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A Venerable Biotech Eyes the New World


Anyone with a passing interest in biotech is probably familiar with American icons Amgen (AMGN) and Genentech (DNA), the two biggest players in the field. But the third-largest contender, a $1.24 billion Swiss giant called Serono (SRA), will be a new name for many Americans--even though it is in fact the oldest of them all.

Founded in Rome in 1906, Serono was a traditional family-owned outfit that flourished because of a single, best-selling fertility drug derived from an unlikely source: It was a protein purified from the urine of postmenopausal women--specifically, from Italian nuns. "Not exactly the sexiest raw material," concedes Serono's chief financial officer, Jacques Theurillat. "Today the company is totally different."

GLAMOUR. And how. Serono was completely overhauled by the late CEO Fabio Bertarelli, who moved the headquarters to Geneva in 1977 and introduced recombinant-DNA production technologies and cutting-edge biomedical research. Today, Serono is the world leader in reproductive treatments--but that's just the beginning. It also has hot-selling drugs for multiple sclerosis and other autoimmune diseases, growth deficiency, and AIDS-related wasting. There are 15 new compounds in development. And researchers are now drawing a bead on prions, the rogue proteins thought to cause mad cow disease. "Serono's transition has been very effective," says Commerzbank's biotech analyst, Steve Cox.

At the helm of Serono today is 36-year-old Ernesto Bertarelli, who replaced his father as CEO in 1996. An avid yachtsman who is well known on the European social circuit, the younger Bertarelli brings more than just glamour to the job. He has established a modern, centralized management structure organized into therapeutic areas. And he has built up Serono's brand in 45 different countries--with a special emphasis on the most competitive market of all, the U.S.

Bertarelli, the third generation of his family to head the company, has the right credentials. After spending time as a salesman, project manager, and financial analyst at Serono, he went to Harvard to get his MBA in 1994. While other students were out on job interviews, Bertarelli would sift through the reams of company documents that were sent each week by his father, who by now was suffering from cancer. "He'd call and say, `Have you read that letter? What do you think?"' Bertarelli recalls. The day after graduating, Bertarelli flew to Geneva and was installed as CEO.

Since then he has rapidly made his mark. He increased the company's spending on research and development to an astonishing $300 million--about 24% of estimated 2001 sales--up from 17%, or $114 million, in 1993. Over the past three years, operating income has more than doubled. Last year, Bertarelli orchestrated one of the biotech industry's biggest secondary offerings on the New York Stock Exchange, raising a war chest of $1 billion.

Bertarelli won't use that money to make splashy acquisitions. Instead, he's plotting a slower, more methodical course. To increase U.S. sales to 60% of total revenues in five years, from 35% now, he'll use the cash on Serono's books to strike up innovative biotech collaborations. One example: a $52 million codevelopment deal with Seattle-based ZymoGenetics Inc. (ZGEN) in September. Their goal is to develop drugs against autoimmune diseases based on two proteins discovered by the American partner--molecules involved in the overproduction of antibodies that attack the body's own cells in diseases such as multiple sclerosis and lupus. "We can be a bridge for biotech in Europe, but our future is in the U.S.," says the CEO.

DUELING DRUGS. Long before these research partnerships pay off, however, Serono hopes to build up a U.S. beachhead with its beta-interferon treatment for MS, a drug called Rebif. The compound is already available in 72 countries. But sales of Rebif are blocked in the U.S. by a competing drug from Biogen Inc. (BGEN), called Avonex. The Food & Drug Administration has granted marketing exclusivity to Biogen through 2003, under a law called the Orphan Drug Act.

This law was passed in 1983 to give drugmakers incentives, in the form of tax breaks, grants, or exclusive marketing rights, to develop treatments for diseases that affect relatively small numbers of people. To break a product's orphan-drug status, a competitor must prove that its new drug is safer, more effective, or easier to deliver. That's exactly the tack Bertarelli plans to take with Biogen's Avonex. And he has spent $30 million over the last two years on a head-to-head trial. The result: "On all primary and secondary efficacy measures, Rebif was superior to Avonex after six months of treatment," says Merrill Lynch & Co. biotech analyst Dr. Eric Hecht. Serono submitted its material to the FDA and expects a decision by mid-2002. Biogen, for its part, says that six months is not enough time to judge the effect of a drug. What's more, a company spokesperson says Biogen is confident that its orphan-drug designation will be upheld

Nonetheless, analysts who cover Serono believe Rebif will be approved by the middle of next year and will achieve rapid acceptance. The worldwide market for MS drugs, currently $2.2 billion, is expected to reach $4 billion by 2005, according to Merrill Lynch. By that time, Merrill expects Rebif to be the world leader, with $506 million in U.S. sales alone and 36% of the global market. Bertarelli plans to spend an additional $30 million in the last quarter of this year to prepare for the anticipated U.S. launch.

Serono, which suffered from slower than expected growth in the third quarter, could use some good news. The company had predicted a 20% increase for 2001 earnings but recently lowered that to 6% to 8%. Increased spending on marketing for Rebif, a decline in sales of fertility treatments, and lower interest income as a result of U.S. rate cuts were to blame, says Commerzbank's Cox. Most analysts, however, say the slowdown in earnings is likely to be a short-term dip as long as the company moves quickly to license new compounds.

AFTER THE CUP. Bertarelli can take comfort in the fact that most biotechs are in the same boat: All are heavily dependent on just a few core drugs. In Biogen's case, Avonex accounts for 82% of sales. But Bertarelli is optimistic that Serono's pipeline, coupled with more external collaborations, will be sufficient to fuel future growth. The company has allocated $70 million next year on discovery efforts alone, an increase of nearly 15% from the previous year.

While Serono's scientists hunker down in the lab, Bertarelli is preparing for a different kind of challenge. A lifelong sailor who practices whenever he can on Lake Geneva, Bertarelli has launched a $70 million Swiss bid for the 2003 America's Cup in New Zealand. Bertarelli, who hopes to be on board, is quick to point out that the funding is coming from himself and a handful of corporate partners. But if Bertarelli is to fulfill his dream of taking part, he needs to make sure it's smooth sailing for Serono in the months to come. By Kerry Capell in Geneva


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