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The Risk Takers June 11, 2009, 5:00PM EST

Novartis: Radically Remaking Its Drug Business

CEO Dan Vasella's growth mantra for Novartis is follow the science, not the financials

By Kerry Capell

Five neuroscientists file nervously into Novartis' (NVS) vast boardroom in Basel. CEO Daniel L. Vasella is seated at the table, along with nine senior executives that make up the company's innovation board. The scientists hope to persuade Vasella to move forward on an experimental vaccine for Alzheimer's disease, an illness that afflicts 25 million people worldwide. Even a moderately effective treatment would be a blockbuster, but testing the vaccine would take years and several hundred million dollars.

When one of the scientists points out that other drugmakers are targeting the illness, Vasella just shakes his head. "We still don't know whether Alzheimer's is one disease or several, or if the current approaches even address the right disease mechanisms," he says, frustration edging into his voice. He sends the proposal back for a rethink.

Vasella's ability to quickly set aside one of the world's most troubling diseases reflects a radical shift for Novartis—and one that may offer the drug industry its best chance to come up with the kinds of innovations that have eluded it for so long. Most big drugmakers shower their research and development funds on diseases such as cancer or depression, where huge potential markets beckon despite a deficit of scientific understanding. In recent years this approach has led to high rates of failure when drugs are tested in clinical trials. Seven years ago, Vasella, 55, took a calculated risk and turned Novartis' R&D model upside down. He resolved to push drugs through the long testing process only if they are backed by proven science. It doesn't matter whether the diseases the drugs treat are rare and the initial markets minuscule. Once a drug proves its worth against one disease, Vasella reasons, it can be tested against others. "If you are guided purely by financial estimates and not the science, you end up wasting time and money," he says.

Vasella's goal is to institutionalize the lessons from one of the company's most successful creations, the cancer drug Gleevec. Initially approved for a rare blood cancer that strikes just a few thousand people each year, it has proven effective against six other life-threatening diseases. The drug pulled in $3.7 billion in revenues last year for Novartis, which posted a total of $9 billion in operating income on sales of $41.5 billion. Vasella admits Gleevec was something of a fluke: The drug has a complicated history that mostly predates Novartis' shift in strategy. Yet Gleevec's triumph helped crystallize Vasella's thinking. Today Novartis has 93 drug candidates in the pipeline, 40% more than three years ago, and 80% of Novartis' drugs last year made it from early testing to late-stage development. That's a 60% improvement over 2005.

LOSING PATENTS

If Novartis can quickly build on this track record, it could mark a turning point for both the company and the industry. While plenty of biotech companies place a premium on science, for the past two decades most pharmaceutical companies have been more interested in developing and marketing blockbusters aimed at major diseases. In years past, this approach produced giant wins, including a host of famous cholesterol drugs as well as other moderately effective, mass-market medicines. But experts say drug companies have exhausted the easy targets. With patents on many older blockbusters starting to expire, the industry is poised to lose an estimated $140 billion in sales to generic competition over the next five years. Those revenue sources must be replaced.

Despite multibillion-dollar research budgets, none of the top companies has a wealth of promising compounds in its development pipeline. The industry also faces regulators more vigilant than ever about safety, and health insurers starting to balk at covering costly drugs that bring only modest benefits.

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