Drug Lord

By Unmesh Kher/Basel

On a sunny Friday morning two summers ago, Daniel Vasella got quite a wake-up call. Outside his lakefront home near Zug, Switzerland, gigantic speakers blasted Wagner's Gotterdammerung loud enough to rattle the windows. From across the lake, several boats carrying protesters converged on his house. A helicopter delivered a barrel marked with a skull and crossbones to one of the boats. Baffled, Vasella watched as the barrel was ferried to shore and plunked on his lawn.

The stunt, it turned out, had been organized by Greenpeace to protest an old industrial dump near Basel that was said to be leaking chemical waste into the groundwater. The barrel carried water from a source by the dump in which, protesters said, they had found traces of drugs made by Novartis, the Swiss pharmaceutical giant that Vasella leads as chairman and CEO.

Vasella could have summoned the police. Instead, he stepped outside and asked the crowd, "Who's the boss here?" A man stepped forward, and Vasella told him the commotion was scaring his two younger children. Vasella invited the protest leader and two of his companions for breakfast on his terrace to talk things over. Vasella's wife Anne-Laurence served croissants to the rest of the group.

It was vintage Vasella: cool-headed, personable, direct--adjectives that frequently crop up in descriptions of the drug executive. Vasella is exceptionally smooth in dealing with advocates for lower pharmaceutical prices as well as with regulators and lawmakers, whether in his native Switzerland or in the U.S., where he is embarked on a major expansion. He is fluent in German, French and English and says he can muddle through in Italian and Spanish. More important, he is fluent in many cultures, from the elaborate rituals of Japanese business to an American culture that is at once informal and legalistic. Despite his modest public demeanor, Vasella is an exacting boss who demands short, sure answers to his probing questions. And rivals know him as a ferocious competitor who in less than six years has transformed once sleepy Novartis into one of the world's most dynamic and admired drug companies. For all these reasons, Vasella, 48, has earned a reputation as the quintessential global CEO--one who moves nimbly from corporate finance and strategy to science and marketing to p.r. and lobbying.

Novartis, which operates in 140 countries, last year booked sales of $19 billion, up 10% from 2000. While such competitors as GlaxoSmithKline, Merck and Bristol-Myers Squibb are entering a period of declining revenue growth as patents on their major drugs expire, Novartis is poised for several years of steady double-digit expansion. This year its shares in the U.S. are up about 10%--the best performance among major drug companies--even as the Morgan Stanley Capital USA Health Care Index, a basket of big drug stocks, has fallen about 25%. Novartis is the 17th most valuable company in the world, up from 27th last year.

Its secret? An aggressive expansion in the U.S. and an innovative approach to R. and D. Novartis has launched nine groundbreaking drugs since 2000--three times as many as its nearest competitor--and plans to launch 12 more by 2006. The company's relatively low debt and ample cash reserves have earned it a credit rating of AAA from Moody's. Morningstar analyst Todd Lebor praises the company's "excellent financial disclosure and conservative accounting" and notes that it has no unconsolidated debt. Pfizer's announcement last week that it will merge with Pharmacia sent several drugmakers looking for partners. But while Vasella doesn't rule out an acquisition, his firm is considered one of the few strong enough to succeed on their own.

Vasella knows, though, that he can't insulate Novartis from the rising public rebellion against drug prices. According to the advocacy group Families USA, prices of such branded drugs as Novartis' Miacalcin and AstraZeneca's Prilosec have grown at twice the rate of inflation, even as government controls have kept the same prescriptions much cheaper in most other countries. Patients in the U.S.--who account for roughly half the drug industry's annual global revenues of $364 billion--are howling, and they are getting heard in Congress. But so is Vasella, who employs 19,000 Americans and recently opened a $250 million research facility in Cambridge, Mass. He routinely meets with U.S. lawmakers and regulators. Among drug-company CEOs, he has taken the lead in giving a little on prices to avert sweeping new regulations.

Vasella came late to the business world but was introduced early to illness and adversity. Born in 1953 in Fribourg, Switzerland, the son of a history professor and the youngest of four children in a Catholic household, Vasella developed asthma at 5, then fell ill with tuberculosis and meningitis at 8, each time spending a year away from home in recovery. He was 10 when his eldest sister died of cancer; three years later, his father died from complications after surgery. But the accidental death in 1982 of his second sister, who had attended medical school with him, was most painful. "That was somehow unreal," he recalls. "When I was young, I thought that the sum of mishappenings in our lives is constant, that there must be some kind of balancing justice."

After marrying his high school sweetheart in 1978 and completing medical school and a string of residencies, Vasella started as an attending physician at a university hospital in Bern in 1984. Though he loved working closely with patients, it bothered him that he knew little about business, especially because he had begun to invest modestly in stocks. Four years of psychoanalysis, Vasella says, helped free him "from the rules and obligations one imposes on oneself" and give him the courage to leap into a new career. In 1987 he sought the advice of Max Link, the well-connected and accessible head of the drug business for Swiss conglomerate Sandoz. Vasella was offered a job and sent to learn the ropes at the company's headquarters in East Hanover, N.J.

At 34 he was a trainee--but one with a rocket strapped to his back. A year after joining Sandoz, Vasella became product manager for a new drug named Sandostatin, approved to treat a rare pancreatic cancer. The head of Sandoz's U.S. pharmaceutical unit joked that Vasella could consider his job well done if he made Sandostatin a $5 million product, a pittance in the branded-drug business. Vasella realized that to make Sandostatin a commercial success, he had to find new uses for it. And he believed he could do that only by radically changing the game.

At Sandoz, as at most pharmaceutical companies in those days, new products came to market through a linear, three-step sequence. Researchers would seek out potential drugs. Development teams would test and refine them in hopes of winning regulatory approval. Finally, marketers would peddle the approved drugs to physicians. These steps were typically conducted in isolation, so developers would sometimes find out too late that a candidate drug had terrible side effects or could not be mass-produced economically. Or marketers would discover late in the process that there wasn't much demand for the new drug they would soon be asked to sell.

Vasella changed all that. He had clinical researchers, chemists from production and marketing managers put their heads together to find profitable new uses for Sandostatin. Those exertions paid off. The drug won approval for treating the side effects of certain cancers, and sales rose rapidly, reaching $486 million last year. Vasella asked Kim Clark, then a Harvard Business School professor (and now dean), to sign on as a consultant. "He told me something that stuck in my mind," says Vasella. "He said, 'You can change an organization from top down or bottom up, but it's very hard to change it from the middle.' I was a middle manager."

But not for long. In 1993 Vasella returned to Switzerland to head corporate marketing at Sandoz headquarters in Basel. The next year he briefly led the company's global drug-development programs, and he was its chief operating officer before becoming CEO of its drug business, reporting to the chairman of the conglomerate, Marc Moret--his wife's uncle. Vasella applied the lessons he had learned while managing Sandostatin to all the company's drug-development efforts. When Sandoz announced in 1996 that it would merge with its rival across the Rhine, Ciba-Geigy, Vasella was named CEO of the new company.

Basel is in some ways the Houston of Switzerland: one industry overshadows all the others, and the zoning is haphazard. In Basel it isn't unusual to see a modern glass-and-steel monstrosity amid a row of elegant 19th century neoclassical buildings. The Rhine plies a serpentine course through the city, and Novartis' headquarters are at the river's edge, at a point where France, Germany and Switzerland meet. Across the Rhine from Novartis and a little to the east, marked by a tall white smokestack, is rival Roche. The pharmaceutical execs in Basel know one another, and they talk.

In this environment, Vasella had something to prove. His family ties to Moret had provoked dark mutterings of nepotism, especially in light of his rapid rise. But that was unfair, says SG Cowen analyst Peter Laing. "To anyone who followed the company at the time, Dan was the live wire. He had the most international outlook, and there really wasn't anyone at Ciba to challenge him."

Vasella came up with the name Novartis, from novae artis, Latin for "new skills." But he found it much harder to forge a dynamic culture for the merged company. Ciba's approach was almost academic and plagued by indecision. Sandoz had a command-and-control ethos that Vasella felt discouraged initiative. And there was the matter of strategic focus. Both companies were old chemical manufacturers that had sprouted pharmaceutical arms. Vasella knew his company's future was in pharmaceuticals. Sandoz had already divested most of its chemicals business; Ciba would be required to do the same.

Coordinating some 200 task forces and 600 project teams, Vasella set about knocking heads together. By the time he was done, 12,500 people had been laid off; an $80 million venture fund helped ex-employees with good ideas start businesses. He got the unions to accept performance-based compensation, a concept new to Swiss industry at the time. "Ex-Sandoz people say there is more freedom," says Novartis' elected employee representative Kathrin Amacker. "Ex-Ciba people say there is more drive and deadline consciousness."

Novartis' sales in 1998 and 1999--slowed by a dearth of lucrative products--increased just 2% a year, while those of its main competitors were growing at about 10 times that rate. Looking for a unifying vision for his new company, Vasella championed "life sciences," the idea that biotechnology would unite nutritional, agricultural and pharmaceutical businesses. But the expected synergies did not materialize for Novartis, or for any other company that tried the life-sciences approach. Once he saw his vision wasn't working, Vasella was quick to abandon it. He divested Novartis of its agribusiness unit in 2000.

Novartis has since fashioned itself as a health-care company, but its core business, which generated 63% of group sales last year, is branded pharmaceuticals, led by brands such as Diovan and Sandimmun. Vasella leaves the other units--including generic drugs, animal health, Gerber, the eye-care unit CIBA Vision and over-the-counter medicines--in the hands of trusted lieutenants. Novartis announced earlier this year that it will divest the unit that makes foods such as Ovaltine. Some analysts say Novartis could pick up its growth if it got rid of more of its noncore businesses. But Vasella argues there's no reason for Novartis to do so until the price is right.

Novartis quietly bought a 20% voting stake in Roche last year, startling the firm's managers and prompting speculation about an impending acquisition. But Vasella is biding his time now that he has, in the words of WestLB Panmure analyst Michael King, "parked the tanks on Roche's lawn." Vasella says when he heard that Swiss financier Martin Ebner would be selling his $2.8 billion stake in Roche, he realized the continuing consolidation of the industry might leave a major competitor in his backyard if he didn't act fast. "You don't want to wait to dance until you're stuck with the last girl," he says.

Vasella keeps a keen eye on his cherished drug business from an elegant second-floor office in the old Sandoz headquarters. On a counter behind his black leather chair are a pair of ancient Egyptian vases, a sword from the Han dynasty and a large blue-green bust of Buddha from the Tang dynasty. An avid collector of Oriental art, he recently bought a 13th century Tibetan statue of Buddha made of gilded bronze, which he keeps at his home in Zug. "I talk to him sometimes," says Vasella, "and I say, 'You know, I like you better than Jesus.'" Vasella swims two or three times a week and likes to target shoot on the rare occasion when he can make it to the range. He enjoys walking his Rottweiler and bullterrier and riding his BMW and Harley-Davidson motorcycles over the hilly terrain around Zug. Vacations are precious--a chance to spend time with his wife, his 18-year-old daughter and his 14- and 10-year-old sons.

At work and at play, Vasella is a fierce competitor. "Doing it better than the others" is what excites him, he says. "Screw them, in a sense." He spends about a third of his workdays traveling around Europe, Asia and the Americas. The rest of the time, he is usually in back-to-back meetings with managers. "He challenges us," says John Manser, Novartis' treasurer, who meets with Vasella once a month to discuss the firm's investments. "He wants to know what sectors, what stocks--he goes to that level." Notes another top manager: "He's not a patient guy. He won't sit with you for 15 minutes as you carefully explain something. He wants to know the facts, and you better have them down cold."

The research strategy at Novartis is among the most productive in the industry. It invests 17% of drug sales in pharmaceutical R. and D., or $2 billion annually. Thanks to innovations in technology and management, Novartis carries its drugs through development in only two-thirds the time it takes the average drug company. Its tightly coordinated R.-and-D. and marketing efforts focus on areas, such as cardiovascular diseases, in which treatments are judged to offer the greatest potential for profit. Senior vice president for business development Paul Sekhri, who helped pick these areas by going systematically through some 980 categories of ailments, says Vasella took a keen interest in how they were chosen. But while Vasella has taken aim at larger markets, he has ensured that more specialized products, such as ophthalmologic drugs, are not neglected. If there is enough of an unmet medical need, they too can be enormously profitable. David Epstein, head of Novartis' oncology unit, observes that a drug that works well on a limited population can build its market over time simply by keeping its users alive.

Such drugs can also have other applications. That's what guides Novartis' continuing research on Gleevec, a revolutionary drug initially directed against a rare leukemia. Responding to petitions from patients, Vasella pushed to complete clinical trials of the drug in just 32 months. It was recently approved to treat a second rare cancer that affects the stomach. Now Novartis is evaluating its effects in combination with other drugs on more common cancers, such as those of the prostate.

Vasella has also revamped Novartis' marketing force in the U.S., where it long lagged behind competitors. He poached Paulo Costa from Johnson & Johnson in 1999 and made him CEO of Novartis' U.S. drug unit. Since then, Costa's sales force has grown to 5,800 from 2,815. The payoff? Drug sales in the U.S. grew 24% last year.

That expansion was partly in preparation for the launch of a potential blockbuster drug called Zelnorm, aimed at irritable bowel syndrome, for which there are few treatments. But the FDA, expressing concern about Zelnorm's side effects, rejected the application, asking for more data. In the short term, says Morgan Stanley analyst Duncan Moore, Novartis' prospects for robust growth depend heavily on the FDA's reversing its ruling on Zelnorm and approving an anti-inflammatory drug named Prexige, which Novartis plans to submit to the agency toward the end of this year.

It has been a long day on the 11th floor of the Swiss Center on Fifth Avenue in New York City. Novartis' board of directors has listened to presentations on CIBA Vision's competitive challenges, purchasing and Gerber. Vasella slumps back comfortably in his chair, asking crisp questions. He's the picture of Swiss cool--until he learns that a New York City attorney is "assessing the claims of 300 to 400 possible plaintiffs" who say Novartis' athlete's-foot medicine Lamisil caused them injury. "This is outrageous!" he cries. "It has absolutely nothing to do with right or wrong, just with making money."

That, of course, is exactly what critics say about the drug industry today. Nevada has sued a dozen drug companies for hiking the average wholesale prices (AWP), which the U.S. government uses to determine what it pays for drugs, and using the extra money to pay commissions to doctors who prescribe their products. Activists and state attorneys general say the AWP, set by the companies, rarely reflects the prices charged to HMOs and other drug wholesalers. "What we say is that AWP stands for 'ain't what's paid,'" says Ahaviah Glaser, director of the Prescription Access Litigation Project.

Vasella, acutely aware that his industry is losing the p.r. battle, believes that proactive concessions will help avert legislative action. Novartis donates antileprosy drugs to India, sells antimalaria drugs at cost to the World Health Organization and has established a research center in Singapore to develop treatments for Third World diseases like tuberculosis, whose sufferers can't pay much. (He is not alone in this. Merck has set up anti-AIDS programs in Botswana, and Aventis is helping tackle AIDS in South Africa.) Eight drug companies, including Novartis, have announced a drug-discount program in the U.S. that they say will save qualified patients 20% to 40% on their prescriptions. But Ron Pollack, director of Families USA, says such measures are just p.r. ploys. A discount on what price? he asks. Because the initial AWP is fictitious and prices are climbing rapidly, "this discount is absolutely misleading."

Many pharmaceutical firms have drawn criticism for extending their franchises through frivolous lawsuits blocking equivalent generic drugs that are much less expensive. To allow drug companies to recoup investments and collect healthy returns, the Hatch-Waxman Act of 1984 gives companies 20-year monopolies from the day they patent a product. (After that, revenues from a drug can drop as much as 80% within months as generics erode the market.) The law allows drug firms a 30-month monopoly extension to resolve patent disputes. That loophole is much abused. Companies often sue generic manufacturers just to buy time.

Vasella points out that bringing a drug to market can take a decade and that the glacial pace of drug development and FDA approval puts companies under tremendous pressure to extend exclusive rights to their drugs. Better, he suggests, to grant a drug market exclusivity for a limited period that starts only after it obtains FDA approval.

That sounds reasonable, like most of what Vasella says. But consider what happened two summers ago, after the Greenpeace protesters unplugged their stereo and took the helicopter home. "I got the impression that after this talk, things moved faster," says Stefan Weber, who had breakfast with Vasella that morning. It's telling, however, that the problem has not yet been solved. There are apparently too many technical difficulties--and too many other companies involved. --With reporting by Odette Frey/Zurich

With reporting by Odette Frey/Zurich