By Marta Falconi
BASEL, Switzerland-- Novartis AG needs to continue investing in
research in order to develop new drugs that national health-care
systems are willing pay for, a task that gets harder as generic
versions of older medicines become available, according to the
company's chairman.
Joerg Reinhardt, who assumed the role at the world's largest
drug company by sales eight months ago, says the benchmark for
evaluating drugs is constantly rising as branded medicines lose
patent protection, allowing for cheaper copies to enter the market.
He says health-care systems will choose less-expensive generics,
which often work just as well as the original version, as a way to
keep costs down.
"We need to add value--life-prolonging or quality-of-life
benefits--that are meaningful enough for payers around the world to
say, 'Yes, I'm willing to pay a premium over generic
opportunities,'" Mr. Reinhardt said in an interview with The Wall
Street Journal. "With every new product coming off patent, the
benchmark comes up."
Mr. Reinhardt's comments come as pharmaceutical companies
rethink their R&D efforts in a bid to channel resources to more
promising experimental drug candidates and avoid others that might
be tempting but more difficult to deliver. Some companies, such as
Merck & Co., are streamlining their operations, while leaning
on outside labs for experimental drugs. Roche Holding AG,
Novartis's crosstown rival, has reshuffled its R&D staff in an
effort to revitalize its operations.
In 2013, Novartis raised its spending on in-house R&D by
5.6% to $9.85 billion, an amount Mr. Reinhardt says will remain
stable. The budget is among the highest in the industry and bucks
the broader trend. Spending on R&D across the sector dropped
2.2% to a collective $135 billion last year from a high of $138
billion in 2011, according to PricewaterhouseCoopers.
Novartis is consolidating its activities in four
cities--Shanghai, Basel, Boston and La Jolla, Calif.--a move Mr.
Reinhardt hopes will foster cooperation between researchers in
different disciplines as teams of scientists bounce ideas off each
other. The company will also be able to tap the academic
communities of the four cities.
"A larger group of people benefiting from the infrastructure
that's been created at a research place is a better approach than
having small groups with limited infrastructure spread around the
world," Mr. Reinhardt said.
Born in Germany, Mr. Reinhardt earned a doctorate in
pharmaceutical sciences and worked at Novartis and a predecessor
company, Sandoz, for nearly 30 years. In 2010, he moved to Bayer AG
to lead the health-care business after Joe Jimenez was chosen as
chief executive. He returned as chairman eight months ago,
following the departure of Daniel Vasella, who helped build the
company over 25 years .
Since returning, Mr. Reinhardt has demonstrated his commitment
to R&D, spearheading the creation of a board subcommittee
designed to oversee the company's research. The subcommittee,
believed to be a first in the industry, is tasked with reviewing
Novartis's R&D strategy and organization. It will also advise
the board on scientific trends and activities that are critical to
R&D success.
Mr. Reinhardt says the purpose of the committee is to ensure the
board is closer to the decision-making process for one of the
company's key investment areas.
David Kägi, a health-care analyst with J. Safra Sarasin, says
Novartis, facing challenges brought by the expiration of patents on
blockbusters such as hypertension treatment Diovan and leukemia
drug Gleevec, is smart to invest in research capabilities.
"They have a high need to invest in R&D both to overcome
their patent issues and because they are more exposed to price
pressures," Mr. Kägi said. Part of the reason for this is that some
of Novartis's drugs treat broad disease classes, such as diabetes
or hypertension, which are treated by many drugs already on the
market.
During the interview, Mr. Reinhardt said a year-old review of
Novartis's portfolio of businesses is progressing and will be
completed by the end of the year. Three of its smaller
units--vaccines, over-the-counter treatments and animal health
products--are under scrutiny for restructuring, joint ventures or
sale.
Novartis has had "a number of conversations with different
potential partners" about the units, Mr. Reinhardt said. He said
bolt-on acquisitions of up to $5 billion were possible approaches
to build the scale the smaller units need.
The review also covers Novartis's one-third stake in Roche's
voting stock, which the company started accumulating in 2001 with
the idea of a possible merger. The merger didn't happen, though the
two companies operate in partnership on the sale of some drugs.
Mr. Reinhardt said he doesn't expect a bigger strategic
interaction with Roche in the future, but said he had met with the
company's new chairman, Christoph Franz.
Write to Marta Falconi at marta.falconi@wsj.com
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