Novartis Chairman Stresses Need for R&D Investment; ‘We Need to Add Value,’ Says Jürg Reinhardt

Novartis Chairman Stresses Need for R&D Investment

‘We Need to Add Value,’ Says Jürg Reinhardt

MARTA FALCONI

March 22, 2014 3:46 a.m. ET

BASEL, Switzerland— Novartis AG NOVN.VX +0.76% 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 MRK -1.67% & Co., are streamlining their operations, while leaning on outside labs for experimental drugs. Roche Holding AG ROG.VX +1.03%, 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 BAYN.XE +1.85% to lead the health-care business after Joe Jimenez was chosen as chief executive. He returned as chairman eight months ago, following thedeparture 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.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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