Just What the Doctor Ordered

By John Greenwald

When the tranquilizer Valium became the most frequently prescribed drug of the stressed-out 1970s, F. Hoffmann-La Roche reached the peak of good health. Thanks largely to Valium and its sister sedative, Librium, the Swiss-based Hoffmann-La Roche became the No. 1 maker of prescription pharmaceuticals and one of the most profitable companies on earth. But lulled by the success of Valium, whose U.S. patent expired four years ago, the company failed to keep pace in the '80s with such aggressive rivals as U.S.-based Merck and Swiss neighbors Sandoz and Ciba-Geigy. Symbolic of Hoffmann-La Roche's backward ways was the firm's thinly held stock, the most expensive traded anywhere. In the past year the price of a single share of Hoffmann-La Roche climbed to more than $160,000.*

Now that unwieldy price is about to go the way of the apothecary jar. Hoffmann-La Roche last week announced that it plans to restructure its capital by declaring a 50-for-1 stock split. The move will reduce the value of the 16,000 voting bearer shares to about $3,300 each. The overhaul will also cut the price of Hoffmann-La Roche's 61,440 shares of nonvoting dividend-rights certificates, which the company calls Genussscheine or "joy certificates," from about $95,000 to $1,900 and eliminate a cheaper class of stock that was nicknamed Baby Roche. If holders approve the restructuring, as expected, the company will have a total of 800,000 voting shares and 3.3 million certificates.

The new capital structure will bolster a company war chest that already holds $4 billion in cash. The money will come in handy at a time when international pharmaceutical giants are scrambling to join forces. Hoffmann-La Roche, whose strong suit is prescription products, still smarts from its failure last year to acquire New York City-based Sterling Drug, the maker of Bayer aspirin, Phillips milk of magnesia and other popular over-the-counter brands. Sterling spurned the Hoffmann-La Roche offer and sold out to Eastman Kodak instead. "We wanted primarily to establish ourselves in the American over-the-counter market," recalls Hoffmann-La Roche Chairman Fritz Gerber, 60, whose company gets a third of its sales from U.S. operations based in Nutley, N.J. "It's the biggest pharmaceutical market, and it has a lot of future potential."

Around the world, drug companies are teaming up in search of success. Britain's Beecham Group, purveyor of Tums antacid and Brylcreem hair lotion, last month merged with Philadelphia's SmithKline Beckman, developer of the antiulcer drug Tagamet, in a deal that will create the No. 2 pharmaceutical company after Merck. American Home Products, the maker of Advil and Anacin, is acquiring A.H. Robins. Merck, meanwhile, is scarcely standing still. In March the company formed a joint venture with Johnson & Johnson, its New Jersey neighbor, under which Merck will develop over-the-counter versions of patented medicines that Johnson & Johnson will market.

Confronted by the high cost of research, expiring patents and the explosive growth of generic drugs, many pharmaceutical companies will step up efforts to broaden their global reach through mergers or cooperative ventures. But such pressures were few in 1896, when Hoffmann-La Roche was formed in Basel and began producing a cough syrup called Sirolin. The company prospered at first but then almost went broke during World War I because one of its important markets was revolution-torn Russia. Fearing a Nazi invasion in the 1930s, Hoffmann-La Roche created a twin Canadian-based company called Sapac to run its overseas operations.

Despite the capitalization changes, Hoffmann-La Roche is certain to retain the air of genteel mystery that has long surrounded it. Control will remain in the hands of the Basel-based Sachers. The family, one of Switzerland's leading cultural benefactors, is headed by Maja Sacher, 93, and her second husband Paul, 83. Maja Sacher's first husband, Emanuel Hoffmann, son of the company's founder, died in a car crash in 1932. A prominent patron of modern art, Maja Sacher has endowed Basel's museums with works by 20th century masters. Paul Sacher, an energetic conductor, has sponsored scores by many of the century's great composers. His musical foundation holds the world's most important % collection of Igor Stravinsky's papers. While Hoffmann-La Roche officials have not disclosed what will happen to the Sacher stock after the couple dies, the shares could go into a foundation that would protect the company from possible takeover attempts.

Ten years ago, the Sacher family called in Gerber, who headed the Zurich Insurance Co., to take over Hoffmann-La Roche, whose Valium profits had tranquilized it into lethargy. He streamlined the administration, production and research and set out to find a new generation of superstar drugs. The antibiotic Rocephin, which had worldwide sales last year of $445 million, is currently the firm's largest-selling product. Valium, though, remains the second-best seller. Last week the company reported that 1988 profits had risen to $389 million, up 33% from the previous year, on sales of $5.3 billion. Now that Hoffmann-La Roche no longer lays claim to the title of the world's most expensive stock, Gerber hopes he can find the prescription for more growth.

A year ago Hoffmann-La Roche bearer shares traded at $129,000 and Baby Roche at $7,500

By last week bearer shares had increased to $161,000 and Baby Roche to $9,700

FOOTNOTE: *Berkshire Hathaway, the holding company headed by famed investor Warren Buffett, is the priciest stock on the New York Stock Exchange. It closed last week at $6,275.

With reporting by Naushad S. Mehta/New York and Margaret Studer/Zurich