trials. The partners say they had invested tens of millions of dollars in the trials and had hoped to bring in hundreds of millions in sales. Roche and Antisoma are still working on other cancer drugs together.

As with other pharmaceutical companies that have rushed to make deals for new drugs, the final verdict on Roche's strategy won't be known for many years. Roche must invest millions of dollars and develop plans far in advance for drugs that face long odds against ever making it on the market.

Recently Roche agreed to finance development of a cancer treatment at Kosan, a biotech firm in Hayward, Calif. Kevan Clemens, the head of Roche's cancer business, took Kosan executives to dinner and quizzed them about the hurdles that lie ahead. Over yellowfin tuna and chardonnay at a restaurant in San Francisco's Transamerica Pyramid, Mr. Clemens peppered the team with questions: Could the drug be injected through a syringe? Could it be shipped in refrigerated containers?

Robert Johnson, chief medical officer of Kosan, was surprised because the drug hadn't even entered human tests. "He thought of 150 things within the first five minutes that we wouldn't have thought of," says Dr. Johnson.

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